Association for Public Policy Analysis & Management

An energy efficiency gap for passenger vehicle fuel economy exists if fuel-saving technologies are not adopted even if the value of fuel savings exceeds the cost of adoption. The energy efficiency gap implies that fuel economy or greenhouse gas emissions standards could raise consumer welfare, but the literature has failed to resolve whether a gap exists. Previous research has not quantified the opportunity cost of adopting fuel-saving technology, which arises from foregone performance. This paper addresses whether there is an energy efficiency gap, accounting for consumer valuation of fuel economy and performance.

Using a unique data set and novel statistical techniques to account for the endogeneity of vehicle attributes, we find that consumers undervalue fuel cost savings, paying about 50 cents for one dollar of discounted future fuel cost savings. The estimates are based on a unique data set that contains about 500,000 observations of new car buyers covering the years 2010 through 2014. The estimation strategy uses information on fuel-saving technologies to control for unobserved vehicle attributes that would otherwise bias the estimates.

The estimated willingness to pay for performance implies that the cost of raising fuel economy, including the opportunity cost, exceeds the value, suggesting that an energy efficiency gap for fuel economy does not exist. The results imply that fuel economy and greenhouse gas standards may reduce consumer welfare, as well as consumer demand for new vehicles.