RDCEP Student Group Learns About Fuel Economy Standards Policy from Guest Speaker

Jim Sallee, Assistant Professor at the University of Chicago’s Harris School, recently spoke to RDCEP’s student group. He discussed two of his recent research papers on fuel economy standards in the United States and Japan.

Sallee began the talk by explaining the economic externalities of automobiles, or the negative consequences of buying or using cars that are not reflected in the price of vehicles or gasoline. Externalities may include pollution, traffic congestion, or even automobile accidents. Sallee discussed two policy tools that can be used to address this problem: taxation (e.g., congestion tax, fuel tax) or fuel economy regulation. He then explored the types of inefficiencies or unintended consequences we see from using a regulation approach.

The United States regulates fuel efficiency of new automobiles. In his recently published paper, Sallee looked at the U.S. CAFE (Corporate Average Fuel Economy) Standards. These efficiency requirements are based on the square footage of the vehicle’s “footprint,” or the area between the center of each of the four wheels--the smaller the vehicle's footprint, the higher the fuel economy standard they must meet (see figure 1). This type of system is called “attribute-based regulation,” and may have unintended consequences. Thus manufacturers may be incentivized to create larger, less efficient vehicles. Additionally, trucks and cars are in different “classes,” favoring trucks by allowing more relaxed efficiency requirements.

But exactly how much of an effect is there from these types of regulations? In a second study on fuel economy standards, Sallee analyzed efficiency regulations of the Japanese automobile market. Japan uses weight instead of footprint to set fuel efficiency rates. Another feature of Japan’s policy relevant to Sallee’s research is that it is notched, not linear like the US policy (see figure 2).  Because the policy is notched, he theorized that manufacturers producing cars with a weight near a transition point in the policy would be incentivized to vary the weight of the car to move into a lower efficiency category. He explored whether manufacturers responded to this embedded incentive by analyzing the weight of cars manufactured after a change in the policy was implemented. He found high instances of weights clustered at transition points, implying that manufacturers did, indeed, respond to the change in policy.

Sallee also talked with the group about some meta-analysis of his research, explaining how he came to work on these projects, and the way in which data access can open up new research opportunities.