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

In their initial benefit-cost analysis of the 2012-2016 passenger vehicle fuel economy standards, the U.S. regulatory agencies estimated that the benefits of the standards would be three times greater than the costs. However, their analysis was based on the high gasoline prices forecasted at the time; after their analysis, expected gasoline prices fell by 25 percent. We augment the agencies' benefit-cost framework and use recent evidence on behavioral responses to gasoline prices to estimate the effects of low gasoline prices on benefits and costs. Accounting for consumer changes in miles traveled and vehicle choice, we find that the 25 percent reduction in future gasoline prices reduces the value of fuel savings by 22 percent. Because of consumer changes in 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.
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Keywords: Corporate average fuel economy standards, CAFE, attribute-based standards, greenhouse gas standards, consumer behavior

DOI: 10.5547/2160-5890.7.2.jlin

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Published in Volume 7, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.