Safer or cheaper? Traffic safety, vehicle choices and the effect of new corporate average fuel economy standards

Abstract

The new Corporate Average Fuel Economy (CAFE) Standards increase fuel economy to 54.5 MPG by model year 2025 and determine fuel economy targets based on vehicle sizes. This paper examines the effect of the new CAFE standards on consumer choices and composition of vehicle sales, accounting for the impact of traffic safety. We first formulate and estimate a mixed logit model of consumer demand using micro-level data. Two measures of traffic safety, consumers’ safety concerns and traffic fatalities, are included and interacted with two vehicle characteristics that matter most for traffic safety: weight and size. Further, we conduct simulations of three extreme firm responses to assess the potential impact of the new CAFE standards: lightweighting, paying CAFE fines, and size increase. Simulation results suggest that the sales impact will fall almost entirely on the SUV and light truck segments and on US automakers that use lightweighting. Moreover, consumers in states with more traffic fatalities are the most responsive, shifting away from passenger cars. In addition, the new CAFE standards could result in an increase of 8.1 percent in the share of SUV and light trucks, which will cause as many as 347 more equivalent fatalities on roads each year.