## MIT study finds carbon prices more cost-effective than fuel economy regs at reducing CO2 emissions; fuel economy regs more efficient at reducing fuel use

##### 12 October 2015

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 fuel economy standards (extended to the year 2050) with those of region-specific carbon prices designed to yield identical CO2 emissions reductions.

Their study, which appears in the Journal of Transport Economics and Policy, finds that such stringent fuel economy standards would cost the economy 10% of global gross domestic product (GDP) in 2050, compared with a 6% cost under carbon pricing. 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.

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.

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No $hit. Now all we need are some smart (and brave) politicians with the foresight and will to implement a carbon tax or even to raise the fuel taxes. Good luck with that. Disclaimer: I have 4 degrees including a doctorate in ME from MIT. Pollution controls on ICE are mandatory, regardless of other approaches. But the most simple solution to reduce consumption is price (a tax at the purchase site). The implementation is quite simple. The existing taxing system should require few if any additional government employees. And the simplest solution is usually the best. All consumers understand cost. We use it for all other products on a daily basis. Simply announce an immediate$.50 a gallon tax on motor fuel. Also announce that this tax will increase by $.50 a gallon every 6 months until the price of motor fuel is in the$10.00 a gallon range.

Take the tax revenue and use it for infrastructure improvements and R&D on renewable energy sources.

It's easy to implement. Would work wonders on changing demand. Fix the highway system. And create a pathway to the new energy paradigm.

Just one more reason to adopt carbon trading on a national or multinational basis as a business-friendly way of reducing CO2 emissions. You cannot argue with science.

If gas were $10 I'd quit my job... Sell my car and seek some sort of welfare. I'd probably walk 2 miles to work at the nearest McDonald's or something. And would you tax carbon neutral liquid fuels? Other solution would be a major raise... Like 20k a year at my job Honestly I hope they would get carbon producing utilities taxed too... 12cents is way too cheap...home owners spend more energy on their homes than their car. This needs to be addressed with a sharp increase in rates...maybe$1/kwh

Create an issue than create a market to profit from it.. good work if you can get it.

A carbon tax paying to make incentives for solar panels and electric vehicles makes sense to me. We tax what we don't want then we create incentives for what we do want. That should be obvious to everyone.

Why not both!

A revenue neutral carbon pricing scheme is simple and more likely to be accepted by the public:
https://citizensclimatelobby.org/carbon-fee-and-dividend/

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