Vehicle Manufacturer Technology Adoption and Pricing Strategies under Fuel Economy/Emissions Standards and Feebates

Abstract

New post-2010 Corporate Average Fuel Economy (CAFE) standards and carbon dioxide (CO2) emissions standards have significantly increased the stringency of requirements for new light-duty vehicle fuel efficiency. This study investigates the role of technology adoption and pricing strategies in meeting the new standards, and the impact of possible feebate policies. The analysis simulates manufacturer decision making over the period (2011-2020) using a dynamic optimization model of the new vehicle market that maximizes social surplus while meeting the standards. Consumer surplus is determined from consumer demand, which is represented by a nested multinomial logit model, and the model is conservative in its assumptions on available technology. Results indicate that technology adoption will likely play a much larger role than pricing strategies in meeting the new standards (consistent with the intent of the policy). Feebates, when implemented along with the standards, can bring additional fuel economy improvement and emissions reduction, but the impact of feebates diminishes with the increasing stringency of the standards. Results also show that the impact of the policy on consumers could be relatively limited. In the long run the policy requires increasing up-front technology costs to consumers that outweigh the perceived benefit of fuel savings, and there is some loss in total new vehicle sales. However, the net effect is limited, and the full value of fuel savings to society is substantial. Results also show a small decrease in average vehicle footprint size, indicating that efficiency improvements are primarily distributed across all vehicle sizes, consistent with the intent of the policy.