CAFE Standards.

• Author: Van Doren, Peter

* "Who Values Future Energy Savings? Evidence from American Drivers," by Arik Levinson and Lutz Sager. NBER Working Paper no. 28219, December 2020.

The original rationale for Corporate Average Fuel Economy (CAFE) standards is that consumers supposedly fail to correctly appreciate the tradeoffs between the higher initial expense of a vehicle with better fuel economy and the subsequent savings in fuel costs over the lifetime of the vehicle. Regulation has discussed the evidence for this rationale several times (see "Do Consumers Value Fuel Economy?" Winter 2005-2006, as well as Working Paper columns for Winter 2015-2016, Spring 2017, and Spring 2018). The evidence suggests that, in the aggregate, consumers trade off higher initial costs and subsequent fuel savings correctly.

This paper examines data at the individual level using U.S. National Household Travel Survey (NHTS) data from 2009 and 2017. Instead of asking whether the price premium for a hybrid Toyota Camry, for example, is justified given the average annual mileage such cars are driven, the authors examine the actual annual miles driven and calculate the gasoline expenses of each participant in the survey.

Fuel economy is only one of many attributes that consumers consider in their purchase decision. The authors use a clever research design to separate the effect of fuel economy from other vehicle attributes: They examine the 24,362 drivers of vehicles available in either a gas or hybrid version, 2,337 of which are hybrids. For each driver, they calculate the annual fuel cost difference discounted at 7% over a 14-year vehicle lifetime. There are 2,430 who would save money in hybrids, and nearly precisely that many, 2,337, actually drive hybrids. But they are mostly the wrong 2,337 drivers. Of the 2,430 for whom a hybrid would save money (given actual gasoline prices and given actual miles driven), only 12% (286) actually drive hybrids. The remaining drivers drive gas cars and drive enough miles annually that they would save money with a hybrid over the vehicle's life.

More drivers (21,932) would save money in the gas cars. Of those, 91% choose correctly the gas versions. The other 2,051 drive hybrids, overinvesting in fuel efficiency.

A second research design examines all vehicles in the survey data and statistically controls for attributes other than fuel economy to estimate the initial extra cost of a...