Fuel Economy Standards and Used Cars

Last August the Obama administration announced new fuel economy standards. Cars and trucks sold in the United States must reach an average fuel economy of 41.7 miles per gallon by 2020, increasing to 54.5 miles per gallon by 2025. Supporters of the tightened standards argue that they will reduce oil consumption by billions of barrels.

These standards will make cars smaller, lighter, and more fuel-efficient. Will this limit the choices available for consumers? Yes and no. It is going to become more difficult to buy new trucks, SUVs, and minivans. However, because fuel economy standards affect new vehicles only, these larger, fuel-inefficient vehicles are going to continue to be a substantial part of the U.S. vehicle fleet for many years.

Mark Jacobsen (UCSD) and Arthur van Benthem (University of Pennsylvania) are looking closely at the market for used cars and trucks and finding that vehicle scrappage is extremely important. Their complete study will be available soon. In the meantime, they shared with me this figure which shows annual scrap rates by MPG quartile.

fig-21
As you would expect, older vehicles are scrapped at much higher rates. But what is particularly interesting is the comparison across MPG quartiles. Among vehicles 9+ years old, the least efficient vehicles (Quartile 1) have the lowest scrappage rates, remaining in the vehicle stock long after the smaller, fuel-efficient vehicles (Quartile 4) have been sent to the scrapyard.

Jacobsen and van Benthem find that new fuel economy standards will exacerbate this pattern, leading fuel inefficient vehicles to remain in the vehicle stock even longer. The reason is that tightened fuel economy regulation leads to higher prices for large and fuel-inefficient new vehicles. More people will buy a used SUV or pickup truck instead of a new one. This means that prices of used vehicles increase, giving owners an incentive to postpone the decision to scrap their vehicles. In economics this is known as the Gruenspecht effect, named after a study by Howard Gruenspecht. The original study is available here.

Overall, Jacobsen and van Benthem find that increases in fuel consumption by fuel inefficient used cars will offset about 1/5th of the direct impact of updated fuel economy standards. This Gruenspecht effect is one of the reasons why 92% of economists would prefer a gasoline tax over fuel economy standards. (According to a new study available here, only 22% of non-economists feel the same way.) Whereas standards treat new and used cars differently, a gas tax does not. And a gas tax both encourages consumers to buy more fuel efficient vehicles and encourages them to drive them less.

About Lucas Davis

Lucas Davis is an Associate Professor of Economic Analysis and Policy at the Haas School of Business at the University of California, Berkeley. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
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8 Responses to Fuel Economy Standards and Used Cars

  1. Steve Plotkin says:

    Work by Dave Greene and others shows why vehicle buyers don’t necessarily respond efficiently to higher fuel prices….implying that higher gasoline taxes by themselves may not achieve socially efficient levels of fuel economy. I agree that it’s a great idea to raise fuel taxes…in concert with, not instead of higher fuel economy standards.

  2. Mark Cooper says:

    As a matter of proper scientific practice, results should not be claimed until the underlying research is available for review. The paper is not cited nor does it appear to ve available for peer review.

    • Lucas Davis says:

      The working paper will be released soon, and I will post a link as soon as it is available. You are right — I should have waited until the paper was available. -LD

  3. Azmat says:

    Higher fuel prices will depress econ activity by sucking spending power from other uses.

    • sapitosetty says:

      Right, it’s much better to let low fuel prices depress economic activity by wasting everyone’s time driving, wasting their health through pollution and decreasing innovation by locking everyone away in 1-person cars. Places with low fuel prices like Venezuela, Alabama and South Carolina have great economies because there is so much more disposable income to spend on other stuff, while places like Brazil and California are in horrible shape because they have high fuel prices. Oh wait…

  4. Jim says:

    I look forward to seeing the paper, and wonder if it’s based on old data. According to Forbes (quoting Kelley Blue Book data), sales of mid-sized SUVs have decreased 72% since 2007 and 20% of car shoppers are saying they plan to move to a more efficient car. http://www.forbes.com/sites/altheachang/2012/08/31/how-fuel-efficiency-standards-could-affect-car-buyers/

  5. Dave Hackett says:

    Thanks for posting this interesting analysis. I note that Howard Gruenspecht is the Deputy Administrator of the Energy Information Administration. Who knew Howard had a named effect?

  6. jasonized says:

    Interesting finding. Two questions:
    * What are the confidence intervals around those lines? I’m curious to know whether dispersion of the quartiles is distinct, or whether there’s large overlap in parameter estimates…
    * What is the real world impact of a 5 to 7 percentage point difference in scrap rates between Quartiles 1 and 4? It’s hard to judge how much we should care about this effect without putting the magnitude of the difference into perspective.

    Cheers from a former Haas GSR!

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