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An Evaluation of Footprint-Based Corporate Average Fuel Economy Standards

An Evaluation of Footprint-Based Corporate Average Fuel Economy Standards. Takahiko Kiso August 6, 2012. Introduction. Corporate Average Fuel Economy (CAFE) Standards: Regulate each automaker’s sales-weighted average fuel economy Administered by EPA & Dept. of Transportation

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An Evaluation of Footprint-Based Corporate Average Fuel Economy Standards

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  1. An Evaluation of Footprint-Based CorporateAverage Fuel Economy Standards Takahiko Kiso August 6, 2012

  2. Introduction • Corporate Average Fuel Economy (CAFE) Standards: • Regulate each automaker’s sales-weighted average fuel economy • Administered by EPA & Dept. of Transportation • Goal: reduce gasoline consumption • CAFE Standards have been tightened in recent years • Current goal: improve market average fuel economy by 40% between 2009 and 2016 • In addition to stringency, the “rules” of CAFE standards are changing • This paper evaluates effectiveness of 4 different “rules”

  3. Rule 1: “Flat” Standard, Two Functions, Two Constraints (Old EPA/DOT rule) For each automaker’s each category, sales weighted average of credit > sales weighted average of deficit Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM) “deficit” “credit” “deficit” “credit” PC’s GPHM LDT’s GPHM Target Passenger Cars (Sedans, etc) Footprint (vehicle size)

  4. Rule 2: Footprint-based Standard,2 Functions, 2 Constraints Deficit (credit) for large (small) vehicles decreased → Standards looser (tighter) if primarily produce large (small) vehicles Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM) “deficit” “credit” “deficit” “credit” PC’s GPHM LDT’s GPHM Target Passenger Cars (Sedans, etc) Footprint (vehicle size)

  5. Rule 3: Footprint-based Standard,2 Functions, 1 Constraint (New EPA/DOT rule) Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM) Allow credit trading across two categories → only 1 constraint “deficit” “credit” “deficit” “credit” PC’s GPHM LDT’s GPHM Target Passenger Cars (Sedans, etc) Footprint (vehicle size)

  6. Rule 4: Footprint-based Standard,1 Function, 1 Constraint Light Duty Trucks (SUVs, Pickups, etc) Gallons per 100 miles (GPHM) Remove “gap” between PCs and LDTs → PCs’ (LDTs’) target loosened (tigthened) “deficit” “deficit” “credit” PC’s GPHM LDT’s GPHM Target Passenger Cars (Sedans, etc) Footprint (vehicle size)

  7. Framework • Equilibrium model of US new vehicle market • Data: • National Household Travel Survey (2001) • WARDS Automotive Yearbook • EPA’s fuel economy test data • Estimate consumer’s vehicle choice and VMT (vehicle miles traveled) choice • Model automaker’s profit maximization under imperfect competition and fuel economy standards • Simulate counter-factual standards • Related studies: Bento et al. (2009), Coleman et al. (2010), Whitefoot et al. (2012)

  8. Welfare measures (changes from Rule 1) • Rule 2: 2 functions, 2 constraints Rule 3: 2functions, 1 constraint • Rule 4: 1 function,1 constraint

  9. Welfare measures (changes from Rule 1) Case 2: Medium production cost for improving FE

  10. Welfare measures (changes from Rule 1) • Rule 2: 2 functions, 2 constraints Rule 3: 2functions, 1 constraint • Rule 4: 1 function,1 constraint

  11. Main Findings • Compare Rules 1-4 that achieve (almost) same market average fuel efficiency: • Few robust differences across Rules 1, 2 & 3 • 1-constraint rules (3 & 4) can save more gasoline than 2-constraint rules (1 & 2) • Rule 4 consistently achieves highest social welfare • Overall, “flat” and “footprint-based” do not differ much in terms of market-level effectiveness • Credit trading across categories (i.e., 1-constraint; Rules 3 & 4) or removing target value gap between PCs and LDTs (e.g., 1-function; Rule 4) has larger market-level impact • → Improving LDT’s fuel efficiency is socially less costly than improving PC’s fuel efficiency

  12. Thank you!

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