COSTS AND BENEFITS OF AUTOMOTIVE FUEL-ECONOMY IMPROVEMENT - A PARTIAL ANALYSIS

This paper describes an exercise in estimating the costs and benefits of technology-based fuel economy improvements for automobiles and light trucks. Benefits quantified include vehicle costs, fuel savings, consumers' surplus effects, the effect of reduced weight on vehicle safety, impacts on emissions of CO2 and criteria pollutants, world oil market and energy security benefits, and the transfer of wealth from U.S. consumers to oil producers. A vehicle stock model represents sales, scrappage and vehicle use effects under three fuel price scenarios. Three alternative fuel economy levels for 2001 are considered, ranging from 32.9 to 36.5 miles per gallon (MPG) for cars and 24.2 to 27.5 MPG for light trucks. Overall, fuel economy improvements of this size are probably cost-effective. The size of the benefit, and even whether there is a benefit, strongly depends on the financial costs of fuel economy improvement and judgments about the values of energy security, emissions, safety, etc. Three sets of values for eight parameters are used to define the sensitivity of costs and benefits to key assumptions. The net present social value (1989$) of costs and benefits ranges from a cost of $11 billion to a benefit of $286 billion. The two largest components are always the direct vehicle costs and fuel savings, but these tend to counterbalance each other for the fuel economy levels examined here. Other major components are the wealth transfer, oil cost savings, CO2 emissions reductions, and energy security benefits. Safety impacts, emissions of criteria pollutants and consumers' surplus effects are relatively minor components.