Assessing Environmental Regulation in Automobile Markets.

• Author: Gillingham, Kenneth

Spending on transportation is the second-largest category of personal expenditure in the United States, surpassed only by housing. Spending on automobiles is in turn the largest component of transportation expenditures, an amount that is on par with health care and food. (1) Moreover, emissions from transportation constitute just under a third of total US greenhouse gas emissions, with light-duty vehicles accounting for almost two-thirds of this total. (2) These figures make studying the economic effects of automobile market regulation especially important.

The effects of environmental regulations on automobiles are governed by complex interactions between consumer behavior and firm decisions in the markets for both new and used vehicles. The design of the regulations creates incentives that can drive the overall direction of innovation and product offerings and greatly influence the nature and use of the vehicle fleet. Regulation can also have important consequences for emissions and social welfare. My work uses novel identification strategies and structural models to answer policy-relevant research questions on environmental regulation in transportation. Two of the major themes are the economics of standards and equilibrium in automobile markets.

Fuel Economy and Greenhouse Gas Emission Standards

Fuel economy and greenhouse gas emission standards for new light-duty vehicles are perhaps the most prominent regulations intended to reduce gasoline use and the resulting emissions. Since 2012, the fuel economy standards set by the US Department of Transportation have been aligned with the greenhouse gas emission standards set by the Environmental Protection Agency since there is an extremely close relationship between vehicles' fuel economy and carbon dioxide emissions.

Evaluating the effects of new-vehicle standards on social welfare is a complicated and fascinating endeavor. New-vehicle standards affect prices and quantities in both the new and used vehicle markets, characteristics of the new-vehicle fleet, the number of vehicles of each model year on the road, the number of miles driven, vehicle scrap-page, emissions, and crash fatalities. One important issue is whether consumers fully value fuel economy when purchasing new vehicles. If consumers undervalue future savings from fuel economy improvements relative to how they make other potential investments, then mandatory standards might raise social welfare by shifting consumers into vehicles that provide valuable fuel savings that they did not fully account for in their vehicle choice decisions. (3) Undervaluation of fuel economy is the working assumption in all regulatory analyses and could come about due to behavioral anomalies in decision making, such as consumer myopia.

Arthur van Benthem, Sebastien Houde, and I investigated the valuation of fuel economy in the context of a major restatement of fuel economy that affected 1.6 million Hyundai and Kia vehicles in 2012. (4) This provided a unique natural experiment to explore how consumers value fuel economy because the restatement was abrupt and entirely unexpected by consumers, the vehicles were identical before and after the restatement, and there were similar models that were not affected and that provided a useful control group. By examining how used-vehicle prices for the affected models changed, we...