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Are Fuel Economy Standards Regressive?

Lucas W. Davis, Christopher R. Knittel

Chapter in NBER book Energy Policy Tradeoffs between Economic Efficiency and Distributional Equity (2019), Tatyana Deryugina, Don Fullerton, and Billy Pizer, organizers
Conference held September 16-17, 2016
Published in March 2019 by Journal of the Association of Environmental and Resource Economists, volume 6, number S1 (University of Chicago Press)

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.

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Document Object Identifier (DOI): https://doi.org/10.1086/701187

This chapter first appeared as NBER working paper w22925, Are Fuel Economy Standards Regressive?, Lucas W. Davis, Christopher R. Knittel
 
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