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Are Fuel Economy Standards Regressive?

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  • Lucas W. Davis
  • Christopher R. Knittel
Abstract
Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. We pair a simple model of the automakers’ profit maximization problem with unusually rich nationally representative data on vehicle registrations to estimate the distributional impact of US fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers that creates an implicit subsidy for fuel-efficient vehicles and an implicit tax for fuel-inefficient vehicles. Moreover, when these obligations are tradable, permit prices make it possible to quantify the exact magnitude of these implicit subsidies and taxes. We use the model to determine which vehicles are most subsidized and taxed, and we compare the pattern of ownership of these vehicles between high- and low-income census tracts. Finally, we compare these distributional impacts with existing estimates in the literature for a carbon tax.

Suggested Citation

  • Lucas W. Davis & Christopher R. Knittel, 2019. "Are Fuel Economy Standards Regressive?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(S1), pages 37-63.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/701187
    DOI: 10.1086/701187
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    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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