Using Economic Analysis to Assess the Viability of Post-2016 MY Greenhouse Gas Emission and Fuel Economy Standards for Light Duty Vehicles 2012-01-0754

Fundamental to the concept of “sustainable development” is the belief that environmental improvement and economic development are intertwined - that one cannot succeed without the other. From a sustainable development perspective, assessing the economic impact of future standards is as important as evaluating the technological feasibility of achieving those standards. TO determine the potential economic impacts of possible future fuel economy and greenhouse gas (GHG) emission standards, assumptions must be made about technology costs, discount rate, retail price markup, customer willingness to pay, rebound rate and other factors. This paper examines the assumptions used by government agencies and how changes to these assumptions impact the viability of possible post-2016 model year (MY) standards.

Historically, disagreements between government agencies, non-governmental organizations and industry regarding the viability of proposed fuel economy standards have centered on the cost and feasibility of future technology. In the 2012 - 2016 MY fuel economy and GHG emission standards rulemaking, the government deviated from past practice by using economic assumptions that were not found in mainstream, peer-reviewed economic literature. These and other such assumptions were also used in the post-2016 MY rulemaking. The cost/benefit calculations resulting from the government's new approach suggest that standards become more beneficial and less costly as they became more stringent, a clear contradiction of the law of diminishing returns.

Traditionally, critics of government analyses have countered with comprehensive independent studies that replicated in many cases the work already done by the government. In this paper, the authors put forward a faster and less costly alternative to the traditional approach that involves adjusting the government's cost/benefit conclusions to reflect mainstream economic assumptions. Once this is done, the consumer net costs of possible post-2016 MY fuel economy and GHG standards and the impact of these costs on vehicle sales and automotive sector employment can be calculated.

This study concludes that, when adjusted to reflect mainstream economic assumptions, the range of possible post-2016 MY fuel economy and GHG standards announced by the government will result in substantial net consumer costs. Furthermore, a standard cost curve generated using consumer net costs demonstrates that the proposed standards result in ever-higher marginal costs as they become more stringent. These costs will lead to significant and substantial reductions in automotive sales and employment. Thus, these standards achieve their environmental goals at the expense of the economy rather in harmony with it, an outcome counter to the precepts of sustainable development.