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Should Automobile Fuel Economy Standards be Tightened?

Abstract:
This paper develops analytical and numerical models to explain and estimate the welfare effects of raising Corporate Average Fuel Economy (CAFE) standards for new passenger vehicles. The analysis encompasses a wide range of scenarios concerning consumers valuation of fuel economy and the full economic costs of adopting fuel-saving technologies. It also accounts for, and improves estimates of, CAFE's impact on externalities from local and global pollution, oil dependence, traffic congestion and accidents. The bottom line is that it is difficult to make an airtight case either for or against tightening CAFE on pure efficiency grounds, as the magnitude and direction of the welfare change varies across different, plausible scenarios.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Efficiency; Energy and the Environment – Climate Change and Greenhouse Gases

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q55 - Environmental Economics: Technological Innovation
Q54 - Climate; Natural Disasters and Their Management; Global Warming

Keywords: Fuel economy standards, oil dependency, Carbon emissions, rebound effect, gasoline tax, CAFÉ

DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No4-1


Published in Volume 28, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.