Low Pump Prices vs. Fuel Economy Efforts

Fuel economy standards lie at the center of US efforts to reduce oil consumption and greenhouse-gas emissions. This week, the Environmental Protection Agency, the Department of Transportation, and California Air Resources Board released a technical report to inform the level of the final fuel economy standards through 2025. Today, in a new paper posted by Resources for the Future (RFF), the effects of low gasoline prices on vehicle fuel economy standards are examined, an important consideration not taken up directly in the agencies’ recent report.

The new paper is Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards? Its authors are RFF fellow Benjamin Leard and senior fellows Joshua Linn and Virginia D. McConnell. The brief is published in conjunction with the Columbia Center on Global Energy Policy.

The new report specifically studies the period between June 2014 and August 2015 on consumer purchases of new vehicles. Due to declining oil prices, gasoline prices fell 25 percent during this time. Surprisingly, perhaps, the authors find that low fuel prices had only a modest effect on meeting the federally required level of fuel economy. They note that if that finding continues, low fuel prices will not substantially undermine the program’s fuel consumption goals.

However, they also note that low gasoline prices will make it more costly for manufacturers to meet the current standards because consumers will be less willing to pay for higher fuel economy. As a result, manufacturers will have to add further fuel-saving technology, reducing short-term profits. Automakers have argued that the standards should be relaxed because of the higher costs of meeting them.

The question of the effectiveness of the new fuel economy standards is an important one because passenger vehicles account for almost half of domestic oil consumption and a large share of US greenhouse gas emissions. The US has pledged to reduce its greenhouse gas emissions by about one quarter between 2005 and 2025. The Environmental Protection Agency and Department of Transportation jointly administer new vehicle fuel economy and greenhouse gas standards.

By April 2018, the regulatory agencies will review and finalize new regulations that will roughly double vehicle fuel economy and cut transportation sector greenhouse gas emissions by 20 percent by 2025. The regulatory agencies could raise or lower the standards in addition to making other changes to the program.

Although the authors found that low fuel price had only a modest effect on the required level of fuel economy, they caution that “lower gasoline prices may cause consumers to shift to larger vehicles (which are subject to weaker standards) and also to drive more (because lower gasoline prices reduce the cost of driving).”

Under such circumstances, tighter standards would be needed to help the US meet international climate pledges.

Read the full policy brief posted by RFF: Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards?

Read the full policy brief posted by Columbia University: Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards?