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Fuel Economy Standard

Fuel-economy standards are minimum fuel efficiency standards for new vehicles. These standards curb GHG emissions by improving the fuel efficiency of the new vehicle fleet. Fuel-economy standards should be administered upstream to capture 100 percent of the market for new vehicles, requiring each vehicle manufacturer to meet a fleet average fuel-economy standard for all new vehicles sold during a year. Fuel-economy standards can also be designed to provide flexibility and reward performance by allowing credit trading between manufacturers (rewarding manufacturers that offer more fuel-efficient product mixes by allowing them to sell credits to underperforming manufacturers). More stringent standards should phase in gradually with a clear ramp to meeting a final target. This approach allows manufacturers time to meet the final target while promoting continuous improvement by improving fuel economy on an ongoing basis.

In most cases, fuel-economy standards save customers money over the lifetime of the vehicle due to reduced spending on fuel. However, many purchasers of new vehicles often do not account for lifetime fuel use in their purchasing decisions, and increases in vehicle cost may be perceived as increasing costs to consumers.

Fuel-economy standards improve new vehicle efficiency, but in the absence of complementary fuel-price or emissions tax policies, some of this gain may be offset by increased vehicle use due to the cheaper cost per mile of traveling. This “rebound effect” phenomenon is exacerbated if fuel is subsidized rather than taxed. Fuel taxes are thus a useful complement to fuel economy standards.

For a more detailed discussion, see the applicable chapter of Designing Climate Solutions, our book on smart energy and climate policy design.