WEAI/AERE 2012 - Individual Paper Abstract
Title: Gasoline Taxes and Fuel Economy: A Preference Heterogeneity Approach
Author(s): Mario SAMANO, Department of Economics, University of Arizona, 1130 E. Helen St., Room 401, Tucson, AZ 85721-0108, USA, 520-269-5795, 520-621-8450, msamano@email.arizona.edu [Photo credit: http://en.wikipedia.org /wiki/File:Trafficjamoninterstate5atpyramidlake.jpg]
Abstract:
Gasoline consumption is the second largest source of greenhouse gas (GHG) emissions in the U.S. In 2009, 27% of CO2 emissions came from gas consumption. This paper studies two policies that have been implemented to reduce its consumption. First, in order to increase the efficiency of gasoline use, the U.S. introduced a vehicle efficiency standard. This efficiency measure is the Corporate Average Fuel Economy (CAFE) which is a weighted harmonic mean of the efficiency of vehicles -in miles per gallon- from a manufacturer. If a car maker's CAFE is under the standard, a fine proportional to the difference from the standard has to be paid. Second, gasoline taxes have also become an instrument to induce lower gasoline consumption by increasing the cost per mile traveled. To evaluate which one of the two policies is more effective we need to examine the social and environmental costs associated to each one in terms of the amount of gasoline consumption that can be avoided. This paper develops an empirical method to evaluate such costs.
In 2011, two main changes to the CAFE regulation are going into effect. The first is an "attribute"-based policy where the standard is a decreasing function of the footprint of the vehicle (defined as the surface covered by the rectangle between the four wheels) embedded in the Energy Independence and Security Act (EISA) of 2007. The second is due to the National Fuel Efficiency Policy of 2009. Under this program, GHG emissions and fuel efficiency are jointly regulated. Its goal is to attain the new vehicle fuel efficiency average of 35 mpg by 2016, four years earlier than the goal in EISA. This is the first time that there has been a significant change in the policy since 1990. Both changes aim to increase the overall fuel efficiency to 35 mpg in the next five to nine years. This paper, although not directly modeling the new restrictions, sheds some light on what the effects are when the overall standard is mandated to increase in such a short period of time and the main tool for manufacturers is prices but not so changes in technology.
The paper estimates an equilibrium model for the U.S. car market to measure the value of those two policies aimed at reducing gasoline consumption. We use a structural model based on Berry, Levinsohn and Pakes (1995) that allows for flexible substitution patterns across car models, measures preferences on cost per mile driven, accounts for the problem of endogeneity of prices, includes the specifics of the CAFE policy in the supply side, and jointly solves for the manufacturers' optimal responses. The data used include income and miles driven. We believe that the two main contributions of the paper to the literature on CAFE studies is that our model is not subject to the independence of irrelevant alternatives property, and that we solve for the problem of price endogeneity. Counterfactual results show that the welfare loss gross of externality costs from tightening the standard by 27 percent is about two times the cost of increasing net gasoline prices to obtain an equivalent reduction in gasoline consumption. When accounting for externalities, the two policies may be welfare increasing.