Blog Post

How Have Recent Fuel Economy and GHG Standards for New Passenger Vehicles Affected the US and European Markets?

Jan 16, 2014 | Joshua Linn

Figure 1. Fuel Economy Technology Adoption for US Light Trucks
Figure 1. Fuel Economy Technology Adoption for US Light Trucks

In the second post of a two-part series, RFF Fellow Joshua Linn examines how recent standards have affected the type and rate of technology adoption in new vehicles. Click to read the first installment.

Concerns about global warming and energy security have caused many countries to tighten passenger vehicle standards for greenhouse gases and fuel economy. As noted last time, US fuel economy standards will roughly double by 2025. This is part of a larger trend—European standards, for example, will tighten by about 30 percent by 2015.

Economic theory suggests that tighter standards will have two effects on the vehicles that manufacturers offer. First, the standards create a stronger incentive to adopt technology that raises power train efficiency, spurring manufacturers to adopt technology more quickly. Second, tighter standards cause manufacturers to use more of that improved efficiency to raise fuel economy than boost other vehicle attributes, compared to how they would allocate that efficiency if standards were held constant.

In fact, we see both types of responses when we look at recently tightened standards in the United States and Europe. The response is perhaps strongest for US light trucks, which have experienced the longest period of tightening standards. The light truck standards began tightening in 2005, and then more quickly in 2011. Figure 1, above, shows how efficiency—the black curve in the figure labeled “frontier”—increased steadily through 2004, and then began increasing more quickly as the standards tightened. This pattern is consistent with what we expect—the more stringent standards cause manufacturers to adopt technology more quickly. We also see that torque and weight increased through 2004 and then leveled off. Fuel economy was flat until about 2005, at which point it began increasing steadily. The patterns for torque, weight, and fuel economy suggest that manufacturers used more of the efficiency improvement to raise fuel economy than they did before the standards tightened. Both manufacturer responses are consistent with theory.

Of course, there are some caveats—there were other things going on during this period that could have affected technology, including rising gas prices, the recession, and the bailout, for example. Statistical analysis, however, suggests that the patterns we see in the figure hold up under closer scrutiny.

What do these findings mean? Certainly, we see that vehicle standards introduce tradeoffs between fuel economy and other vehicle characteristics. Rough calculations suggest that the consumer value of the lost torque is comparable to the value of the fuel savings. But future work is needed to refine these calculations. Regardless, we can see how, in a market where manufacturers choose multiple product attributes jointly, regulating one product attribute—in this case, fuel economy—can have unexpected and significant effects on other product attributes.