At an RFF First Wednesday Seminar, The Evolving US Vehicle Fleet: Responding to New Federal Regulations, we gathered various experts to discuss key issues related to trends in the evidence regarding the efficiency and effectiveness of the new Corporate Average Fuel Economy (CAFE) standards. Several of these issues will be examined as part of this blog series, Evidence for the New CAFE Standards.
We still don’t fully understand much about how car buyers value fuel economy when they purchase a new vehicle, despite numerous studies on the topic. Some argue that consumers usually greatly undervalue the economic savings of choosing vehicles with higher fuel economy. In fact, this is the assumption underlying the evaluation of costs and benefits of the new Corporate Average Fuel Economy (CAFE) rules. At a recent RFF First Wednesday Seminar, Chris Knittel of MIT pointed out that 80 percent of the benefits found in the assessment of the new rules (by the Environmental Protection Agency [EPA] and the National Highway Traffic Safety Administration [NHTSA]) are a result of consumer undervaluation of improved fuel economy.
However, Knittel mentioned three recent papers from the economics literature that all suggest that consumers undervalue fuel economy only slightly, if at all. Those papers examine how changing fuel costs are reflected in vehicle prices, holding fixed vehicle characteristics, and compute an implied consumer discount rate. If that discount rate is consistent with the cost of borrowing, then that provides evidence that consumers are fully valuing fuel savings. But if consumers discount savings at rates higher than their borrowing costs, that would indicate undervaluation and would be consistent with the agencies’ cost-benefit analysis. The three studies taken together suggest discount rates between 0 and 7 percent for new cars and higher rates for used cars. In his presentation, Knittel pointed to evidence that the actual cost of borrowing is consistent with the discount rates estimated in these studies. Thus, he argues, there is little evidence that consumers undervalue fuel economy.
However, the actual costs of borrowing vary a good deal across consumers, suggesting that some may value fuel economy more than others. Digging deeper into consumers’ understanding and choice of fuel economy appears to be key to properly estimating the costs and benefits of fuel economy standards; Knittel is currently engaged in work to do just that. He and his colleague Hunt Allcott designed a short, personalized course on fuel economy for consumers who are shopping for a car at new car dealerships. The goal of the project is to be able to observe how well consumers understand fuel savings, and whether information about how to evaluate fuel savings makes a difference in purchase decisions. Some consumers get a version of the course that provides them with information about the fuel costs of the vehicles they are considering. Others are asked only about their best estimates of fuel savings without receiving any fuel cost information. Preliminary results suggest that close to half of consumers believe they accurately estimate fuel costs. In the other half, more believed that they undervalued the savings. Knittel cautions that it is too early to draw any conclusions, and to stay tuned for the full results, which will be out later this spring.
Up next in the series: Complying with the CAFE Standards: Will It Be More Difficult than Predicted?
Read previous posts in this RFF blog series, Evidence for the New CAFE Standards: