WP-019: Jeremy West, Mark Hoekstra, Jonathan Meer and Steven Puller, "Vehicle Miles (Not) Traveled: Why Fuel Economy Requirements Don’t Increase Household Driving" (May 2015)

A critical energy policy question is whether increases in fuel economy will increase miles driven and thus partially undo gains from the increased fuel efficiency, exacerbating externalities from pollution and greenhouse gases associated with driving and gasoline consumption.  A new paper by Jeremy West, Mark Hoekstra, Jonathan Meer and Steve Puller finds households induced to purchase more fuel-efficient vehicles do not drive any additional miles after purchase.

Policy analysts argue that increasing the fuel economy of the vehicle fleet through changes in the Corporate Average Fuel Economy (CAFE) standards will not necessarily lead to a proportionate reduction in fuel consumption. The intuition underlying their concern is straightforward: because vehicles with higher fuel economy travel farther per gallon of fuel, the cost of driving each mile is comparatively lower in fuel-efficient vehicles, and this lower cost-per-mile may result in an increase in the quantity of miles traveled. That has been called the “rebound effect.” The existing literature has measured the rebound effect using variation in fuel prices. As the authors show in their paper, there are several reasons why the impact of fuel prices on driving may differ from the rebound effect for fuel economy.

The primary difference between rebound effects caused by fuel prices and fuel economy is that in contrast to fuel prices, fuel economy is negatively correlated with other desirable vehicle attributes. More fuel-efficient vehicles tend to be smaller, cheaper and less powerful. It is often the case that households choosing to purchase more fuel efficient vehicles end up purchasing cars that are smaller, less comfortable, and have poorer driving performance. The characteristics reduce the desire to drive more.  Thus while both gasoline prices and fuel economy alter the cost per mile of driving, fuel economy restrictions may also affect the benefit per mile traveled.

The authors use household-level data from Texas to study a unique natural experiment in which some households were quasi-randomly induced to buy more fuel-efficient vehicles. The researchers exploit the eligibility requirement for the 2009 U.S. “Cash for Clunkers” (CfC) program, which incentivized eligible households to buy more fuel-efficient vehicles. Specifically, they use the CfC’s requirement that only households owning “clunkers” with fuel economy of 18 MPG or less were eligible for the subsidy, while households owning clunkers with 19 MPG or greater were ineligible. They compare the fuel economy of vehicle purchases and subsequent miles traveled of barely eligible households to those households who were barely ineligible. The miles driven by the barely ineligible households serve as a control group to which the driving of the barely eligible is compared. The key to this comparison is that all of these households had very similar demographics and previous purchasing and driving characteristics. The paper makes this comparison using all households who purchased a new vehicle within one year of the beginning of the CfC program, which has been shown to account for any pulling forward of sales by the program.

The research results show that households who were barely eligible for the subsidy purchased vehicles that were more fuel efficient but also were cheaper, smaller and lower performing.  What was the effect on driving of purchasing more fuel efficient but downsized vehicles?  The research shows that the households did not drive the cars more miles – there was no rebound.

This paper has important implications for policies that target gasoline consumption with fuel economy standards. Policies such as CAFE are likely to change not only the price-per-mile of driving but also other characteristics of vehicles. If policymakers mistakenly focus on estimates of the traditional rebound effect, they will ignore that more fuel-efficient vehicles also have characteristics that impact the desirability of driving. This paper suggests that using rebound estimates that hold vehicle characteristics constant can overstate the driving response to fuel economy standards. This has implications for policy design, as the National Highway Traffic Safety Administration explicitly accounted for a rebound effect of 10 percent when it was designing the 2012 CAFE standards. More generally, their results can give policymakers some cause for optimism, as it suggests that second-best strategies such as CAFE used to combat the negative externalities associated with gasoline consumption are more effective than previously thought.