Fuel Economy and CO2 Emissions Standards, Manufacturer Pricing Strategies,
and Feebates
Changzheng Liu, Oak Ridge National Laboratory, 865-946-1306, liuc2@ornl.gov
David L. Greene, Oak Ridge National Laboratory, 865-946-1310, dlgreen@ornl.gov
David Bunch, University of California, Davis, 530-752-2248, dsbunch@ucdavis.edu
Overview
New 2012-2016 Corporate Average Fuel Economy (CAFE) Standards and Greenhouse Gas Emissions Standards
have substantially tightened requirements for new light duty vehicle fuel efficiency. The stringency of new
standards raises an important practical question : To what extent will automobile manufacturers apply pricing
strategies in response to meet new standards? A deepened understanding of this issue will help in evaluating the
benefits and costs of fuel economy and emissions standards.
This paper examines the role of manufacturers’ technology adoption and pricing strategies in meeting current
standards assuming the use of currently available, proven technologies. It further investates whether a fuel
efficiency rebound effect exists. Additionally, it also examines the case when manufacturers face both regulatory
standards and feebates.
Methods
The analysis makes use of a dynamic optimization model that simulates automobile manufacturers and
consumer behavior. The objective of manufacturers is assumed to be maximization of consumer surplus
(equivalent to profit maximization under the assumption of a competitive or monopolistically competitive
automobile market) while simultaneously considering consumer response and meeting fuel economy and
emissions standards. Consumer demand for new vehicles is represented by a nested multinominal logit model,
calibrated to sales data of 860 make,model,engine, and transimission combinations.
Results
Our analysis indicates that technology adoption plays the major role in meeting new CAFE and emissions
standards. Pricing is minor for most of the analysis period but may be employed in outer years if cost-effective
technologies are less plentiful. The provision of flexibility mechanisms turns out to be a great help to
manufacturers for meeting standards. . Feebates, when implemented along with the standards, can bring
additional emissions reduction, but the benefit may diminish over time if feebates act as a replacement for
manufacturers’ pricing strategies when standards are increasingly binding. Our simulation results also indicate
that the new standards are unlikely to produce unfavorable rebound effect of shifting sales toward fuel-inefficient
vehicles. Instead, the standards appear likely to induce sales shifts toward fuel-efficient vehicles. Furthermore,
our results find no evidence of sales shifts toward small size vehicles by examining fleet average footprint.
Conclusions
The empirical study in this study may suggest that new standards would work as they are designed. Technology
adoption plays the major role in meeting standards. No evidence is found to support fuel efficiency rebound
effect. The effectiveness of the standards is primarily determined by their stringency and availability of costeffective technologies.Some new regulaton features are also critical. The allowance of credit trading equalizes
compliance cost across cars and trucks categories and across firms. It removes the incentive for undesired sales
shifts as discussed in Thorpe (1997).
References
1. Greene, D. L. Short-Run Pricing Strategies to Increase Corporate Average Fuel Economy. Economic
Inquiry, 29: 101–114, 1991.
2. Thorpe, S.G. Fuel Efficiency Standards, new vehicle sales, and average fuel efficiency. Journal of
Regulatory Economics Vol. 11, No. 3, 1997, pp. 311-326.
3. Greene, D. L., P. D. Patterson, et al. 2005. "Feebates, rebates and gas-guzzler taxes: a study of
incentives for increased fuel economy." Energy Policy 33(6): 757-775.
4. U.S. Environmental Protection Agency and U.S. Department of Transportation. Light-Duty Vehicle
Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards, Final Rule.
Federal Register, Washington, DC, 2010.
5. Bunch, D.S. and D.L. Greene. Potential Design, Implementation, and Benefits of a Feebate Program for
New Passenger Vehicles in California: Interim Statement of Research Findings. Institute of
Transportation Studies, University of California, Davis, CA, 2010.