Association for Public Policy Analysis & Management

The federal Corporate Average Fuel Economy standards and the Environmental Protection Agency greenhouse gas emissions (GHG) standards are the primary mechanisms through which the U.S. federal government regulates transportation-related GHG emissions. In 2012, these standards were set to rise for light-duty vehicles between 2017 and 2025, and eventually achieve approximately 54.5 miles per gallon in 2025, with corresponding GHG emissions limits. Since 2012, however, gas price projections have dropped dramatically, consumers have increased their interest in the purchase of trucks and crossover sports utility vehicles, and new projections suggest that the cost of compliance with these standards will cause higher consumer prices than previously thought.

In this article, we analyze the possible macroeconomic effects of the federal standards, both with information available in 2012 and with revised estimates that reflect these important changes that have occurred since 2012. Our research question is two-fold: what are the effects of federal fuel economy and GHG emissions standards on the economy; and are these potential effects different if we use information available in 2012 versus more recent information on energy markets and consumer preferences?

We analyze the macroeconomic effects using a dynamic structural economic forecasting and policy analysis model that combines input-output, computable general equilibrium, econometric, and economic geography modeling components. The model, referred to as REMI, contains thousands of different simultaneous equations pertaining to output and demand, labor and capital demand, population and labor supply, prices and costs, and trade ratios. In our modeling approach, we divide the federal standards into three separate mechanisms: 1) a vehicle price premium; 2) supply chain innovation investment; and 3) gasoline savings. We consider the effects of all three mechanisms between 2017 and 2035 both individually and collectively, and for the nation as well as different regions. These mechanisms allow us to model fuel economy standards with greater accuracy and nuance than previous studies, and can thereby contribute to the conference theme of better measurement.

Preliminary results reveal that the short-term effects on the economy of the federal standards will be negative but the long-term effects will be positive. The transition from annual negative employment estimates to positive values occurs between 2023 and 2026, depending on which set of assumptions are used. Cumulative estimates of effects on gross domestic product switch from negative to positive between 2027 and 2032. The results are highly sensitive to parameters that reflect a 2012 understanding of transportation markets versus a more recent understanding. The study concludes with a series of sensitivity analyses as well as a discussion about the validity of assumptions used in the analysis, and the degree to which they reflect current and real-world conditions.