Issue Brief

How Do Low Gas Prices Affect Costs and Benefits of US New Vehicle Fuel Economy Standards?

Summary

The new Corporate Average Fuel Economy and greenhouse gas emissions standards will radically change the fuel economy and emissions of US light-duty vehicles. What are the implications of lower gasoline prices for the benefits and costs of the standards?

Key Findings

  • In their initial benefit–cost analysis of the 2012–2016 standards, the agencies did not account for consumer or manufacturer behavioral responses to low gasoline prices.
  • We augment the agencies' benefit–cost framework and use recent evidence on behavior and gasoline prices to estimate the effects of low gasoline prices on benefits and costs.
  • The 25 percent reduction in future gasoline prices reduces the value of fuel savings by 22 percent, allowing for consumer changes in miles traveled and vehicle choice.
  • Lower gasoline prices raise compliance costs by about $0.5 billion per year, or about 9 percent of the total net benefits of the program.
  • Accounting for these responses does not overturn the agencies' initial conclusions that benefits exceed costs.