The impact of adding a fuel economy standard to the CAT policy depends on the availability and cost of abatement opportunities in transport—if advanced biofuels provide a cost-competitive, low carbon alternative to gasoline, the fuel economy standard does not bind and the use of low carbon fuels in passenger vehicles makes a significantly larger contribution to GHG emissions abatement relative to the case when biofuels are not available.

In a study published in the journal Energy Economics, MIT researchers have found that a fuel economy standard is at least six to fourteen times less cost effective than a fuel tax when targeting an identical reduction in cumulative gasoline use (20% by 2050). The researchers also found that a binding fuel economy standard, combined with a cap-and-trade (CAT) policy, increases the cost of meeting the GHG emissions constraint by forcing expensive reduction in passenger vehicle gasoline use, displacing more cost-effective abatement opportunities.

This analysis underscores the potentially large costs of a fuel economy standard relative to alternative policies aimed at reducing petroleum use and GHG emissions. It further emphasizes the need to consider sensitivity to vehicle technology and alternative fuel availability and costs as well as economy-wide responses when forecasting the energy, environmental, and economic outcomes of policy combinations. —Karplus et al.

The team used a modified computable general equilibrium model, the MIT Emissions Prediction and Policy Analysis (EPPA) model, to investigate the effect of combining a fuel economy standard with an economy-wide GHG emissions constraint in the United States. (Their modifications to the model were recently published in the January 2013 issue of the journal Economic Modelling.)

Tighter vehicle efficiency standards through 2025 were seen as an important political victory. However, the standards are a clear example of how economic considerations are at odds with political considerations. If policymakers had made their decision based on the broader costs to the economy, they would have gone with the option that was least expensive—and that’s the gasoline tax.

A tax on gasoline has proven to be a nonstarter for many decades in the US, and I think one of the reasons is that it would be very visible to consumers every time they go to fill up their cars. With a vehicle efficiency standard, your costs won’t increase unless you buy a new car, and even better than that, policymakers will tell you you’re actually saving money. As my colleague likes to say, you may see more money in your front pocket, but you’re actually financing the policy out of your back pocket through your tax dollars and at the point of your vehicle purchase. —Valerie Karplus, the lead author of the study and a researcher with the MIT Joint Program on the Science and Policy of Global Change

Karplus and her colleagues found that it takes longer to reduce emissions under the vehicle efficiency standards. With more efficient vehicles, it costs less to drive, so Americans tend to drive more. Meanwhile, the standards have no direct impact on fuel used in the 230 million vehicles currently on the road. Karplus also points out that how quickly the standards are phased in can make a big difference. The sooner efficient vehicles are introduced into the fleet, the sooner fuel use decreases and the larger the cumulative decrease would be over the period considered, but the timing of the standards will also affect their cost.

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