Cost Effectiveness of 1985 Automobile Fuel Economy Standards

The cost effectiveness of the current automobile fuel economy standards program is evaluated. A life cycle cost analysis is used to quantify the costs and benefits of fuel economy improvements stimulated by the program. The magnitude of these improvements is estimated by measuring the difference between the standards and a baseline “no standards” case. Due to the uncertainty associated with technology cost estimates, two scenarios are developed to bound the cost of fuel economy improvement; an “optimistic” scenario using technology cost and MPG gains documented by DOT and another “pessimistic” scenario based on conservative technology cost and fuel economy estimates.

A review of fuel economy legislation concludes that marginal cost effectiveness to the nation be a significant criterion for setting future fuel economy standards. Decreasing the 1985 fuel economy standard from 27.5 to 26.5 mpg is shown to result in net consumer losses without accounting for decreases in national benefits. The conflicting requirements of increased costs due to fuel economy improvements, the consumer and national benefits which also result and other aspects of economic practicability are discussed and an overall frame work for setting future fuel economy standards is suggested.