Fuel Economy Standards and Public Transport

Corporate average fuel economy (CAFE) standards are a major environmental policy measure in both the EU and US. They require car producers to reach a fleet-wide level of average fuel efficiency. To design effective and efficient climate policies for the transport sector, it is important to understand the relevant channels of fuel economy standards on welfare and emissions. The main focus in the conventional literature is on the welfare cost of compliance occurring in the automobile market from adjusting engine technology, car features and pricing schedules. But fuel economy standards also reduce the marginal cost of driving and thus provide an incentive for households to switch their transport mode more often away from public transport to individual driving. By considering these shifting mode choices and their interactions with the urban form, we identify and examine a new channel of fuel economy standards on welfare and emissions. To this end, we incorporate public transport, mode choice and vehicle choice into a monocentric city model that we calibrate with empirically justified parameters and solve numerically.
On the one hand, fuel economy standards, on average, increase vehicle purchase costs. On the other hand, they reduce the marginal cost of driving and, thus, provide an incentive for households to switch their transport mode choice more often away from public transport to individual driving. This causes additional carbon emissions and undermines the climate policy goals. Since the variable and fixed costs of the transit system must be covered by fewer passengers, ticket prices rise endogenously, making public transport use less attractive. The resulting feedback loop additionally exacerbates the mode switching behavior towards individual driving and the corresponding increase in emissions. We find welfare costs of 1056US$ p.p.p.a. for a 50% emission reduction considering mode choice, vehicle choice, ticket prices and adjustment of the urban form.