Evaluating the effects of the footprint-based cafe standard on auto manufacturers and household behavior

Matsushima, Hiroshi

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https://hdl.handle.net/2142/117652 Copy

Description

Title

Evaluating the effects of the footprint-based cafe standard on auto manufacturers and household behavior

Author(s)

Matsushima, Hiroshi

Issue Date

2022-11-27

Director of Research (if dissertation) or Advisor (if thesis)

Khanna, Madhu

Doctoral Committee Chair(s)

Khanna, Madhu

Committee Member(s)

• Ando, Amy
• Christensen, Peter
• Deltas, George
• Leard, Benjamin

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

CAFE Standard

Abstract

Light-duty vehicles have consistently been the largest source of greenhouse gas (GHG) emissions as a single end-use sector, accounting for 17 percent of GHG emissions in the United States in 2019. To curb such pollutant emissions, the Corporate Average Fuel Economy (CAFE) standard has set the annual average fuel economy that automakers are required to achieve since 1978. In 2012, the CAFE standard underwent a historic revision for the first time since its enactment; the standard has been raised every year and a new footprint-based mechanism has been introduced that differentiates the stringency of the standard along vehicle size in terms of vehicle footprint. This dissertation analyzes how this substantial regulatory change has affected optimal vehicle pricing by automakers (Chapter 1), the equilibrium market sales share and average fuel economy of new vehicles (Chapter 2), and the fuel-economy rebound effect through changes in vehicle attributes (Chapter 3). The major contribution of this dissertation to the literature is that it provides more comprehensive reduced-form and structural empirical evidence under the new regime of the CAFE standard by addressing three major challenges unmet in the existing studies. First, I incorporate both the stringency of the standard, regulatory incentives for flex-fuel vehicles (FFV), and market conduct jointly in estimating the price-setting equation. Second, I explicitly account for and decompose both supply- and demand-side factors in quantifying the effectiveness of the footprint-based CAFE standard in raising the average fuel economy. Third, I break one of the strongest empirical assumptions that fuel economy is increased without degrading other vehicle attributes and directly compare the fuel-economy rebound effects between the previous and new regimes of the CAFE standards. These new considerations yield results and policy implications that are consistent not only with economic theory but also with each other, enabling regulatory authorities to evaluate the effectiveness of the footprint-based CAFE standard and draft future standards in a more realistic and accurate manner. Chapter 1 analyzes how automakers strategically set prices for vehicles that differ in their fuel economy and fuel type to comply with the new CAFE standard. I derive testable hypotheses about the deviation between vehicle prices (Manufacturer Suggested Retail Price: MSRP) and marginal costs of vehicles due to regulatory stringency, the flex-fuel capacity of vehicles, and the degree of market concentration. I estimate a reduced-form vehicle-pricing function to test these hypotheses using data for 4,809 vehicle trims offered in the U.S. from 2012 to 2016. The results show that a more stringent CAFE standard is associated with an increase in MSRPs of fuel-inefficient vehicles and gasoline vehicles by two to three times more than fuel-efficient vehicles and FFVs, respectively. Furthermore, the MSRPs of vehicles sold in concentrated market segments were less responsive to the CAFE standard. The industry-wide average shadow compliance cost was approximately $13-$15/vehicle-mpg during our sample period, with considerable heterogeneity between manufacturers ranging between $9/vehicle-mpg and $68/vehicle-mpg. In general, the results provide reduced-form evidence of the reliance on altering vehicle prices as a mechanism to comply with the footprint-based standard and the differential cost imposed on vehicles depending on their fuel economy and flex-fuel capacity. Chapter 2 quantifies the effectiveness and welfare effects of the new CAFE standard under the rapid market shift away from sedans to SUVs and pickup trucks. Between 2012 and 2018, SUVs gained sales share by 12%-points while sedans quickly lost their share by 15%-points, heightening concerns that the rapid market shift substantially diluted the effectiveness of the standard in raising fuel economy. I estimate a structural model of the system of supply and demand for 4,690 new vehicle models offered in the US from 2005 to 2018 in the presence of the CAFE standards. The results show that households exhibit an increasing preference for SUVs over sedans, and this trend has been robust regardless of the development of primary vehicle attributes, household income, age, and gas prices. Importantly, the market shift has also been driven by the footprint-based mechanism of the CAFE standard itself. As a result, between 2012 and 2018, the possible increase in the average fuel economy (+3.9 mpg) by the CAFE standard was offset by 1.8 mpg by the market shift away from Sedans. The results further suggest in favor of more stringent standards, especially for pickup trucks, which are likely to increase the average fuel economy and increase welfare gains from new vehicles. Chapter 3 investigates whether the new CAFE standard affected the magnitude of the fuel-economy rebound effect differently from its previous version. Under the new standard, the relationship between fuel economy and other primary vehicle attributes has changed more substantially than before such that acceleration performance is sacrificed in favor of fuel economy. To the extent that the new mechanism of the CAFE standard affects the optimal set of vehicle attributes differently, it would also affect the driving behavior of households who own vehicles that were remodeled after 2012. I estimate the fuel-economy rebound effect by distinguishing the per-mile cost reduction (that is, fuel-cost rebound effect) and the bundle quality adjustment (that is, quality-adjustment rebound effect), both of which occur when the fuel economy of a vehicle is improved with remodeling. Using the 2017 National Household Travel Survey of approximately 110,000 vehicles that were produced between 2005 and 2016, I estimate the rebound effects before and after 2012 by taking a two-step approach and using vehicle remodeling cycles as a new source of variation. The results show that the quality-adjustment effect offsets the fuel-cost rebound effect for both periods but to a greater extent before 2012. The quality-adjustment effect completely offsets the fuel-cost rebound effect and yields a 0% fuel-economy rebound effect before 2012, while the quality-adjustment effect attenuated and yields a 6.9% fuel-economy rebound effect after 2012. Moreover, the quality-adjustment effect turned to exacerbate the rebound effect for light trucks after 2012. These differences in the quality-adjustment effect before and after 2012 and between cars and trucks imply that stricter standards for light trucks could have saved more gasoline consumption after 2012. Failing to account for the quality-adjustment effect resulted in an overestimation of the true fuel-economy rebound effect by 11.0%-points between 2005 and 2011 and by 3.1%-points between 2012 and 2016, which in turn would yield biased cost-benefit analyses of the CAFE standard.

Graduation Semester

2022-12

Type of Resource

Thesis

Handle URL

https://hdl.handle.net/2142/117652

Copyright and License Information

Copyright 2022 Hiroshi Matsushima

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