However, 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% relative to a no-policy scenario in 2050, versus only 6% 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. If they’re more focused on energy independence, fuel economy standards can deliver, but a tax on gasoline would be more cost-effective. 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.

—lead author Valerie Karplus, assistant professor of global economics and management at the MIT Sloan School of Management

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 greenhouse gas emissions from the transportation sector. 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.

—Jonathan Rubin, professor at the Margaret Chase Smith Policy Center and School of Economics at the University of Maine

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.

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%. 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, the MIT analysis suggests that a coordinated approach that includes a price on CO₂ will be far more effective at achieving this goal.

The EPPA model used in this study is supported by a consortium of government, industry, and foundation sponsors of the MIT Joint Program.

Resources

• Karplus, Valerie J.; Kishimoto, Paul N.; Paltsev, Sergey (2015) “The Global Energy, CO₂ Emissions, and Economic Impact of Vehicle Fuel Economy Standards” Journal of Transport Economics and Policy (JTEP), Volume 49, Number 4 pp. 517-538 (22)