What is the Effect of Fuel Efficiency Information on Car Prices? Evidence from Switzerland.

• Author: Alberini, Anna
• Position: Report

1. INTRODUCTION

   There is considerable debate in academic and policy circles about the existence, extent and causes of the so-called "energy efficiency gap," namely the sluggish pace at which energy-efficient technologies are adopted (Jaffe and Stavins, 1994; Hassett and Metcalfe, 1995; Golove and Eto, 1996; Allcott and Greenstone, 2012). A wide variety of energy-using goods, such home appliances, buildings, machinery and vehicles, are potentially affected. Possible remedies to correct the negative externalities associated with excessive energy consumption include taxes, subsidies, regulations and standards, and programs that provide or reinforce information about the energy efficiency of these goods (Gillingham et al., 2009).

   In the case of passenger vehicles, which in developed countries account for some 20% of total carbon dioxide (C[O.sub.2]) emissions, the effectiveness of these policies depends crucially on whether consumers value or misperceive the benefits of improved fuel efficiency (Anderson et al., 2011). Labels that clearly convey energy consumption rates, associated costs, and emissions of conventional pollutants and C[O.sub.2], have been devised and used in the last two decades in several countries. What we examine here is one such label program.

   The energy consumption and C[O.sub.2] emissions of new passenger cars in Switzerland are among the highest in Europe. In 2012, new cars sold in Switzerland emitted on average 151 grams of C[O.sub.2] per kilometer, a much higher rate than their counterparts in Germany (140 grams C[O.sub.2]/km), France and Italy (less than 130 grams C[O.sub.2]/km). Representatives of the automotive industry assert that the high purchasing power of the Swiss and the country's topography are in part responsible for the heavy fuel use on Swiss roads. Motor fuels are also slightly less expensive in Switzerland than in other European countries.

   In 2003 the Swiss government introduced a system of energy efficiency labels for new cars that presumably assist in conveying information about the fuel consumption and C[O.sub.2] emissions from a car. This system places cars into seven energy efficiency categories, ranging from A (best) to G (worst), and displays each car's average fuel consumption in liters per 100 km, along with C[O.sub.2] emissions in grams per kilometer. (1) The fuel efficiency categories are based on a combination of absolute and relative fuel consumption per 100 km, where relative means fuel consumption per 100 km per unit of curb weight. The cutoffs for placement into one of the seven label groups are computed so that they divide the distribution of this "composite" fuel economy of the cars approved for sale in Switzerland from the two previous years into even intervals.

   The label itself summarizes the car's fuel type, fuel economy, and C[O.sub.2] emissions rates, and compares the latter with the average of new cars sold in Switzerland, but does not display an estimate of the fuel cost, either on an annual basis or for a specified distance. Information about the fuel economy of a vehicle was available to car buyers even before the establishment of the energy label system, as it was and is normally included in manufacturers' "spec sheets" and in the Swiss Touring Club's description of each car, which is widely available to the public. The label must be affixed to the vehicle prior to the sale, but is then removed and there is no visible display of the fuel economy class when the car is driven around.

   In this paper we ask two key research questions. First, is a vehicle's fuel economy capitalized into its price? Second, does the label have an additional effect on price, all else the same, above and beyond that of the fuel efficiency alone? Evidence of such an effect is potentially consistent with a number of possible explanations, including that some consumers experience utility directly from their vehicles' fuel economy or low emissions, (2) or that the additional information from the label helps consumers reduce uncertainty about true fuel economy and/or lowers search efforts (Sallee, 2013; Houde, 2014a).

   Our analysis is based on a dataset that lists all cars approved for sale in Switzerland in each year from 2000 to 2011, and reports manufacturer-suggested retail prices (MSRPs) and extensive information about the attributes of the vehicles. Attention is restricted to new passenger vehicles with maximum weight of 3,500 kilograms and up to nine passenger seats. To disentangle the effect of the label above and beyond that of the fuel economy, and other car characteristics with which it is strongly correlated, we use a regression discontinuity design (RDD). The RDD takes advantage of the exact rule used by the Swiss Federal Office of Energy (SFOE) to assign a vehicle to the appropriate energy class. We perform a number of falsification tests and robustness checks, including several based on matching methods.

