Note: This post is co-authored with Benjamin Leard (University of Tennessee) and Katalin Springel (HEC Montreal)
The US Department of Transportation (DOT) and the US Environmental Protection Agency (EPA) have been jointly regulating passenger vehicle fuel economy and greenhouse gas (GHG) emissions standards for over 10 years. Last year, the agencies set standards through 2026, and sometime this spring, the agencies will propose post-2026 standards. We expect that the standards will continue to get tighter over time, which would help the Biden administration achieve its economy-wide GHG emissions targets and its goal of getting zero-emission vehicles (including battery electric, plug-in hybrid, or fuel cell electric vehicles) to account for half of all new vehicle sales by 2030.
As DOT and EPA prepare to set new standards, now is a good time to ask: How well have the standards worked so far? Between 2012 and 2022, the standards tightened by about 33 percent, which has reduced fuel consumption and GHG emissions. Is society better off? Who has enjoyed the benefits and paid the costs of these standards?
We use a newly enhanced model of the US passenger vehicle market to answer these questions. As we explain here and in a new working paper, society has gained $83 billion in benefits from the tightened fuel economy and GHG standards for vehicles produced and sold in 2022. This number perhaps is smaller (but broadly similar to) the benefits that DOT and EPA had anticipated when they first implemented the tighter standards. Additionally, the tighter federal standards have benefited lower-income households more than higher-income households, and for surprising reasons.
Modeling the Benefits of Federal Standards for Fuel Economy and Vehicle Emissions
Using data on new vehicle purchases, we estimated that consumers undervalue fuel cost savings associated with fuel-saving technologies. The average consumer is willing to pay for about three years of savings, rather than the full value of the savings over a vehicle’s lifetime. Our finding of undervaluation is consistent with other recent studies that employ different data and methodologies.
Lower-income households are willing to pay even less for fuel economy than the average household—only about one year of savings. An important corollary point that we’ll expound on below is that those same lower-income households also care less about a vehicle’s horsepower than higher-income households.
We used these estimated consumer preferences and a model to compare two hypothetical scenarios. In one scenario, we assumed that, contrary to what actually happened, the federal standards did not change between 2012 and 2022. In the second scenario, we used the actual (tighter) 2022 standards. We determined the costs and benefits of these two scenarios, along with the consequences of adopting the 2022 levels rather than maintaining the 2012 levels.
Our working paper includes three key results. First, the tighter standards in 2022 have benefited society by $83 billion (2018$) (Figure 1). The total societal benefits include the benefits to consumers of purchasing the vehicles (net of vehicle purchase price and fuel costs over the vehicle’s lifetime); manufacturer profits (manufacturer revenue less the costs of production and design); and GHG damages (which are negative). The red bars in the figure indicate the difference in societal benefits between the two scenarios.
Figure 1. Societal Benefits from Strengthening US Federal Standards for Vehicle Fuel Economy and Greenhouse Gas Emissions in 2022
Note: Numbers may not add up to precise sums due to rounding.
Our estimates of the total societal benefits that result from strengthening the 2022 standards appear to be a bit smaller than the benefits that EPA and DOT anticipated prior to implementing the regulations, although comparing our results with the agencies’ projections is not straightforward, due to differences in the assumptions between the models.
Figure 1 also demonstrates our second key result: Consumer benefits account for most of the gains in societal benefits. With the weaker federal standards in 2012, consumers would be better off buying a vehicle with higher fuel economy, because the lifetime fuel cost savings would exceed the increase in the up-front purchase price. However, because consumers on average undervalue the lifetime fuel cost savings, they buy vehicles with lower fuel economy than is optimal for them. The tighter standards in 2022 make consumers better off on average by forcing consumers to buy vehicles with higher fuel economy. The importance of consumer benefits is consistent with EPA and DOT expectations.
Our third key result is that the stricter fuel economy and GHG emissions standards in 2022 have benefited lower-income consumers more than they’ve benefited higher-income consumers (Figure 2). When consumer valuation of horsepower is taken into account, the consumer benefits decrease with income—meaning that low-income households benefit more than high-income households.
Figure 2. Average Consumer Benefits of 2022 Standards by Income Group
We explored some additional scenarios to understand this surprising result. Vehicle manufacturers comply with the 2022 standards by adding some fuel-saving technology and trading off horsepower for fuel economy. Horsepower is about 20 percent lower in the 2022 scenario with tighter fuel economy standards. Because higher-income households place higher value on horsepower, they mind more when manufacturers reduce horsepower to comply with the standards. To illustrate this point, the purple bars in Figure 2 show the average benefits per household if, instead of using the actual consumer valuation of horsepower (represented by the red bars), we instead assume that all consumers across incomes value horsepower to the same degree. Under this assumption, consumer benefits would increase with income rather than decrease, because the stricter 2022 standards lead to higher prices for used vehicles, which harms lower-income households more. The purple bars increasing with income suggests that the horsepower valuation is driving the relationship between income and consumer benefits.
This result arises due to a combination of compliance strategy (the manufacturer trade-off between horsepower and fuel economy) and consumer preferences (higher-income households show greater demand for horsepower)—so, lower-income households have benefited disproportionally more from the tighter standards.
What Do Our Results Indicate for the Upcoming Proposal from Federal Agencies?
Soon, EPA and DOT will estimate the benefits and costs of proposed standards that will go into effect after 2026; thus, understanding any differences between our approach and theirs can be informative in predicting the outcomes of the post-2026 standards. Our model and theirs differ in two key ways. First, EPA and DOT estimate fuel cost savings for a “representative consumer,” which prevents them from distinguishing the benefits and costs among consumers groups.
Second, the agencies assume that federal standards do not affect horsepower, whereas we include the possibility that manufacturers comply at least partly by trading off horsepower and fuel economy; our approach is consistent with existing research on historical manufacturer compliance. Importantly, by modeling these consumer preferences for vehicles and manufacturer choices related to horsepower, we’re able to show that federal standards have benefited lower-income groups more than higher-income groups.
We largely confirm EPA and DOT’s prior expectations for the 2012–2022 standards, which is important, given that the agencies are about to publish fresh predictions. Also, particularly given the subsidies for plug-in vehicles in the Inflation Reduction Act, the forthcoming federal standards may have much larger effects on the market shares for plug-in vehicles than historically. To date, higher-income consumers have been more likely to buy plug-in vehicles than lower-income households, whereas lower-income groups have benefited the most from the standards—though these patterns may not persist in the future. We can use our model to evaluate the implications of higher plug-in market penetration across income groups.
This post also appears on Resources for the Future’s Common Resources blog.