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Jeremy West

Mark Hoekstra

Jonathan Meer

Steven L. Puller

Working Paper 21194



1050 Massachusetts Avenue Cambridge, MA 02138 May 2015 We are grateful to Hunt Allcott, Antonio Bento, Paul Ferraro, Ken Gillingham, Mark Jacobsen, Chris Knittel, Arik Levinson, Shanjun Li, Joshua Linn, Gregor Pfeifer, Dave Rapson, Arthur van Benthem, Matthew Zaragoza-Watkins, and numerous seminar participants for comments. We gratefully acknowledge financial support from NSF EV-STS and MIT CEEPR. Any errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2015 by Jeremy West, Mark Hoekstra, Jonathan Meer, and Steven L. Puller. All rights reserved.

Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Vehicle Miles (Not) Traveled: Why Fuel Economy Requirements Don't Increase Household Driving Jeremy West, Mark Hoekstra, Jonathan Meer, and Steven L. Puller NBER Working Paper No. 21194 May 2015 JEL No. L91,Q41,Q48


A major concern with addressing the negative externalities of gasoline consumption by regulating fuel economy, rather than increasing fuel taxes, is that households respond by driving more. This paper exploits a discrete threshold in the eligibility for Cash for Clunkers to show that fuel economy restrictions lead households to purchase vehicles that have lower cost-per-mile, but are also smaller and lower- performance. Whereas the former effect can increase driving, the latter effect can reduce it. Results indicate these households do not drive more, suggesting that behavioral responses do not necessarily undermine the effectiveness of fuel economy restrictions at reducing gasoline consumption.

Jeremy West Jonathan Meer Department of Economics Department of Economics Massachusetts Institute of Technology TAMU 4228 77 Mass. Ave, Bldg E17-231 Col

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Mark Hoekstra Steven L. Puller Department of Economics Department of Economics Texas A&M University Texas A&M University 3087 Allen Building 3046 Allen 4228 TAMU College Station, TX 77843-4228 College Station, TX 77843 and NBER and NBER puller@econmail.tamu.edu markhoekstra@tamu.edu 1 Introduction Negative externalities from gasoline consumption are well-documented, ranging from the local effects of automobile pollution on health [Currie and Walker, 2011; Knittel, Miller, and Sanders, 2011] to the global impact of vehicle emissions on climate change [Interagency Working Group, 2013]. The current level of gasoline taxes in the United States is generally thought to be insufficient to correct for these externalities [McConnell, 2013], but the direct policy solution – increasing these Pigouvian taxes – remains politically unfeasible. As a result, U.S.

transportation policy addresses fuel consumption externalities primarily by regulating the fuel efficiency of new vehicles via Corporate Average Fuel Economy (CAFE) requirements.1 Although CAFE standards remained largely constant for nearly two decades, the federal government has set ambitious new targets for the fuel economy of the future fleet. Regulators project that these new standards will increase the average fleet-wide fuel economy of new light-duty vehicles to 46.2 miles per gallon by 2025, compared to 25.9 miles per gallon in 2010 [NHTSA, 2012]. In the absence of behavioral changes, these projections amount to a substantial reduction in gasoline consumption.

However, policy analysts argue that increasing the fuel economy of the vehicle fleet will not necessarily lead to a proportionate reduction in fuel consumption (e.g. National Research Council [2013]). The intuition underlying this concern is straightforward: because vehicles with higher fuel economy travel farther per gallon of fuel, the cost of driving each mile is comparatively lower in fuel-efficient vehicles, and this lower cost-per-mile may result in an increase in the quantity of miles traveled. This has been called the “rebound effect”.

Despite the simplicity of this argument at a conceptual level, researchers have struggled to quantify the extent of the rebound effect that arises from an increase in fuel efficiency [Gillingham, Kotchen, Rapson, and Wagner, 2013a]. The fundamental challenge has been a lack of exogenous variation in fuel economy. Vehicle owners select the vehicles they purchase in part based on their expected driving behavior, so disentangling the causal impact of fuel economy on driving is empirically problematic. To circumvent these endogeneity issues, most research on the rebound effect exploits variation in fuel prices – rather than fuel economy – to identify the relationship between vehicle miles traveled (VMT) and the price-per-mile of driving. As we argue in the following section, there are several reasons why the impact of fuel prices on consumption may differ from the rebound effect for fuel economy, at least in the short run.

1 See Knittel [2013] for a history of the (lack of) political support for increasing the gasoline tax dating back to the Nixon administration. Extensive research examines the inefficiencies associated with using fuel economy standards rather than a gasoline tax (e.g. Portney, Parry, Gruenspect, and Harrington, 2003;

Fischer, Harrington, and Parry, 2007; Anderson, Parry, Sallee, and Fischer, 2011; Jacobsen, 2013).

1 The primary difference between rebound effects caused by fuel prices and fuel economy is that in contrast to fuel prices, fuel economy is highly – and typically negatively – correlated with other desirable vehicle attributes, such as vehicle performance (e.g., horsepower) and safety (e.g., vehicle size). Thus, while both gasoline prices and fuel economy alter the cost per mile of driving, fuel economy restrictions may also affect the benefit per mile traveled.

More formally, a change in fuel prices induces movement along the demand curve for VMT because the price per mile varies but vehicle characteristics are held constant. However, a change in fuel economy induces both a shifting of and a movement along the demand curve.

