Association for Public Policy Analysis & Management

Second best environmental regulations are often the subject of intense debate because they have the potential to exacerbate other unpriced externalities. One of the most controversial regulations is the Corporate Average Fuel Economy standard, which is attacked based on safety concerns. It has long been argued that increasing the CAFE standards to reduce gasoline consumption in automobiles leads to a down-weighting of the fleet, increasing accident fatalities. In this paper we examine the effect of CAFE on vehicle weight dispersion, which prior studies in the ‘Arms Race’ literature suggest is the main determinant of accident severity. With more than 30,000 fatal crashes a year, the risks are significant. Using standard values of a statistical life, if even a small fraction of these fatalities are due to CAFE, these costs will dominate the direct compliance costs.

We estimate the dispersion in vehicle weight caused by CAFE, link it to supplier strategies to meet the standard, and examine how firms that are unconstrained by CAFE may either exacerbate or mitigate those changes. In this way it is the first paper to actually measure if CAFE increased or decreased the weight dispersion of the products on the market. We then apply these estimates to a model of accidents that captures fatalities resulting from dispersion of vehicle weight in ways not possible in previous studies.

Our results suggest that the changes in vehicle weight are not the dominant response across the entire product space and, where they do occur, are considerably more complex than a uniform down-weighting. For the domestic car fleet we find that increased stringency, no matter what measure is used, results in down-weighting of moderate weight vehicles (vehicles in the 25-50^th quantiles). This means that for each 1 mile per gallon increase in the CAFE standard, firms may down weight vehicles by 25 to 81 lbs in the lower quantiles. We find very little response to the stringency of CAFE standards for heavier vehicles Interestingly we find that while Asian manufacturers do not react much to their own-stringency measures, they do react to the stringency of the domestic firms. By up-weighting their low weight vehicles, they may be taking competitive advantage of the product space vacated by the domestic manufacturers resulting in lower dispersion overall. We also examine European manufacturers, who seem to have a more uniform down weighting response to CAFE and the domestic light truck segment of the market, which reacts similar to the domestic car segment with most dispersion occurring in the middle of the product space.

Using these estimates, we then perform counterfactual policy analysis. We find dispersion effects for the middle of the vehicle weight distribution with the lowest and higher weight vehicles remaining largely unchanged. Second we find that there is substantial offsetting behavior by the Asian firms who appear to use the opening of the product space generated by CAFE. These results suggest that concerns of increased fatalities are likely to have been overstated by prior studies.