Whether the goal is to mitigate climate change or increase energy security, transportation is arguably the most important segment of the U.S. energy economy. However, the federal government’s key policy for reducing fuel consumption in transportation—fuel economy standards—is proving to be both expensive and inefficient, particularly as consumer buying habits have changed amid low oil prices. A new policy proposal seeks to improve the standards by introducing a more market-based approach.
“The current policy is loaded with loopholes and inefficiencies that undermine fuel savings,” says EPIC Executive Director Sam Ori, one of the authors of the proposal. “It also regulates efficiency rather than consumption, leaving as much as three fourths of potential savings on the table. And, it is highly vulnerable to volatile oil prices, which federal regulators now acknowledge means that the originally promised fuel savings will not be achieved.”
Ori explains that their new proposal, co-authored by EPIC’s Director Michael Greenstone and Harvard professor Cass Sunstein, offers an opportunity to achieve more cost-effective and certain fuel savings by removing considerations of vehicle type and size, refocusing on expected lifetime vehicle emissions, and establishing a robust cap-and-trade program.
The proposal contains three main elements:
- Regulate expected CO2 emissions directly. Standards would be equalized to treat light trucks and larger vehicles with the same level of stringency as they treat other vehicles.
- Estimate and target a vehicle’s lifetime emissions. Current standards based on fuel efficiency alone would be replaced with expected lifetime emissions, incorporating consideration of vehicle usage.
- Develop a robust cap-and-trade market to reduce compliance costs. The EPA would establish a nationwide cap on lifetime vehicle emissions and allow automakers to trade credits more flexibly.
“Overall, these changes would dramatically reduce the costs of achieving fuel and emissions savings in transportation no matter the policy goal,” Ori says. “Importantly, this policy approach could be implemented without new legislation, making it highly relevant as the Trump Administration considers reforms to fuel economy standards.”