Abstract
Why does the fuel efficiency of gasoline cars increase over time? Do persistent spikes in gasoline prices induce such innovation? Does the increasing stringency of regulatory standards, such as CAFE, accelerate this technical change? How much of the observed progress would have occurred without these two factors? This paper examines the evolution of fuel efficiency using data on gasoline cars entering the US market from 1984 to 2020. Our analysis controls for gasoline price and tax shocks that occurred in OECD countries during this period. The study also accounts for the increasing stringency of fuel efficiency regulations, such the US CAFE standards. In contrast to previous contributions that downplay the role of fuel prices and taxes in shaping fuel efficiency, the study shows that their effect may be significant and robust. Doubling the user cost of gasoline with a stringent carbon tax is associated with an irreversible increase in fuel efficiency, by 5%. Increasing the stringency of the US CAFE standards by 10% raises average fuel efficiency by up to 1.2%. The progress stemming from other factors has an annual rate of 0.3–0.4% and accounts for 60% of the recorded change in fuel efficiency.
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