The effect of CAFE standards on vehicle sales projections: A Total Cost of Ownership approach

Abstract

We conduct a Total Cost of Ownership analysis to estimate the impacts that the 2017–2025 Corporate Average Fuel Economy (CAFE) standards will have on sales of light duty vehicles (cars and light trucks). Vehicle sales are an important macroeconomic indicator that can impact both the economic outlook of the automobile industry as well as the efficacy of the CAFE standards. Our analysis focuses on the relative impacts of three determinants of the net premium consumers' face when deciding whether to purchase a new vehicle, namely: 1) consumers' valuation of fuel savings, 2) fuel price variation over time, and 3) gross price premium of the vehicle due to the Federal Standards. We find that uncertainty about consumers’ valuation of fuel savings leads to greater variation in estimated vehicle sales impacts than uncertainty about the gross price premium or fuel prices. Specifically, the estimated sales impacts for model year 2025 range from −7% to +3% and −4% to +5% for cars and light trucks, respectively, when we vary assumptions about valuation of fuel savings. The range of estimates is −6% to −2% and −2% to 0.5% for cars and light trucks, respectively, when we vary the gross price premium and −4% to +1% and −1% to +3% for cars and light trucks, respectively, when we vary fuel prices for model year 2025. These percentages are computed relative to a baseline scenario where CAFE standards remain fixed at 2016 levels. Our findings highlight the importance of more carefully examining the uncertainty introduced through consumer valuation of fuel economy in the mid-term reviews of the CAFE standards.