Carbon Pricing Beats Vehicle Fuel Economy Standards

Currently planned fuel economy standards (extended to the year 2050) would cost 10 percent of the economy’s global gross domestic product (GDP) in 2050, compared with only 6 percent under cap-and-trade carbon pricing, according to a study published in the Journal of Transport Economics and Policy.

The study was conducted by researchers at MIT’s Joint Program on the Science and Policy of Global Change. The researchers compared the worldwide economic, environmental and energy impacts of currently planned fuel economy standards (extended to the year 2050) with those of region-specific carbon prices designed to yield identical CO2 emissions reductions.

The study’s finding reinforces economists’ contention that improving the efficiency of motor vehicles through fuel economy standards will yield significantly less CO2 emissions reduction per dollar than an economy-wide instrument that encourages such cutbacks where they are cheapest — in the electric power and industrial sectors.

The fuel economy standards modeled in the study did prove beneficial in terms of fuel consumption, however. They reduced fuel used in passenger vehicles by 47 percent relative to a no-policy scenario in 2050, versus only 6 percent under carbon pricing.

To arrive at their findings, the researchers used the MIT Emissions Prediction and Policy Analysis (EPPA) model to simulate the impact of fuel economy and carbon pricing policies. The fuel economy scenario simulated the impacts of extending current fuel economy mandates past their expiration dates through 2050. The carbon pricing scenario consisted of a patchwork of national and regional cap-and-trade policies designed to achieve the same CO2 emissions reductions by 2050 as the fuel economy standards produced in each market.

The study also determined that by 2050, currently planned fuel economy standards would reduce CO2 emissions by about 4 percent relative to a no-policy scenario. Extending these standards past their deadlines through 2050 would decrease emissions by an additional 6 percent.

Although it may be politically easier to repurpose or replicate commonly applied fuel economy standards to reduce CO2 emissions, this analysis suggests that a coordinated approach that includes a price on CO2 will be far more effective at achieving this goal.

At a recent conference, Shell CEO Ben van Beurden said governments should put a price on carbon, which will then drive the “right behavior of consumers and producers” in terms of tackling climate change.

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