WASHINGTON—Passenger vehicles presently account for about 15 percent of US greenhouse gas emissions and half of transportation sector emissions. Upcoming fuel-economy standards in the United States will roughly double between 2005 and 2025 to 54 miles per gallon. Raising passenger vehicle fuel economy will be a central part of international efforts to reduce the risks of climate change for some time to come.
Economic theory suggests that manufacturers direct fuel-saving technology adoption to consumers with high willingness to pay for fuel savings, and to vehicles with high market size. The relevance of market size has implications for the ability of electric vehicles and other new technologies to compete with established technologies that dominate the market. Yet there is little empirical evidence on the factors driving technology adoption for passenger vehicles.
Now, a new paper posted by Resources for the Future (RFF) documents a strong connection between market size, as measured by sales, and technology adoption: The Effect of Market Size on Fuel-Saving Technology Adoption in Passenger Vehicles. Its authors are Thomas Klier, senior economist and research advisor at the Federal Reserve Bank of Chicago; Joshua Linn, RFF senior fellow; and Yichen Christy Zhou, an RFF postdoctoral researcher from the University of Maryland.
The authors find that manufacturers direct efficiency improvements to vehicles with greater market size, all else equal. They note that, “fuel costs affect efficiency via market size but not independently of market size.”
The results have implications for the effects of fuel prices and policies on passenger vehicle technology. Historical variation in fuel prices has had a substantial effect on new vehicle efficiency. Furthermore, a fuel tax, carbon tax, feebate, or fuel economy standard raise the efficiency of gasoline-powered vehicles with high fuel economy relative to vehicles with low fuel economy. The market size effect implies that these policies have the unintended consequence of making it more challenging for electric vehicles to compete with gasoline-powered vehicles that have high fuel economy.
Read the full paper: The Effect of Market Size on Fuel-Saving Technology Adoption in Passenger Vehicles.
* * * * * * * *Resources for the Future (RFF) is an independent, nonpartisan organization based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.