Consumer Responses to Fuel Economy/GHG Standards Christopher R. Knittel William Barton Rogers Professor of Energy Economics, Sloan School of Management, MIT Director, Center for Energy and Environmental Policy Research, MIT Faculty Director, The E2e Project, MIT and UC Berkeley Research Associate, National Bureau of Economic Research
My starting point • Goal of the midterm review would seem to be to understand: • 1. Were benefits over/understated? • 2. Were costs over/understated (including design costs)? • 3. Adjust program accordingly • Topics I’ll discuss • Consumers’ valuation for fuel economy • This cost turns out to be a benefit • Potential for “within household” rebound • Might reduce the environmental benefits
Costs and benefits Breakdown of Costs and Benefits of CAFE, MY 2017-2025 (in 2010 $M) Undiscounted Value Sum of Present Discounted Sum of Present Discounted Societal Effect Values @ 3% Values @ 7% Lifetime Fuel Expenditures (Pretax) $577,260 $459,059 $358,200 Consumer Surplus from Additional Driving $53,178 $42,264 $32,988 Refueling Time Value $17,088 $13,769 $10,869 Petroleum Market Externalities $29,626 $23,816 $18,776 Maintenance Costs ($5,204) ($5,204) ($3,877) Congestion Costs ($22,347) ($17,964) ($14,166) Accident Costs ($10,492) ($8,425) ($6,639) Noise Costs ($416) ($334) ($263) Value of Reduced Fatalities $52 $20 $5 Relative Value Loss (EVs) ($91) ($91) ($40) CO2 $59,625 $46,881 $46,881 CO $0 $0 $0 VOC $674 $550 $440 NOX $1,280 $1,072 $880 PM $8,387 $6,839 $5,467 SOX $7,070 $5,682 $4,478 Total $715,690 $567,933 $454,001 Source: NHTSA, US Dept. Of Transportation, Table X-7
Implications • 80% of the benefits come from consumers/firms making private “mistakes” • This is not the standard environmental policy • What might be causing this? • Consumer myopia • Firms believing consumers are myopic • Information asymmetries (need not be a market failure) • Market power associated with new technologies • Credit market failures • Can tell alternative stories where these benefits don’t exist (to this degree) • Focus of the midterm review should be on whether these savings are being realized
Growing literature on consumer myopia • Famous Hausman (1979) paper • Home air conditioners • Implied discount rates of • A number of recent papers on automobiles • Sallee, West, and Fan (2009), Allcott and Wozny (2012), Busse, Knittel, and Zettelmeyer (2013), and others (See meta-study by David Greene)
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More research is needed… • Hunt Allcott and I have an on-going experiment with Ford • Have Research Assistants armed with an iPad app related to fuel economy stationed at six Ford dealerships across the country • Consumers put into control or treatment group • Also, “hitting” consumers earlier on in buying process via an online survey company
Equally important • We need to know consumers’ cost of capital to make inference about myopia • For discussion purposes: Histogram of APRs paid, All High income, high credit scores From a panel of ~4000 HHs. Conditional on having CC debt (~60-70% of US) See, Stango and Zinman. “Borrowing High vs. Borrowing Higher” NBER WP 19069.
Cost of capital for automobile buyers .15 .1 Density .05 0 0 10 20 30 40 APR New Used
Something to think about: Evidence of within household shift in miles
One more potential discussion topic • What are the prospects for CNG in the light duty sector? • Private CNG refueling station company planning five stations in the Boston area next year • That will bring the count to 11! • Tailpipe emissions reduced by ~25 percent • (Fugitive emissions an important topic) • Depending on your geographic location, CNG can be better than EVs • How should geographic variation in lifecycle emissions be taken into account within CAFE?
Relevant papers • Bastani and Knittel. “Distribution of the Distributional Welfare: Gasoline Taxes and CAFE Standards under Uncertainty,” Working Paper. • Bastani and Knittel. “Is Technology King? Technological Progress and Barriers to Adoption in the Automobile Industry,” Work in Progress. • Knittel and Sandler. “The Welfare Impact of Second Best Uniform-Pigouvian Taxation: Evidence from Transportation,” Working Paper. • Blonigen, Knittel, and Soderbery. "Keeping it Fresh: Strategic Product Redesigns and Welfare,” Working Paper. Paper in PDF Format. • Knittel and Sandler. "Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation,” Paper in PDF Format. • Busse, Knittel, and Zettelmeyer. "Are Consumers Myopic? Evidence from New and Used Car Purchases,” The American Economic Review , 103(1), February 2013. Paper in PDF Format. • Knittel. "Leveling the Playing Field for Natural Gas in Transportation." Hamilton Project Discussion Paper. Paper in PDF Format. Policy Brief. • Knittel. "Reducing Petroleum Consumption from Transportation," Journal of Economic Perspectives , 26(1), Winter 2012, pp. 93-118. Paper in PDF Format. • Knittel. "Automobiles on Steroids: Product Attribute Trade-offs and Technological Progress in the Automobile Sector,” Paper in PDF Format. The American Economic Review, 101(7), December 2011, pp. 3368-3399.
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