Paper Number: 2019-02
Document Date: 01/2019
Author(s): Heather Klemick, Elizabeth Kopits, and Ann Wolverton
Subject Area(s): Energy, Motor Fuels, Benefit-Cost Analysis
JEL Classification: D12, D22, R41, Q58
Keywords: Consumer valuation, fuel economy, vehicle purchase decisions, benefit-cost analysis
Abstract: Engineering-based studies of energy efficiency often find that firms and consumers fail to adopt technologies that appear to provide net private benefits absent regulation. We examine the recent empirical literature on the extent to which expected future fuel costs are reflected in vehicle prices and therefore valued by consumers when making purchase decisions. These studies improve upon the prior literature due to their use of highly disaggregated panel data that allows for defensible identification strategies. These studies found that vehicle purchase prices reflect about 50 to 100 percent of future fuel expenses, assuming static consumer expectations about future gasoline prices and a discount rate of five to six percent. Recent regulatory analyses have estimated the benefits of more stringent vehicle standards implicitly assuming that no improvements in fuel economy will occur in the baseline, absent regulation. This assumption is consistent with consumers placing no value on future fuel costs when making vehicle purchase decision. The recent empirical evidence supports using a range of consumer valuation assumptions and applying this range consistently in the baseline and regulatory scenarios when modeling consumer purchase and firm investment decisions.
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