   We believe that our research questions and findings (summarized below) are of interest for four reasons. First, with a population of about 8 million, a stock comprised of 4.2 million passenger vehicles, new cars sales around 300,000 units a year, and no domestic car manufacturing, Switzerland is a small car market that depends entirely on imports. Automakers are unlikely to modify their models especially for the Swiss market, although auto importers can select which models they import into Switzerland. An individual auto importer, however, has only limited ability to influence the Swiss Federal Office of Energy's label cutoffs, because these also depend on the fuel economy of the vehicles carried by the other importers, and collusion is unlikely.

   Second, starting in the late 1990s, the European Union entered in voluntary agreements with the major automakers aimed at fuel economy improvements and C[O.sub.2] emissions reductions. Switzerland is not part of the European Union, but it pursued similar voluntary agreements with the auto importers and may have benefited from the major automakers' technological advances and efforts. (3)

   Third, there is growing interest in assessing policies that shape a fleet's fuel economy in Europe, but most research in this area has focused on tax instruments (Mabit, 2008; Clerides and Zachariadis, 2008; Adamou et al., 2014; Klier and Linn, 2011, 2012; D'Haultfoeuille et al., 2014; Huse and Lucinda, 2014) alone or imposed on top of a fuel economy label program (D'Haultfoeuille et al., 2013). Fourth, fuel- or energy-efficiency labels (or similar certification systems) are currently applied in the European Union and other countries for many durables, and plans to extend them to many others (e.g., used cars, certain types of machinery) are currently under consideration. It is therefore important to understand the implications of introducing these schemes.

   That the label might have an effect on price rests on the assumption that auto importers believe that consumers value the fuel economy of a car, or the additional information conveyed by the label, or derive utility from the label per se. Earlier research has sought to estimate the fuel economy premium using hedonic pricing methods, but hedonics empirical work is fraught with difficulties, due to the high collinearity between vehicle attributes and fuel economy (Atkinson and Halvorsen, 1984; Knittel, 2011) and the potential for omitted variable bias. Earlier research has found mixed evidence about the value of fuel economy (Goodman, 1983; Arguea and Hsiao, 1993; Witt, 1997; Murray and Sarantis, 1999; Matas and Raymond, 2009).

   Espey and Nair (2005) and Busse et al (2013) find evidence of a dollar-for-dollar tradeoff between the price of a car and discounted future fuel costs. Allcott and Wozny (2014) find that only about 70% of future fuel costs is captured into the price of a car, and Sallee et al. (2011) conclude that the discounting is slightly less pronounced than that. Qualitative research suggests that the fuel economy and fuel expenditures are often only a second-order factor when purchasing a car and in households' budget decisions (Turrentine and Kurani, 2007). Consumer failure to consider future fuel costs is seen as an argument in favor of regulatory approaches over market-based instruments, such as fuel taxes (Williams and West, 2005; Bento et al., 2009; Anderson et al., 2011).

   On the other hand, experience from other settings suggests that people value certified energy efficiency in homes, office buildings and home appliances (Brounen and Kok, 2011; Ei-chholtz et al., 2010; Houde, 2013), may attach different weight to different pieces of information about energy efficiency and savings on the energy bills (Newell and Siikamaki, 2013), and respond to social norms (Allcott, 2011), for example reducing their usage of electricity when they are told that they use more than their neighbors but increasing it slightly otherwise. Studies have also found that people are, or say that they are, willing to pay more for the environmentally friendly version of an otherwise identical good, such as electricity (Ethier et al., 2000; Kotchen and Moore, 2007; Kotchen, 2009; Jacobsen et al., 2012). This has been interpreted as willingness to contribute to the public good.

   One important feature of the Swiss label system is that label assignment is strictly based on a numeric variable and on the range that it falls into for any given car. A tiny change in this numeric variable may grant assignment to a better or worse label category. In other words, label assignment is based on "notches" (Sallee and Slemrod, 2011), which may encourage product manipulation to take advantage of whatever benefit may be associated with falling in one rather than the next notch. This product manipulation is sometimes observed in the form of "bunching" at the boundary between categories, which allows manufacturers to meet standards and avoid penalties, with little actual effect on overall fuel or energy...