Are standards effective in improving automobile fuel economy? An international panel analysis

Panel: Panel 8: Transport and mobility

Authors:
Sofronis Clerides, Department of Economics, University of Cyprus
Theodoros Zachariadis, Economics Research Centre, University of Cyprus

Abstract

Although the adoption of fuel economy standards has induced fuel savings in new motor vehicles, there are arguments against standards and in favour of fuel tax increases because the latter may have lower welfare costs. We therefore attempted to analyze the impact of standards and fuel prices in the fuel consumption of new cars with the aid of cross-section time series analysis of data from 18 countries. To our knowledge, this study is the first one that attempts to explore econometrically this issue at an international level.

We built an unbalanced panel comprising 384 observations from the US, Canada, Australia, Japan, Switzerland and 13 EU countries spanning a period between 1975 and 2003. We specified a dynamic panel model of fuel economy and estimated the model for the whole sample and also for North America and Europe separately. Based on these estimates, we derived three important policy conclusions.

Firstly, it seems that if there were no FE standards or voluntary targets in force, transportation energy use would increase more rapidly. Secondly, if CO2 targets are not to be tightened in Europe, retail fuel prices might have to double in order to attain the currently discussed target of 120 g CO2/km in the future. Thirdly, without higher fuel prices and/or tighter FE standards, one should not expect any marked improvements in fuel economy under ‘business as usual’ conditions. European policy makers might need to consider this issue carefully because some recent European studies tend to be optimistic in this respect.