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Tradable Fuel Economy Credits for Cars and Light Trucks

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The effectiveness of CAFE standards in raising the light-duty vehicle fleet's fuel efficiency, and other effects of CAFE regulations, have been discussed in a large body of literature. Most recently, the National Research Council (NRC, 2002) has come out with a comprehensive review of the effectiveness and impact of CAFE standards. The NRC concluded that the CAFE program has clearly increased fuel economy since its inception, although certain aspects of the CAFE program have not functioned as intended. The NRC concluded that raising the CAFE standard would reduce future fuel consumption, but that other policies could accomplish this same end at lower cost and greater flexibility. The NRC concluded (Finding 11): “Changing the current CAFE system to one featuring tradable fuel economy credits and a cap on the price of these credits appears to be particularly attractive.”

We propose to calculate the net benefits to the United States from implementation of a tradable fuel economy credit system. These benefits include the economic cost savings from reduced fuel use, reductions in fuel use, and reductions in US GHG emissions. We also propose to examine a number of policy extensions not envisioned by the NRC to determine their economic and environmental benefits.

Objective:
The primary purpose of this research is to calculate the net benefits to the United States from implementation of a tradable fuel economy credit system as advocated by the NRC. The fuel economy of the US light-duty vehicle fleet (cars, minivans, SUVs, light trucks) has fallen significantly since its peak in 1989 following its rise pursuant to the corporate average fuel efficiency (CAFE) standards established by the US Energy Policy and Conservation Act of 1975. CAFE regulations specify minimum fleet average standards for fuel efficiency that vehicle manufacturers must meet. The reasons commonly cited for this decline include an exogenous taste shift from cars toward trucks (which, for CAFE purposes includes vans, minivans, pickup trucks and sport-utility vehicles), the low price of gasoline, and the CAFE regulations themselves. Light-duty vehicles produce 57% of transportation CO2 emissions (including international bunker fuels). Combustion of fossil fuels to power transportation was the single largest source of greenhouse gas emissions in the U.S. economy in 1999 (USEPA, 2001).

Approach:
The work proposed here builds on the combination of the developing theory of intertemporal permit trading, new cost and technology assessments of fuel economy technology, and a better understanding of consumers’ valuation of fuel economy improvements.

Using different fuel economy supply curves, reflecting differences in opinions about cost, performance and technical change, we will estimate how different credit systems promote cost-savings as CAFE standards are increased to the levels suggested by the NRC. Well-designed credit systems are especially valuable since they allow manufacturers greater ability to redesign and implement known technologies over the next 10 to 15 years.
Expected Results:

The cost and environmental information we will produce will enhance the ability of policymakers to make better informed decisions regarding the use of energy, production of GHGs, and enhancement of safety in the light-duty vehicle fleet. These benefits include the economic cost savings from reduced fuel use, reductions in fuel use, and reductions in US GHG emissions.

Supplemental Keywords:
Cost-Benefit, Modeling, Socio-Economic, Conservation , Air, Economic, Social, & Behavioral Science Research Program, POLLUTION PREVENTION, RFA, Scientific Discipline, Air Quality, Ecology and Ecosystems, Economics and Business, Energy, Market mechanisms, Social Science, CAFE standards, allowance market performance, consumer behavior, emissions trading, energy efficiency, environmental economics, market incentives, market-based mechanisms, policy incentives, pollution allowance trading, tradeable fuel economy credits

Metadata

EPA/NSF ID:
R830836
Principal Investigators:
Rubin, Jonathan
Greene, David
Leiby, Paul
Technical Liaison:
Research Organization:
Maine, University of
Funding Agency/Program:
EPA/ORD/Incentives
Grant Year:
2002
Project Period:
January 1, 2003 to December 31, 2004
Cost to Funding Agency:
$177,247
Project Status Reports:
Project Reports:

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