US federal regulations aim to increase the fuel economy of new automobiles and reduce their GHG emissions. How do the standards affect vehicle consumers?
Standards for new vehicle fuel economy and greenhouse gas emissions were a centerpiece of President Obama’s efforts to combat climate change. The Trump administration is currently considering whether to back off those standards. While this decision will depend on many factors, the effects of the standards on new vehicle consumers will be a key part of that decision.
In the United States, passenger vehicles account for about half of the nation’s oil consumption and 15 percent of its greenhouse gas (GHG) emissions. Motivated by climate and energy security concerns, the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) are preparing to finalize standards that would reduce GHG emissions and oil consumption from new passenger vehicles in the United States through 2025. The joint standards first came into effect in 2012 and are projected to cut new passenger vehicle oil consumption and GHG emissions in half by 2025.
Under the Obama administration, the agencies claimed that the standards benefit consumers as well as the general public. By raising fuel economy, the standards cut fuel costs for new vehicle buyers. The standards also improve energy security by lowering oil imports and reducing GHG emissions in the United States. According to the agencies’ analysis, fuel savings accounted for nearly three-fourths of the estimated total monetary benefits of the standards.
New vehicle consumers undervalue fuel savings, paying about $0.54 for $1 of future fuel savings.
The effects of the 2025 standards on vehicle consumers have been the center of intense controversy. Proponents of tighter standards claim that without the standards, manufacturers underprovide fuel economy. Tighter standards can address this market failure for fuel economy, which is known as the energy efficiency gap. However, critics argue that tighter standards could also harm new vehicle buyers if those consumers do not highly value new vehicle fuel economy.
We addressed the debate over consumers in recent research, showing that the standards have had approximately zero net effect on the well-being of new vehicle consumers. We considered two opposing effects of tighter standards on consumer well-being, with regard to fuel savings and vehicle performance. Our analysis indicates that the benefits to consumers from greater fuel savings are roughly offset by the costs of trading off performance for fuel economy. (Note that our analysis does not include public benefits related to climate change and energy security; more on this below.) Here we describe the results of this work and the implications for future vehicle policy.
In Theory: How Do Tighter Standards Affect New Vehicle Buyers?
Let’s start with fuel savings. The energy efficiency gap refers to the fact that both new vehicle manufacturers and consumers do not adopt fuel-saving technologies—even when the value of the resulting fuel savings exceeds the cost of doing so. This could happen for a variety of reasons, such as consumers not paying attention to the fuel savings. Tighter standards encourage manufacturers to add these technologies to their vehicles. For consumers, the benefits from spending less on gasoline typically exceed the direct costs of purchasing new vehicles with additional fuel-saving technology (which are generally more expensive than vehicles without the technology).
But consumers also care about vehicle performance, which can be directly affected by the standards. To comply with tighter standards, manufacturers can take advantage of the technological trade-off between fuel economy and performance (performance is tightly related to engine horsepower and vehicle weight). For example, between 1985 and 2005, when fuel economy standards were effectively unchanging, Honda adopted a number of fuel-saving technologies that allowed it to increase the engine size of its Civic model—doubling horsepower without sacrificing fuel economy. If standards had been tightening during that period, however, Honda could have used those same fuel-saving technologies to raise fuel economy rather than performance (i.e., horsepower). In that case, tighter standards would have caused manufacturers to forgo performance improvements.
Yet trading improvements in performance for greater fuel economy is just one way among many that manufacturers can respond to tighter fuel standards. In fact, tighter standards cause manufacturers to adopt fuel-saving technology more quickly and to reduce the price of vehicles with high fuel economy or low emissions. For example, manufacturers can offer discounts on electric vehicles, which encourages consumers to buy those vehicles and reduces the average emissions of vehicles sold by the manufacturers, helping them meet tighter standards. In short, EPA and NHTSA provide manufacturers with flexibility to choose how to meet the standards—whether that means adding more technology, trading off fuel economy for performance, adjusting vehicle prices, or other measures—and this flexibility helps reduce the costs of meeting the standards.
Given the range of possible manufacturer responses, tighter standards can leave consumers either better or worse off. On one hand, if tighter standards address the energy efficiency gap, consumers would be better off because of greater fuel cost savings. On the other, if manufacturers trade off performance for improvements in fuel economy but consumers care more about vehicle performance than fuel economy, tighter standards leave consumers worse off because they have to sacrifice performance. So what do the data tell us? Which effect has been bigger?
