Abstract: Using disaggregated confidential household data, we estimate spatial variation in household-level gasoline price elasticities and the welfare effects of gasoline taxes. A novel approach allows us to model a discrete-continuous household choice of vehicle bundles, while disaggregating the choice set and including vehicle-specific fixed effects and unobserved consumer heterogeneity. The mean elasticity of demand for gasoline is -0.67, but with tremendous variation across location and income. We find that rural households have 30 percent more negative welfare impacts than urban households from gasoline taxes. Finally, we explore different policies that can help to mitigate welfare inequalities due to these taxes.

Abstract: In September 2011, the National Highway Traffic Safety Administration and U.S. Environmental Protection Agency promulgated the first-ever federal regulations mandating fuel economy improvements for heavy-duty commercial vehicles. While the performance-based approach to these rules offers familiarity and assurances of fuel economy improvements, it also has some well-known weaknesses. In this paper, we describe fuel economy technologies for the trucking sector, its economic structure, the details of the new fuel economy regulations, and the controversies they sparked. We then address issues raised in reviewing the accompanying regulatory impact analysis. Next, we highlight some flaws of this form of regulation and suggest a variety of alternative, more market-oriented approaches that might work better.

Abstract: To investigate how fuel economy is valued in the Indian car market, we compute the cost to Indian consumers of purchasing a more fuel-efficient vehicle and compare it to the benefit of lower fuel costs over the life of the vehicle. We use hedonic price functions for four market segments (petrol hatchbacks, diesel hatchbacks, petrol sedans, and diesel sedans) to compute 95 percent confidence intervals for the marginal cost to the consumer of an increase in fuel economy. We find that the associated present value of fuel savings falls within the 95 percent confidence interval for some specifications, in all market segments, for the years 2002 through 2006. Thus, we fail to consistently reject the hypothesis that consumers appropriately value fuel economy. When we reject the null hypothesis, the marginal cost of additional fuel economy exceeds the present value of fuel savings, suggesting that consumers may, in fact, be overvaluing fuel economy.

Abstract: This paper presents an overview of the economics literature on the effect of Corporate Average Fuel Economy (CAFE) standards on the new vehicle market. Since 1978, CAFE has imposed fuel economy standards for cars and light trucks sold in the U.S. market. This paper reviews the history of the standards, followed by a discussion of the major upcoming changes in implementation and stringency. It describes strategies that firms can use to meet the standards and reviews the CAFE literature as it applies to the new vehicle market. The paper concludes by highlighting areas for future research in light of the upcoming changes to CAFE.

Abstract: By 2016, the Corporate Average Fuel Economy (CAFE) standard will increase by 40 percent from its current level, representing the first major increase in the standard since its creation in 1975. Previous analysis of the CAFE standard has focused on its short-run effects (1–2 years), in which vehicle characteristics are held fixed, or its long run effects (10 years or more), when firms can adopt new power train technology. This paper focuses on the medium run, when firms can choose characteristics such as weight and power, yet have only limited ability to modify current technology. We first document the historical importance of the medium run and then estimate consumers’ willingness to pay for vehicle characteristics. We employ a novel empirical strategy that accounts for the vehicle characteristics’ endogeneity by using variation in the set of engine models used in vehicle models. The results imply that consumers value an increase in power more than a proportional increase in fuel economy. Simulations of the medium-run effects of an increase in the CAFE standard suggest that regulatory costs are significantly smaller in the medium run than in the short run.

Abstract: This study explores the role of market power on the cost-effectiveness of policies to address fuel consumption. Market power gives manufacturers an incentive to under- (over-) provide fuel economy in classes whose consumers, on average, value it less (more) than in others. Adding a second market failure in consumer valuation of fuel economy, a policy trade-off emerges. Minimum standards can address distortions from price discrimination but, unlike average standards, do not provide broad-based incentives for improving fuel economy. Increasing fuel prices raises demand for fuel economy but exacerbates undervaluation and incentives for price discrimination. A combination policy may be preferred. For modelers of fuel economy policy, failure to capture consumer heterogeneity in preferences for fuel economy can lead to significant errors in predicting the distribution of effort in complying with regulation, as well as the calculation and distribution of the benefits.

Abstract: Previous literature finds that consumers tend to undervalue discounted future energy costs in their purchase decisions for energy-using durables. We argue that this finding could result from ignoring consumer heterogeneity in empirical analyses as opposed to true undervaluation. In the context of automobile demand, we show that, if not accounted for, consumer heterogeneity could lead to sorting, which in turn biases toward zero the estimate of marginal willingness to pay for discounted future fuel costs.

Abstract: This paper discusses fuel economy regulations in the United States and other countries. We first describe how these programs affect fuel use and other dimensions of the vehicle fleet. We then review different methodologies for assessing the costs of fuel economy regulations and discuss the policy implications of the results. We also compare the welfare effects of fuel economy standards with those of fuel taxes and assess whether these two policies complement each other. Finally, we review arguments in favor of a “feebate” system, which imposes fees on inefficient vehicles and provides rebates for efficientvehicles.

Abstract: Most developed and developing country governments levy taxes on gasoline and diesel fuel used by motor vehicles. However, outside of the United States and Europe, automobile and heavy truckexternalities have not been quantified, so policymakers have little guidance on whether prevailing tax rates are anywhere close to their corrective levels. This paper develops a general approach for roughlygauging the magnitude of motor vehicle externalities, and hence the corrective tax on gasoline and diesel, for individual countries, based on pooling local data sources with extrapolations from U.S. data. The analysis is illustrated for the case of Chile, though it could be readily applied to other countries with appropriate data collection.

Abstract: This paper provides an updated assessment of economically efficient taxes on gasoline (used by light-duty vehicles) and diesel (used by heavy-duty trucks) to address various highway externalities in the United States. The (second-best) corrective fuel taxes are estimated, and we discuss the implications of fuel economy regulations and prospective (nationwide) controls on carbon emissions. We also examine how optimal fuel taxes depend on how they interact with the broader fiscal system. Our baseline estimates of the corrective taxes on gasoline and diesel are $1.23 and $1.15 per gallon, respectively. However, optimal fuel taxes can be substantially higher if extra revenues are used to reduce distortionary income taxes, or substantially lower if revenues are not used to enhance economic efficiency.

Abstract: Although fuel taxes are a practical means of curbing vehicular air pollution, congestion, and accidents in developing countries—all of which are typically major problems—they are often opposed on distributional grounds. Yet few studies have investigated fuel tax incidence in a developing country context. We use household survey data and income-outcome coefficients to analyze fuel tax incidence inCosta Rica. We find that the effect of a 10 percent fuel price hike through direct spending on gasoline would be progressive, its effect through spending on diesel—both directly and via bus transportation—would be regressive (mainly because poorer households rely heavily on buses), and its effect through spending on goods other than fuel and bus transportation would be relatively small, albeit regressive.Finally, we find that although the overall effect of a 10 percent fuel price hike through all types of direct and indirect spending would be slightly regressive, the magnitude of this combined effect would be modest. We conclude that distributional concerns need not rule out using fuel taxes to address pressing public health and safety problems, particularly if gasoline and diesel taxes can be differentiated.