NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Automobiles on Steroids

If weight, horsepower, and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006. Instead, fuel economy actually increased by only 15 percent.

In the United States, the transportation sector accounts for more than 30 percent of greenhouse gas emissions. Yet Corporate Average Fuel Economy (CAFE) standards for passenger cars have not increased since 1990; for light trucks and SUVs, they have increased by only 10 percent in that period.

From 1980 to 2004 the fuel economy of U.S. vehicles has remained stagnant despite apparent technological advances. The average fuel economy of the U.S. new passenger automobile fleet increased by less than 6.5 percent, while the average horsepower of new passenger cars increased by 80 percent, and their average curb weight increased by 12 percent. For light duty trucks, average horsepower has increased by 99 percent and average weight increased by 26 percent over this period. But there's more to this story: in 1980, light truck sales were roughly 20 percent of total passenger vehicles sales -- in 2004, they were over 51 percent.

In Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector (NBER Working Paper No. 15162), Christopher Knittel analyzes the technological progress that has occurred since 1980 and the trade-offs that manufacturers and consumers face when choosing between fuel economy, weight, and engine power characteristics. His results suggest that if weight, horsepower, and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006. Instead, fuel economy actually increased by only 15 percent.

Furthermore, once technological progress is considered, meeting the CAFE standards adopted in 2007 requires halting the observed increases in weight and engine power characteristics, but little more. In contrast, the standards recently announced by the new administration are certainly attainable but will require non-trivial "downsizing."

Knittel finds that U.S. manufacturers tend to be above the median in terms of their passenger vehicle fuel efficiency, conditional on weight and engine power, and are among the top for light duty trucks. However, over time the U.S. manufacturers' relative fuel efficiency in both passenger cars and light trucks has degraded. Using vehicle model-level data for automobiles offered in the United States from 1980 to 2006, Knittel concludes that the passenger car fleet manufactured by Honda is the most fuel efficient of any manufacturer. Volvo manufactures the most fuel-efficient fleet of light-duty trucks.

These results shed some new light on the CAFE standards adopted by both the Bush and Obama administrations. They suggest that the Bush CAFE standards would have done little to push manufacturers and consumers to smaller, less powerful cars or away from SUVs and back into passenger cars. In contrast, the Obama standards will require shifts to smaller, less powerful cars and fewer SUVs.

Knittel's estimates of manufacturers' relative ability to obtain fuel economy, conditional on weight and engine power, suggest that U.S. manufacturers are relatively successful at achieving such economy in the production of passenger cars. While Honda, Toyota, and Nissan all perform well, GM outperforms Nissan, and Ford outperforms most non-Japanese manufacturers. In addition, when considering light trucks, GM outperforms all three Japanese manufacturers for fuel efficiency conditional on vehicle characteristics, and Ford trails only Honda.

-- Lester Picker

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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