Vehicle fuel economy standards as global climate policy: How much can they deliver and at what cost?

October 12, 2015 by Mark Dwortzan, Massachusetts Institute of Technology
Higher fuel economy standards may enable fewer trips to the gas pump, but they are not as cost-effective as carbon pricing in reducing carbon dioxide emissions. Credit: Upupa4me/Flickr

Over the past decade, many countries and regions seeking to reduce climate-warming carbon dioxide emissions have adopted more aggressive fuel economy standards designed to boost the efficiency of new, light-duty cars and trucks. Economists, however, generally argue that a more cost-effective way to reduce CO2 emissions is to price carbon through a system such as cap-and-trade, in which emitters across all sectors of the economy pay for each ton of CO2 they put into the atmosphere. Impacts of these two approaches have been previously compared on a national and regional level, but until now, have not been evaluated on a global scale.

To fill this gap, researchers at the MIT Joint Program on the Science and Policy of Global Change have compared the worldwide economic, environmental, and energy impacts of currently planned (extended to the year 2050) with those of region-specific carbon prices designed to yield identical CO2 reductions. Their study, which appears in the Journal of Transport Economics and Policy, shows that such stringent standards would cost the economy 10 percent of global gross domestic product (GDP) in 2050, compared with only 6 percent under .

This finding reinforces economists' contention that improving the efficiency of motor vehicles through fuel economy standards will yield significantly less CO2 emissions reduction per dollar than an economy-wide instrument that encourages such cutbacks where they are cheapest—principally in the electric power and industrial sectors. But the fuel economy standards modeled in the study did prove beneficial in terms of fuel consumption: They reduced fuel used in passenger vehicles by 47 percent relative to a no-policy scenario in 2050, versus only 6 percent under carbon pricing.

"Many developed countries are choosing very expensive ways to reduce CO2 emissions, but if that's a top priority, they should go with a price on carbon," says the study's lead author Valerie Karplus, assistant professor of global economics and management at the MIT Sloan School of Management. "If they're more focused on energy independence, fuel economy standards can deliver, but a tax on gasoline would be more cost-effective."

"The new paper by Professor Karplus and her colleagues provides important new insights into the role of efforts by nations around the world to reduce petroleum use and from the transportation sector," says Jonathan Rubin, a professor at the Margaret Chase Smith Policy Center and School of Economics at the University of Maine. "The research shows that the often-used policy of requiring fuel economy improvements, while capable of reducing petroleum use, is significantly more expensive than other, economy-wide options which are more cost-effective at reducing greenhouse gas emissions."

Capturing the interwoven responses of a global economy

To arrive at their findings, the researchers used the MIT Emissions Prediction and Policy Analysis (EPPA) model to simulate the impact of fuel economy and carbon pricing policies. The fuel economy scenario simulated the impacts of extending current fuel economy mandates past their expiration dates through 2050. The carbon pricing scenario consisted of a patchwork of national and regional cap-and-trade policies designed to achieve the same CO2 emissions reductions by 2050 as the fuel economy standards produced in each market.

An important feature of the study was its ability to capture, via the EPPA model, two major effects of national and regional fuel economy standards: rebound and leakage. Adoption of more fuel-efficient vehicles, by decreasing fuel demand, also reduces the per-mile price of fuel as supply and demand balance in the market. This price reduction can lead to more driving in the market covered by the policy—known as the rebound effect—as well as in sectors and regions not covered by the policy—known as the leakage effect—because globally interlinked fuel markets cause prices to fall worldwide.

"What makes our study unique is that we used a global model that captures market linkages around the world, rather than within a single nation, region or sector," says Karplus.

Modeling new technologies and behaviors

The model simulates not only rebound and leakage effects, but also the gradual adoption of new, more expensive vehicles and retirement of old ones; how vehicle owners navigate the tradeoff between using more fuel and purchasing a more efficient vehicle; the relationship between changes in household income and vehicle usage behavior; and the adoption of off-the-shelf and advanced, low-carbon technologies that increase miles per gallon.

The study also determined that by 2050, currently planned fuel economy standards would reduce CO2 emissions by about 4 percent relative to a no-policy scenario. Extending these standards past their deadlines through 2050 would decrease emissions by an additional 6 percent. These relatively modest reductions would come at a high cost.

Although it may be politically easier to repurpose or replicate commonly applied fuel economy standards to reduce CO2 emissions, this analysis suggests that a coordinated approach that includes a price on CO2 will be far more effective at achieving this goal.

Explore further: Regulations only a first step in cutting emissions

More information: The Global Energy, CO2 Emissions, and Economic Impact of Vehicle Fuel Economy Standards, Journal of Transport Economics and Policy (JTEP), Volume 49, Number 4, October 2015, pp. 517-538(22) … 49/00000004/art00002

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3.7 / 5 (3) Oct 12, 2015
Taxes are always a bad way to control a market, because the government that collects the tax becomes dependent on the money, since they need to spend it to fix the problems caused by the taxation. It's a catch-22.

Carbon tax on fuel is basically a consumption tax, which hits the poor the worst because they spend the largest part of their income on direct consumption, and because transportation and energy costs are shifted directly into prices of food and basic services. Such a regressive tax then causes the need to spend more money on welfare and other social programs, and the cycle is complete.

