Fuel economy standards: Regulatory loopholes and firms’ heterogeneous responses

Abstract

Fuel economy standards have been implemented worldwide to improve the fuel efficiency of vehicles for decades, while the attribute-based design provides regulatory loopholes for automakers' compliance. Based on vehicle model-level data, a bunching analysis is used to explore automakers' responses to the weight-based and stepped fuel economy standards in China. Bunching responses are found at regulatory thresholds while exhibiting significant heterogeneity across automaker types. About 10% of vehicle models and 16% of sales of local brands have excess bunching at notches, while imported and joint-venture vehicles show fewer bunching effects. The regulatory loopholes not only induce weight increase but also bias automakers' technological inputs in fuel efficiency, leading to a larger “rebound effect” in fuel consumption; however, this effect has been weakened due to automakers' heterogeneous responses. The revised linear policy since 2021 is expected to reduce automakers’ manipulation behavior.