Fuel economy standards require that vehicles can drive a certain number of miles per gallon, which reduces vehicle fuel costs—and saves drivers money. But a key issue looms: if tighter standards mean consumers save money, why does the new vehicle market rely on regulations, and not market forces, to encourage automakers to adopt fuel-saving technology?
A new paper by Resources for the Future (RFF) University Fellow Benjamin Leard and intern Kevin Ankney dives into why market forces alone are not sufficient to drive change. In particular, the authors look at how consumers value fuel cost savings. They find that consumers undervalue fuel cost savings over a vehicle’s lifetime, placing value only on the first three years of fuel costs, with near zero value on future costs beyond that point.
“It can take a several years for an investment in fuel economy to pay off,” Leard said. “This time horizon, or 'payback period' as some call it, makes it challenging to convince car buyers to make the investment.”
The researchers compared the value that vehicle buyers assign fuel savings compared to the value assigned by vehicle lessees, who tend to use a specific vehicle for a much shorter period. In 2018, about a quarter of all new vehicle transactions were leases.
They found that people leasing vehicles (who only incur fuel costs over their leasing period) fully value fuel costs during their lease. By comparison, new vehicle buyers substantially undervalue lifetime fuel costs.
However, both buyers and lessees are willing to pay around 29 cents at the time of vehicle transaction in exchange for $1 of future fuel savings over the course of a vehicle’s expected life. Because of this, buyers may also undervalue the lifetime fuel cost savings resulting from energy-saving standards in the new vehicle market.
For leasing, specifically, companies that own the leased vehicles respond to fuel cost changes by adjusting residual value, or the expected resale value of the vehicle at the end of the lease. While lessees fully value lease-specific fuel costs, companies expect used car buyers who buy the formerly leased cars to significantly undervalue post-lease fuel costs, suggesting that this undervaluation is systemic.
For more, read, “How Much Do Consumers Value Cost Savings? Evidence from the Passenger Vehicle Leasing Market,” by Benjamin Leard, RFF university fellow and University of Tennessee researcher, and Kevin Ankney, Ph.D. candidate in Economics at Georgetown University.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
For more information, please refer to our media resources page.