It's a big problem because taxing carbon does not make the other options any cheaper.

That means that even as people switch over from carbon - which removes the tax income - the previously mentioned social costs remain due to the high cost of the alternatives, but without the tax income from the carbon tax the government no longer has the money to pay.
5 / 5 (2) Oct 12, 2015
Needs a 1-2 punch. Carbon tax first...and after the easy stuff has been taken care of then stricter regulations second.

The industry certainly isn't going to wake up and smell the roses of their own accord.

Carbon tax is preferrable to regulation as it hits more industries thus spreading the load better and not making it worse for the poorest, only. A tax can also go to financing aid programs to offset any hit the poor will feel. A regulation enforced savings cannot.

3 / 5 (2) Oct 12, 2015
In general, taxes and subsides as used to control a market only go against the general interest of the public - one way or another.

For example, forcing the adoption of higher cost energy sources by taxing the cheaper ones, people have to work longer hours to pay their bills and more work means more spent resources - in other words more consumption to get the same amount of wealth ouf of it. The end result is lower efficiency of resource utilization.

This is nearly a truism, because the reason why the more expensive sources are more expensive is because they're less effective and need a bigger investment to operate at the same level and quality of output. The society has to spend more resources on them and less on everything else.

That means the people can't pay their bills and instead have to lower their living standards to compensate for the increased cost of living, which means the government just paid cleaner energy with more poverty, illness and crime.
3 / 5 (2) Oct 12, 2015
Carbon tax is preferrable to regulation as it hits more industries thus spreading the load better and not making it worse for the poorest, only.

It will hit the poorest regardless, because the industries pass the expenses on to their prices, and the price levels affect the poor directly. The rich people don't spend the majority of their income on basic necessities like fuel, food and housing, so they aren't nearly as affected.

The real lesson here is that there's no good way to force the transition through political action without shooting yourself in the foot. It will always end up hurting the people, and especially the poor people who can't insulate themselves from the effects of your policies with money and influence.

The only good effort is massive investment in R&D to bring the cost of the alternatives to parity and below.

The next best would be progressive taxation and energy subsidies, but that causes the exodus of the rich and all the jobs.
1 / 5 (2) Oct 12, 2015
The base of the problem is believing that there is a problem which requires fixing. Rather than controlling the production of vehicles and punishing manufacturers (who pass on their costs to the consumer), we should continue to develop alternatives if we want to reduce carbon based fuel.

this analysis suggests that a coordinated approach that includes a price on CO2 will be far more effective

Every article about the evils of CO2 has the primary message that we should tax CO2 or at least an eventual statement that we should tax CO2. All the AGWites seek a redistribution of wealth -- hence the taxes on CO2 or the indirect taxes of government control of industry.
5 / 5 (3) Oct 12, 2015
It will hit the poorest regardless, because the industries pass the expenses on to their prices

Pretty much invalidates your first post, doesn't it?
As I said: with a tax you can give the poorest a credit. A restriction cannot.
In general, taxes and subsides as used to control a market only go against the general interest of the public

No. They go against the general interest of companies (whose interest is diametrically opposed to that of the public
It is only, as you point out, possible for companies to offload the burden onto the public to some extent. Letting businesses run rampant has NEVER lead to best efficiency (aside form most efficient money-making).
This is always because companies find ways to offload their costs/damages/wastes onto taxpayers (or who do you think will foot the bill for climate change? Pollution is ALL company profits that we will have to pay for)
1 / 5 (3) Oct 12, 2015
Lowering the Speed Limit on the Interstate Highway from 70mph to 60mph would save 26.5% on fuel spent there, and would reduce upkeep costs on both the autos and the roads, as well as reducing the severity of the worst accidents.

Taxes do not reduce pollution, because people still have to do all the same things to earn a living anyway.

Progressive tax maybe, but in the U.S. the political climate has reach the point the Republicans practically want to cut taxes on everyone except the lower and middle class.

We need like a 10-15% increase in tax on the very wealthy, and instead we're looking at a 10% decrease if they get their way.

Republicans also want to export US oil, even though we still import half the oil we use, which makes no military or economic sense. From a military point of view, it would be best, if we're going to burn oil anyway, to use up everyone else's stuff first...which is why the export ban was made in the first place.
1 / 5 (3) Oct 12, 2015
If they closed the tax loophole on Amazon, the tax loophole on Intel and GE, and the other tax loopholes on corporations and capital gains taxes, as well as passing a law restricting patent rights to "ex-patriated" companies unless they pay at least a certain percent of their tax...

This adds up to several hundred-billion per year worth of tax evasion and loopholes in the U.S. more than the entire tax revenue of most other nations, and a lot of it is going to Ireland, Sweden, and other countries who don't seem to have an economy other than under-cutting other nations more realistic tax codes to steal tax revenues...

We should put an Embargo on Ireland and Sweden until the money from ex-patriated corporations is returned.

