Fuel economy standards are the workhorse of U.S. policy to reduce emissions and oil use by the light duty fleet,
and are slated to be dramatically tightened over the next decade. In this paper Ken Gillingham elucidates the relationship between fuel economy standards and “feebate” policies that penalize low fuel economy vehicles with a fee and reward high fuel economy vehicles with a rebate. The analytical results show how a feebate can be designed to exactly match a fuel economy standard, both under the previous regulation and the current regulation.
Moreover, this paper shows how the current footprint-based standard leads to a perverse incentive to upsize vehicles, and how this could carry over to a “footprint-based feebate.” To more concretely show the effects of both policies, it uses the National Energy Modeling System modified for this study (NEMS-NEPI) to simulate the current fuel economy standards and an equivalently stringent feebate policy. Both policies are found to have broadly similar effects, although the implementation of these policies in NEMS-NEPI leads to minor differences in the uptake of different vehicle technologies.
This paper highlights the importance of the policy details in the final welfare implications of both fuel economy standards and feebates. For reasons of policy transparency, complementary policies, and administrative costs, one could make a reasonable case for preferring feebates over fuel economy standards, but the final verdict depends on the particular standard and feebate policy implemented.