Technological Change, Vehicle Characteristics, and the Opportunity Costs of Fuel Economy Standards

Many countries are tightening passenger vehicle fuel economy standards. In assessing the welfare effects of standards, the literature has not properly accounted either for their effects on the rate of technology adoption, or for improvements in vehicle characteristics in the absence of tightening standards. A dynamic model shows that accounting for both factors has ambiguous effects on estimated welfare costs. We find that recent US and European standards have affected the rate of technology adoption as well as horsepower and torque. Estimated welfare losses from reduced horsepower and torque are of similar magnitude to the welfare gains from fuel savings.