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2003 Progress Report: Tradable Fuel Economy Credits for Cars and Light Trucks

EPA Grant Number: R830836
Title: Tradable Fuel Economy Credits for Cars and Light Trucks
Investigators: Rubin, Jonathan
Current Investigators: Rubin, Jonathan , Greene, David , Leiby, Paul
Institution: University of Maine
EPA Project Officer: Wheeler, William
Project Period: January 1, 2003 through December 30, 2006
Project Period Covered by this Report: January 1, 2003 through December 30, 2004
Project Amount: $177,247
RFA: Market Mechanisms and Incentives for Environmental Management (2002)
Research Category: Economics and Decision Sciences

Description:

Objective:

The fuel economy of new U.S. light-duty vehicles (cars, minivans, SUVs, light trucks) has declined significantly since its peak in 1989 following the implementation of corporate average fuel efficiency (CAFE) standards in 1978. CAFE regulations specify minimum fleet average standards for fuel efficiency that vehicle manufacturers must meet.

The effectiveness of CAFE standards in raising the light-duty vehicle fleet’s fuel efficiency is discussed in a large body of literature. It is debated whether the improvements in average fuel efficiency are attained at a reasonable cost, whether the CAFE regulations induce undesirable changes in vehicles that could lower their safety, or whether the regulations have the unintended effect of encouraging the shift in market share from cars to light-duty trucks. Recently, the National Research Council (NRC) has released a comprehensive review of the effectiveness and impact of CAFE standards. The NRC concluded that the CAFE program clearly has increased fuel economy since its inception, although certain aspects of the program have not functioned as intended. These include indirect consumer and safety costs and the breakdown in the distinctions between minivans, SUVs, and cars in the calculation of fuel economy standards. The NRC also concluded that technologies exist that, if applied to light-duty vehicles, would significantly reduce fuel consumption within 15 years.

The NRC concluded that raising the CAFE standard would reduce future fuel consumption, but that other policies could accomplish this reduction at lower cost and greater flexibility. The NRC also concluded (see Finding 11) that: “Changing the current CAFE system to one featuring tradable fuel economy credits and a cap on the price of these credits appears to be particularly attractive….”

Methods

To test this conclusion, we are estimating the potential cost savings of moving from the current CAFE system to one that allows vehicle manufacturers various levels of increased flexibility, including trading of CAFE credits across manufacturers. In addition, we are examining the cost savings from allowing firms to buy and sell credits across time periods. From a social-welfare maximizing perspective, it often is better for an environmental regulator to allow intertemporal trading at nonunitary rates to account for changing marginal damages and costs across time periods. Given that five firms account for a large portion of total vehicle sales, we are examineing the importance of imperfect competition in the credit market by modeling dominant firms as Cournot-Nash players with a competitive fringe.

Using different fuel economy supply curves, reflecting differences in opinions about cost, performance, and technical change, and accounting for the adjustment costs of manufacturers to changing standards over time, we are estimating how different credit systems promote cost-savings as CAFE standards are increased to the levels suggested by the NRC.

Progress Summary:

The researchers have worked out the theoretical models for: (1) a perfect competition, static model; (2) a perfect competition, intertemporal model with banking and borrowing; and (3) a Cournot-Nash static model. Using preliminary data the researchers have implemented: (1) a perfect competition, static model; and (2) a perfect competition, intertemporal model with banking and borrowing. These preliminary results were presented at the International Association for Energy Economics North American Conference. The investigators also produced a working paper, “Tradable Fuel Economy Credits for Cars and Light Trucks” that contains the relevant literature review, preliminary theoretical models, and some preliminary numerical results of this research.

Future Activities:

During the coming year, we will implement the Cournot-Nash model. This involves writing the computer code, parameterizing the model, and verifying the accuracy of our approach. We also will update the data set and rerun all of the models, perform the sensitivity analysis, and prepare papers of the results for publication.

Journal Articles:

No journal articles submitted with this report: View all 7 publications for this project

Supplemental Keywords:

cost-benefit, modeling, socio-economic, fuel economy, light-duty vehicles, conservation, , Economic, Social, & Behavioral Science Research Program, Scientific Discipline, RFA, Economics and Business, Market mechanisms, tradeable fuel economy credits, market-based mechanisms, trading systems, emissions trading, allowance market performance, market incentives, automotive fuel economy credit trading, environmental economics, pollution allowance trading, policy incentives, consumer behavior, energy efficiency

Progress and Final Reports:
Original Abstract
Final Report

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The perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.

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