Working Paper

Fuel Prices, New Vehicle Fuel Economy, and Implications for Attribute-Based Standards

Summary

An analysis of gasoline prices and US fuel economy standards reveals that price increases in the mid-2000s had a larger effect on vehicle market shares than recent decreases, but the latter have slightly reduced the mandated level of fuel economy.

Key Findings

  • Recent gasoline price decreases have had a significant effect on new vehicle fuel economy, although a smaller effect than gasoline price increases in the mid-2000s.
  • The recent gasoline price decreases have reduced by a small amount the overall level of fuel economy required by federal standards.
  • Vehicle sales appear to be more responsive to rising than to falling or stable prices.
  • There is limited evidence that fuel economy standards have weakened the relationship between gasoline prices and new vehicle fuel economy.

Abstract

Energy efficiency standards based on product attributes may interact with market conditions and affect the overall stringency of the standards. In this paper we analyze the interaction between gasoline prices and the redesigned and tightened federal fuel economy standards. Tighter standards will tend to reduce the effect of gasoline prices on market shares. Furthermore, under the standards a vehicle’s fuel economy requirement depends on its size. Lower gasoline prices incentivize consumers to purchase new vehicles with lower fuel economy, which are typically larger and therefore face lower fuel economy requirements. Using monthly data from 1996 to 2015, we find that fuel prices have had a smaller effect on market shares in recent years than previously. This result appears to be driven by a stronger response to rising than falling or stable prices. We construct two proxies for the stringency of the standards and we find limited evidence that the standards affect the relationship between fuel prices and market shares. Using the estimated responsiveness to fuel costs from the 2008 to 2015 period, the estimates imply that the 25 percent gasoline price decrease between 2014 and 2015 had a modest effect on average fuel economy and the average fuel economy required by the standards.