For example, if a household purchases a more fuel efficient but smaller and lower-performing vehicle, then the change in vehicle characteristics shifts VMT demand in and the decrease in the price per mile moves the household down the demand curve. Therefore, the sign of the effect of fuel economy standards on VMT is theoretically ambiguous. As a result of this logic, we argue that variation in fuel prices is better suited to predicting the efficacy of changing gasoline taxes, but that exogenous variation in fuel economy, coupled with correlated vehicle attributes, is necessary in order to better understand the impact of CAFE standards as they are implemented in the United States.

With this objective, we use administrative household-level data from Texas to study a unique natural experiment in which some households were quasi-randomly induced to buy more fuel efficient vehicles. We do so by exploiting a discontinuity in the eligibility requirements for the 2009 U.S. “Cash for Clunkers” (CfC) program, which incentivized eligible households to purchase more fuel-efficient vehicles. Specifically, we use a regression discontinuity design to assess the household driving response to the exogenous variation in new vehicle fuel economy induced by the program’s requirement that a “clunker” have an EPA rating of no more than 18 miles per gallon (MPG). Households that owned clunkers with a fuel economy of 18 MPG or less were eligible for the subsidy, while households owning clunkers with an MPG of 19 or more were ineligible. Our empirical strategy is to compare the fuel economy of vehicle purchases and subsequent vehicle miles traveled of barely eligible households to those households who were barely ineligible. The key identifying assumption is that all determinants of fuel economy and miles driven are smooth through the eligibility criteria, with the exception program eligibility.

Importantly, although the program ran for less than two months, we use all households who bought new vehicles within one year of the start of the program, which was the maximum time that any household shifted purchases forward [Hoekstra, Puller, and West, 2015]. Thus, by construction this time frame was such that there was no effect of the program on the likelihood of purchase; all households in our sample were going to buy a vehicle sometime in the next year, but some were incentivized to buy somewhat sooner and purchase different 2 vehicles within that time frame. As we show in Section 4.4, households who purchased during this one-year time window have very similar demographic and previous purchasing and driving characteristics across the eligibility cutoff.2 To our knowledge, this is the first study to use quasi-experimental variation in fuel economy to estimate how household driving behavior and fuel consumption respond to policy-induced improvements in fuel economy.

We find this approach to be considerably more compelling than one based on panel data, where one might worry that a change in household fuel economy over time is caused by changes in unobserved income or commute distance, which themselves would affect vehicle miles traveled.

We find a meaningful discontinuity in the fuel economy of new vehicles purchased by CfC-eligible households relative to ineligible households. However, we also find that the more fuel efficient vehicles purchased by the eligible households were cheaper, smaller, and lower-performing. This suggests that given current technological limitations and the cost of fuel-saving technologies such as hybrids, households respond to fuel economy restrictions by purchasing vehicles that are more fuel efficient, but are less desirable along other dimensions.

Results indicate that households induced to purchase more fuel efficient (but cheaper, smaller, and lower-performing vehicles) do not drive any additional miles after purchase.

Thus, we find no evidence of a rebound effect in response to improved fuel economy. We argue that this is consistent with a shifting in of the VMT demand curve due to changing vehicle characteristics, coupled with a movement down the demand curve for VMT because improved fuel economy reduces the price-per-mile of driving.

This paper makes three primary contributions to the literature. First, we believe this to be the first paper to exploit credibly exogenous variation in household fuel economy to identify the effect on driving behavior. As a result, we are able to obtain estimates that are causal under reasonable assumptions, without the need to impose stronger assumptions required to model vehicle purchase and driving decisions.

Second, our finding of no rebound effect from increased fuel economy is directly relevant for policies such as CAFE, given that auto manufacturers are likely to “downsize” the new vehicle fleet by selling smaller cars than they otherwise would, in order to comply with the new set of CAFE standards (Knittel [2011]). The NHTSA assumes a 10% rebound effect, based in part on the existing literature, when calibrating the CAFE standards ([NHTSA, 2012]). However, as we discuss below, much of the existing literature on the rebound effect 2 Specifically, we first use the 2009 National Household Travel Survey to show that Texas households in general look very similar across the CfC eligibility threshold. Second, we demonstrate that households who purchased new vehicles during the 12-month period we study owned similar fleets and exhibited similar driving patterns prior to Cash for Clunkers. Finally, we perform falsification tests for new vehicle attributes and subsequent driving outcomes for the households that purchased new vehicles during 2008 – the year prior to CfC.

3 does not incorporate the effect of downsizing on driving. Our results suggest that if future fuel economy standards require households to downsize vehicles, then estimates of rebound that do not account for changes in vehicle characteristics are likely to be overstated.

Finally, these results have implications for evaluating the welfare comparisons that are frequently made between price-based policies such as a gasoline tax and quantity-based regulations such as CAFE. Quantity-based regulations such as fuel economy standards have been criticized as inefficient on the intensive margin for distorting vehicle utilization relative to the first-best policy of imposing a Pigouvian tax to fully internalize the externalities of driving. This paper makes an important point: extensive margin policies can have countervailing effects on intensive marginal utilization decisions. One effect of increasing fuel economy is captured by a price elasticity of driving – altering the fuel efficiency of the fleet reduces the price-per-mile of driving. A second effect is a vehicle-attribute elasticity of driving – shifting households to fuel efficient cars with less desirable characteristics can reduce the utility-permile of driving and thus the amount of driving. Both of these effects must be captured by a complete welfare analysis to compare a particular policy to first-best.3 This paper is organized as follows. Section 2 reviews the literature on the rebound effect and bolsters our argument regarding the distinction between variation in fuel prices versus fuel economy. Section 3 provides an overview of the U.S. Cash for Clunkers program, describes the data included in our study, and details our empirical strategy. Our findings are presented in Section 4, along with the identification checks and falsification exercises. We conclude in Section 5.

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