New Auto Standards & Low Gas Prices

WASHINGTON—The United States is trying to dramatically reduce the fuel use and greenhouse gas (GHG) emissions of new automobiles. The new national standards for Corporate Average Fuel Economy (CAFE) and GHG emissions presently are phasing in. Surprisingly, however, despite the tightening requirements, average new vehicle fuel economy has been getting worse since October 2015. Many observers attribute the decline to the fact that gasoline prices have fallen by half since 2014. These developments have increased pressure on the agencies to weaken the standards.

Today, Resources for the Future (RFF) posted a new policy brief—How Do Low Gas Prices Affect Costs and Benefits of US New Vehicle Fuel Economy Standards? Its authors are RFF Senior Fellows Joshua Linn and Virginia McConnell and RFF Fellow Benjamin Leard. They conclude that cheap gasoline reduces the benefits and raises costs of the standards, but overall benefits continue to exceed costs.

The agencies that developed the new standards—the US Environmental Protection Agency (EPA) for GHG emissions and the National Highway Traffic Safety Administration (NHTSA) for fuel economy—estimated that the benefits of the standards through 2016 would be about three times the cost. However, in assessing the implications of cheap gasoline, the agencies include only to a very limited extent behavioral responses such as consumer choices of new vehicles and how much to drive.

In the new policy brief, the RFF researchers augment the agencies’ benefit–cost estimation framework, and account for consumer and manufacturer behavioral responses to estimate the effects of lower gasoline prices on the benefits and costs of the standards. They find that lower gasoline prices reduce the value of the fuel savings attributable to the standards. Falling gasoline prices, they write, also lower consumer demand for high fuel–economy vehicles.

Looking at the data for the 2015 model year, the authors estimate that a 25 percent fuel price decrease reduces the value of fuel savings by just 22 percent. Consumer and manufacturer responses explain this difference. Two other results highlight the importance of including behavioral responses. First, lower gasoline prices raise the cost to manufacturers of achieving the standards. Second, lower prices result in the larger GHG emissions reductions that become necessary to meet the standards.

Read the full policy brief: How Do Low Gas Prices Affect Costs and Benefits of US New Vehicle Fuel Economy Standards?