Blog Post

Market Shares and Technology Driving Up Fuel Economy in New Vehicles

Oct 4, 2013 | Joshua Linn

From the late 1980s to about 2004, the average fuel economy of new passenger vehicles in the United States declined gradually. Then, over the past 10 years, fuel economy jumped suddenly, up almost 20 percent by 2012. In a recent paper, my colleague Shefali Khanna and I ask which end of the production line explains this increase—manufacturer decisions about what technology to put under the hood, or consumer decisions about which vehicles to buy.

We found that the two explanations contribute about equally to the increasing fuel economy. Consumers have shifted from larger vehicles with low fuel economy to smaller vehicles with high fuel economy. For example, between 2002 and 2012 the market share of the Honda CR-V, a crossover vehicle that has an US Environmental Protection Agency (EPA)-rated fuel economy of 26 miles per gallon (mpg), has increased from 1.5 percent to 4 percent of the light truck market. At the same time, the market share of the Ford Explorer (a sports utility vehicle with an EPA rating of 21 mpg) has decreased from 5 to 2.5 of the light truck market. Shifting market shares like these explain about half of the overall fuel economy increase. Changing technology, such as adding turbochargers or additional transmission speeds to improve power train efficiency, explain the rest of the fuel economy increase. We also see big differences across market segments in the relative importance of technology and market shares. Technology explains most of the rising fuel economy within the SUV segment, for example, but market shares have been more important for midsize cars.

These trends have two implications for US passenger vehicle policy. EPA and the National Highway Traffic Safety Administration (NHTSA) jointly set fuel economy standards and greenhouse gas emissions rates for new passenger vehicles. These standards are expected to more than double average fuel economy between 2005 and 2025, but some aspects of the standards are controversial. One concern is that manufacturers will meet higher standards partly by selling more small cars with low fuel economy at the expense of large vehicles with low fuel economy. Vehicles sold to meet future standards could be lighter than recently sold vehicles, and because the severity of multi-vehicle crashes depends partly on the weight disparity, such a disparity could cause multi-vehicle accidents to be more harmful to drivers and passengers. Although we do see an increase in market shares of lighter vehicles, overall, average vehicle weight has leveled off without dropping, allaying the safety concerns.

The trends also show that manufacturers have been adding technology, which is just what we would expect to occur with rising standards. When estimating the costs of proposed standards, EPA and NHTSA assume that the standards don’t affect consumers’ decisions to buy different types of vehicles. Upon closer examination, NHTSA’s projections for recent light truck fuel economy changes showed a positive but weak relationship between predicted and actual data.

Unexpected changes—such as rising gasoline prices, modeling assumptions, or other factors—could explain this discrepancy. Ultimately, the trend analysis was aimed at helping readers understand the “how” of rising fuel economy over the past 10 years. Gas prices, the recession, and rising fuel economy standards may have contributed to these trends, and we leave for future research the question of “why” these changes have occurred.