Global Warming and Urban Smog: Cost-Effectiveness of CAFE Standards and Alternative Fuels

In this paper we estimate the cost-effectiveness, in terms of reducing greenhouse gas emissions, of increasing the corporate average fuel economy (CAFE) standard to 38 miles per gallon and substituting methanol, compressed natural gas (CNG), and reformulated gasoline for conventional gasoline. Greenhouse gas emissions are assessed over the entire fuel cycle and include carbon dioxide, methane, carbon monoxide, and nitrous oxide emissions. To account for joint environmental benefits, the cost per ton of greenhouse gas reduced is adjusted for reductions in volatile organic compound (VOC) emissions, an ozone precursor. CNG is found to be the most cost-effective of these alternatives, followed by increasing the CAFE standard, substituting methanol for gasoline, and substituting reformulated for conventional gasoline. Including the VOC benefits does not change the ranking of the alternatives, bug does make the alternative fuels look better relative to increasing the CAFE standard. None of the alternatives look cost-effective should a carbon tax of $35 per ton be passed, and only CNG under optimistic assumptions looks costeffective with a tax of $100 per ton of carbon.