Historically: What Impacts Have Tighter Standards Had on Consumers?
We focused on consumer valuation in response to changes in vehicle fuel economy and performance that occurred in the 2010s, when US standards began tightening. In contrast, other recent studies have focused on consumer responses to fuel price changes in the 1990s and early 2000s, when fuel economy standards were not changing. Moreover, most past research on performance valuation has assumed that performance is uncorrelated with other vehicle attributes (such as sound system quality or seating comfort). This is a poor assumption—manufacturers choose a vehicle’s performance at the same time that they choose many other attributes.
Our analysis indicates that new vehicle consumers undervalue fuel savings, paying about 54 cents for 1 dollar of future fuel savings . This undervaluation is consistent with an energy efficiency gap, and suggests that tighter standards do indeed benefit consumers by reducing fuel costs.
Turning to performance, tighter standards have not reduced horsepower in absolute terms, but they have caused horsepower to be lower than it would have been if the standards had not been tightened. Figure 1 illustrates the pattern. EPA and NHTSA set different standards for cars and light trucks. The vertical lines indicate when the standards tightened for cars and light trucks. For cars, between 1996 and 2011, the standards were about 27 miles per gallon. During that time, manufacturers steadily increased horsepower (red bars) and left fuel economy (blue bars) essentially unchanged. After 2011, when the standards began tightening, fuel economy increases but horsepower does not. Light trucks show a similar pattern. Standards were unchanged from 1996 through 2004—during this time, horsepower increased about 4 percent per year while fuel economy was flat.
The light truck standards began increasing slowly between 2005 and 2011, and then more quickly after 2011. Horsepower stopped rising as rapidly as it had been, and fuel economy increased more quickly. Related research from 2016 shows that tighter standards caused much of the shift from horsepower to fuel economy depicted in Figure 1, causing consumers to forgo some performance improvements.
Figure 1. Year-to-Year Growth Rates in Fuel Economy (miles per gallon) and Horsepower
Our most recent work demonstrates that consumers highly value vehicle performance. Buyers are willing to pay about $1,100 for a 1-second reduction in the time needed to accelerate from 0 to 60 miles per hour (a performance improvement of about 12 percent).
On balance, tighter standards have had approximately zero effect on new vehicle buyers.
But this finding cannot be fully understood without more context. We quantified the effects that higher vehicle fuel economy and lower performance have on consumers. On balance, tighter standards have had approximately zero effect on new vehicle buyers —the benefits to those consumers of reducing fuel costs through improved fuel economy are roughly offset by the loss of consumer well-being from forgone performance. In other words, the standards have benefitted consumers through money saved on gasoline due to higher fuel economy—but the value of those savings is roughly equal to the negative effect of the standards on consumers who would prefer improved performance over fuel economy.
Looking Ahead: What Policy Changes Might We Expect Going Forward?
We emphasize that these results do not mean that the tighter standards have harmed the public. Our analysis does not include the societal benefits of lower GHG emissions and better energy security. The results suggest that the chief benefits of tighter standards may be to reduce US GHG emissions and help lay a foundation for international efforts to reduce the costs of climate change.
Benefits of tighter standards: reduce emissions & help efforts to reduce the costs of climate change.
The Trump administration’s current review of the standards is supposed to incorporate new information since the standards were initially set in 2012. US government analysis from 2016 suggests that the costs of emitting carbon are higher than previously believed, although the Trump administration will probably reduce that cost estimate. Because the US imports less oil than it used to, the energy security benefits of tighter standards are lower than they used to be. Additionally, our findings suggest that the agencies’ estimates of consumer benefits may be too high. Given these developments, the standards will probably be weakened, at least to some degree.
But the story does not end there. Individual states may pick up the slack if the federal government relaxes the requirements for reducing GHG emissions from passenger vehicles. California has been at the forefront of cutting GHG emissions from the transportation sector—and many other states may be ready to join California’s effort. These states may place a higher value on carbon emissions reductions than the Trump administration, or they may have other reasons for promoting a cleaner transportation sector, such as improving local air quality. We take up the role of state policy in addressing vehicle GHG emissions in a companion article in this issue.
For more information about this article and others—including links, interactive features, and references—view Resources online at www.rff.org/resources.