If they did all that they could pass stricter regulations on autos' efficiency, and use the tax money to fund subsidies for the companies' R&D, as well as subsidies for more advanced Wind, Hydro, and Solar R&D
1 / 5 (3) Oct 12, 2015
Pass a Constitutional Amendment*, which says that Corporations which do not pay taxes in the U.S. Must pay a certain fee every year to renew their U.S. Patent Rights, on a per-patent basis. Amount would be at the discretion of the Congress, and subject to annual review. Rules must be progressive and across the board. No exceptions unless it's somehow a matter of national security.

If a Corporation is found to be in violation, the Congress would have the power to seize the patent rights and auction them to another, more patriotic and cooperative entity.

* This is so the idiot Supreme Court can't rule it "unconstitutional".

Patents were never intended to be permanent impediments against competition. They were intended to give inventors and firms enough time to profit from their investments for a while, and then increase the overall technology level of the nation. They've become a way to prevent progress in modern times by corporations hoarding permanent patents.
3 / 5 (2) Oct 12, 2015
Pretty much invalidates your first post, doesn't it?

No. It's simply restating the same thing. You tax, and then you -have- to spend the money back on the poor, which becomes unsustainable if your tax scheme actually accomplishes its intended purpose.

As I said: with a tax you can give the poorest a credit. A restriction cannot

It doesn't work, because once people stop using the thing you're taxing - because that's the whole point of why you're taxing it - the tax revenue runs dry and you run out of money to pay for the wealth back-redistribution. The alternatives haven't become any cheaper, because your whole scheme is based on jacking the price level up to them instead, so the poor still need the money.

A regulation or a standard at least doesn't trap you in a catch-22 where you're doomed to fail.
3 / 5 (2) Oct 12, 2015
No. They go against the general interest of companies (whose interest is diametrically opposed to that of the public

That's a false statement. The interest of companies and the public is the same, because a business can't do any business if it doesn't have any customers. Going against the public interest is a long term failing strategy.

Letting businesses run rampant has NEVER lead to best efficiency

In an imperfect world, that is true, because it's too easy to cheat. That however does not meant that business in general is out to get you at every turn. That's just a cynical left-wing myth.

This is always because companies find ways to offload their costs/damages/wastes

Costs are always reflected in the prices. That's correct. It's the public's job to define what they want to buy and what they want to pay for. Currently, we can't afford the clean stuff even if it was offered to us, and forcing people to pay for it just creates other problems.

3 / 5 (4) Oct 12, 2015
Essentially, the real question about things like carbon tax is: who are you going to throw under the bus to have your carbon-free economy?

Because our societies and populations are built on cheap, abundant fossil fuels with no emission controls which operate at a price point far below that of the available renewable fuels. Deliberately jacking the prices of fossil fuels up to the point that people would actually switch over to using the alternatives would cripple our societies.

Tax or regulation won't help. The problem is the cost of the renewables, which is unsustainable in the current economy. That cost has to come down, and neither tax or regulation will make that happen.

3 / 5 (2) Oct 12, 2015
The other unintended consequencey on things like carbon tax is that people will not switch to the alternatives you would want them to.

Point in case: how half the cars on European roads run on diesel despite higher emissions that everyone pretends they don't know about, because the massive fuel taxes means people just can't afford to drive otherwise.

Adding a carbon tax on road fuels in the US would see a similiar development, because a diesel car is still cheaper to run than a gasoline hybrid. Of course, you could then outlaw diesel cars or regulate them out of existence... but then you're simply playing whack a mole and the next thing people will do is start driving on BBQ propane or something else you aren't yet taxing.

It was a popular sport in Sweden for example to install dual-fuel systems that ran on paraffin oil due to high road fuel tax after WW2. Paraffin oil was lamp fuel and wasn't taxed.
5 / 5 (2) Oct 12, 2015
You tax, and then you -have- to spend the money back on the poor, which becomes unsustainable if your tax scheme actually accomplishes its intended purpose.

No, you increase tax on motor fuel and use the revenue to rebuild the failing infrastructure of roads and bridges. That creates more semi-skilled jobs that employ the poor and reduce unemployment, which in turn raises wages for other unskilled/semi-skilled people.

This not only helps to make non-carbon fueled vehicles more price competitive, but also creates valuable infrastructure, creates jobs, and improves the economy. As a bonus, the higher tax on motor fuel could be made variable so that fluctuations in oil prices could be dampened, further helping to secure the economy.

OF course this idea is politically untenable because conservatives reject the higher taxes, and liberals think every tax dollar should be given to the poor as welfare.
1 / 5 (2) Oct 13, 2015
"conservatives reject the higher taxes, and liberals think every tax dollar should be given to the poor as welfare"

I guess you are the only smart one here, huh?

Why do you resent the help we give to those less fortunate?
1 / 5 (2) Oct 14, 2015
Fusion power and improved batteries will make (fossil) fuel economy standards irrelevant, way before 2050. We will all have self driving Google electric cars. Cap-and-Trade is 99.9999% a new sources of funds for government, and if it affects climate, that's a side effect.

Why all the hate for plant food CO2 anyway? We need all we can get to feed the ever growing human population. I'd rather see activity now to develop a strategy to mitigate the next ice age, which is overdue.

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