Kate Whitefoot, Carnegie Mellon University

Abstract:
When setting the U.S. Corporate Average Fuel Economy (CAFE) and Greenhouse Gas (GHG) emission standards for light-duty vehicles, firms’ ability to trade off fuel economy for other vehicle performance attributes, such as acceleration performance, is not considered. If these engineering design tradeoffs comprise an important part of manufacturers’ compliance strategies, a failure to account for them can significantly mischaracterize how the policy affects GHG emissions and associated costs. In this paper, we examine the role that engineering design tradeoffs between acceleration performance and fuel economy can play in automakers’ response to the reformed standards. To do this, we nest a flexible approximation of engineering design tradeoffs generated from physics-based vehicle performance simulations within an economic equilibrium model of the automotive market. Results indicate that acceleration tradeoffs can be important in two respects: (1) they can significantly reduce the costs of complying with the standards, and (2) they can reduce emissions associated with a particular level of the standards by mitigating incentives to shift sales toward larger vehicles and reducing the likelihood consumers will opt out of the new vehicle market and drive older vehicles instead. We contrast these simulation-based results with changes in vehicle attributes observed under the reformed standards. We find evidence that is consistent with firms using acceleration tradeoffs to achieve compliance. Taken together, our analysis suggests that acceleration tradeoffs play a role in automaker compliance strategies, with potentially large implications for both compliance costs and emissions.