Regan Brown
Fuel economy standards for vehicles are a primary policy instrument in many countries to reduce the carbon footprint of the transportation sector. These standards have many channels of costs and benefits, affecting sales, vehicle attributes, miles travelled, and externalities in the new-car fleet. The cost of crude oil is the largest factor in the retail price of gasoline. Taxes and fees make up approximately 14% of what consumers pay at the pump, with some states adding additional taxes. New analysis of consumer survey data indicates that consumers undervalue fuel economy when purchasing a new vehicle, suggesting that consumers benefit from the fuel savings of tighter standards.
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What You'll Learn
Fuel economy standards
Standards for fuel economy have been tightened in recent years, which has resulted in rising fuel economy. This has led to a reduction in fuel costs for consumers, but there has been a trade-off with performance improvements. Automakers have had to forgo performance enhancements to meet the stricter standards, and consumers have shown a high valuation of performance, undervaluing the fuel cost savings.
The welfare costs of the forgone performance roughly equal the expected fuel savings, resulting in a net zero private consumer benefit from the tightened standards. This implies that consumers undervalue fuel economy when purchasing a new vehicle, and the tightened standards have had roughly zero effect on buyers.
However, the tightening of fuel economy standards can generate welfare gains through the reduction in gasoline use. The welfare gain is achieved if the pre-existing gasoline tax does not fully charge consumers for fuel-related external costs, which is often the case as the value of the tax is usually below the value of external costs of fuel consumption. Therefore, while consumers may not see direct benefits in terms of vehicle performance, there are broader societal benefits in terms of reduced gasoline consumption and environmental impact.
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Fuel costs and savings
Fuel costs are influenced by several factors, including the type of crude oil used, refining costs, distribution and marketing costs, retail dealer costs, and taxes. The largest component of the retail price of gasoline is typically the cost of crude oil, which can account for over half the cost of a gallon of gasoline. These costs can vary seasonally, regionally, and over time, with higher prices generally seen during periods of increased demand, such as in the summer.
Refiners also charge more for higher-octane fuel, with premium-grade gasoline being the most expensive. The price difference between grades of gasoline has generally increased over time. In 2023, the national annual average price of mid-grade gasoline was 52 cents more per gallon than regular-grade, while premium-grade gasoline was about 85 cents more per gallon. Taxes and fees can further impact fuel prices, with some states having additional taxes that make fuel prices higher than in other areas.
To save on fuel costs, consumers can consider various fuel-saving practices. Maintaining your vehicle by regularly tuning it, keeping air filters clean, and ensuring proper tire inflation can improve fuel economy. For example, an engine tune-up can increase fuel economy by one mile per gallon, while under-inflated tires can decrease it by the same amount. Reducing weight in your vehicle by removing unnecessary items can also increase fuel efficiency.
Additionally, driving habits can significantly impact fuel consumption. Smooth and gradual acceleration, maintaining a constant speed, and reducing speed can all improve fuel economy. The use of air conditioning can decrease fuel efficiency, but today's air conditioners create less drag on the engine than driving with the windows down. Consumers can also benefit from tighter fuel economy standards, which have reduced fuel costs without negatively impacting consumer well-being. These standards aim to improve fuel efficiency and reduce emissions, resulting in potential cost savings for consumers.
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Performance improvements
The automotive industry's historical focus on performance over fuel economy has influenced consumer preferences. During periods of stable fuel economy standards, automakers prioritized performance enhancements, creating a perception among consumers that performance is a more valuable attribute. This trend has shifted with tightening fuel economy standards, but the legacy of this historical focus persists.
Consumer survey data reveals that buyers undervalue fuel economy when purchasing new vehicles. This undervaluation suggests that consumers are willing to sacrifice fuel savings to prioritize performance improvements. The perceived value of performance improvements is approximately equal to the expected fuel savings, resulting in a net-zero private benefit to consumers from tightened fuel economy standards.
Additionally, performance improvements can also include advancements in technology and vehicle features. Consumers may value enhancements such as advanced driver-assistance systems (ADAS), improved infotainment systems, or more comfortable and luxurious interiors. These types of performance improvements may not directly impact fuel efficiency but can still influence a consumer's purchasing decision.
While consumers may prioritize performance improvements, it is important to note that fuel economy standards and environmental considerations are still crucial factors in the automotive market. The trade-off between performance and fuel efficiency will likely continue to evolve as new technologies and innovations emerge, potentially offering consumers improved performance without sacrificing fuel economy.
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Environmental impact
The environmental impact of consumer valuation of fuel costs and performance is significant. Fuel-economy standards for new vehicles are a primary policy instrument in many countries to reduce the carbon footprint of the transportation sector. The transportation sector, particularly in the US, is a major contributor to heat-trapping emissions, with fossil-fueled passenger cars and light-duty trucks contributing 57% of the country's total transportation emissions in 2022.
The welfare consequences of automakers forgoing performance increases to improve fuel economy have been evaluated in recent studies. These studies found that the undervaluation of fuel cost savings by consumers and the high valuation of performance resulted in approximately zero net private consumer benefit from tightened standards. This suggests that consumers are willing to trade off fuel cost savings for improved performance, which has environmental implications.
The transition to cleaner vehicles that produce zero tailpipe emissions is already underway, but it needs to be accelerated to effectively reduce emissions. This includes the deployment of new technologies that cut global and local pollution, such as electric vehicles. Federal policy changes, such as those implemented under the Trump administration, can also support this transition by promoting electric vehicles.
Additionally, the phasing out of petroleum and the reduction of gasoline and diesel production must be carefully planned to consider the livelihoods and local economies of communities dependent on oil production and refining. By mid-century, it is projected that there will be a significant cleanup of the transportation sector, requiring a transition away from oil.
Overall, the environmental impact of consumer valuation of fuel costs and performance is complex. While there is a push for cleaner and more fuel-efficient vehicles, consumer preferences for performance over fuel economy may slow down the transition to more sustainable transportation options.
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Consumer behaviour
Historical data from the US shows that when fuel economy standards remained unchanged, automakers prioritised performance enhancements over improving fuel economy. However, with the introduction of tighter standards, automakers have been forced to increase fuel economy, leading to a trade-off between performance and fuel efficiency.
Consumer survey data reveals that buyers undervalue fuel economy when purchasing new vehicles. This suggests that while they benefit from the fuel savings brought about by stricter standards, they do not necessarily factor this into their purchasing decisions. The value they place on fuel savings is roughly equal to the cost of the performance improvements they forgo, resulting in a net-zero private benefit to consumers from tightened standards.
External factors, such as seasonal variations and regional differences, also influence fuel costs. For instance, gasoline demand typically rises during the summer, leading to higher prices. Additionally, certain regions may require specific gasoline formulations to reduce air pollution, impacting the production process and, consequently, the price.
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Frequently asked questions
Consumers undervalue fuel costs when purchasing a new vehicle. This is because they do not consider the fuel savings of tighter standards.
The primary factors influencing gasoline prices are global crude oil cost (50-61%), refining costs (25%), distribution and marketing costs (11%), and federal and state taxes (14%).
Fuel economy standards affect the consumer's willingness to pay for vehicles by influencing sales, vehicle attributes, and miles travelled. It also affects the composition and size of the vehicle fleet.
Historical data shows that automakers increased performance but not fuel economy when fuel economy standards were unchanged. However, with tightening standards, fuel economy has increased, but performance improvements have been forgone.
Consumers can improve fuel efficiency by regularly tuning their vehicles, maintaining clean air filters, and ensuring proper tire inflation. Additionally, reducing weight in the vehicle and minimizing the use of air conditioning can also enhance fuel efficiency.
