Transportation Policy

Transportation has recently surpassed electricity as the largest source of carbon emissions in the United States (29%) and is one of the major sources of carbon emissions worldwide (14%).  Designing effective transportation policies for reducing both carbon and local tailpipe emissions requires understanding how people decide whether and how much to drive, what type of vehicle to purchase, and how emissions from vehicles deteriorate as they age. This project aims to study a number of these issues with the goal of informing policymakers about how current transportation policy can be improved.

Optimal Corrective Taxes for Tailpipe Emissions from Motor Vehicles

Mark Jacobsen, Jim Sallee, Joe Shapiro, and Arthur van Benthem

Project Overview

What is a feasible and efficient policy to regulate air pollution from vehicles? Theoretically, optimal policy would apply a Pigouvian tax on emissions: the polluter pays for the exact amount of their damages. Such a tax is technologically infeasible, and most countries instead rely heavily on exhaust standards for new vehicles that limit air pollution emissions per mile. These standards regulate air pollutants like nitrogen oxides and have very different properties than fuel economy regulations.

In this project, Risk Center researchers carefully assess these standards’ effectiveness and efficiency. We show that the emissions rate of new vehicles in the US has fallen by more than 99 percent since exhaust standards began in 1967. Used vehicles have had comparable declines. Exhaust standards have caused much of this decline. Yet exhaust standards are not cost-effective in part because they give no incentive to scrap old vehicles, which account for a large share of total emissions. To study counterfactual policies, we develop analytical and quantitative models of the new and used vehicle fleets. A key conclusion is that making registration fees increase with a vehicle type’s mean emissions would substantially enhance policy efficiency. By contrast, current actual registration fees (perversely) decrease with a vehicle’s emissions.

Consumer Myopia in Vehicle Purchases

Ken Gillingham, Sébastien Houde, and Arthur van Benthem

Project Overview

A central question in the analysis of fuel-economy policy is whether consumers are myopic with regards to future fuel costs. In other words, do consumers correctly calculate the stream of future gasoline payments when they choose between different types of vehicles? In this project, Risk Center researchers provide the first evidence on consumer valuation of fuel economy from a natural experiment that provides exogenous variation in fuel-economy ratings. We examine the short-run equilibrium effects of a restatement of fuel-economy ratings that affected 1.6 million vehicles produced by Hyundai and Kia, which were found to overstate the true fuel economy of a subset of their vehicle models. Using the implied changes in willingness-to-pay, consumers are found to act myopically: consumers are indifferent between $1 in discounted fuel costs and 16-39 cents in the purchase price when discounting at 4%. This undervaluation persists under a wide range of assumptions. This finding has important implications for policy analysis, as it adds substantially to the benefits of fuel-economy standards, which now help consumers save money they would have left on the table otherwise.

Formative Experiences and the Price of Gasoline

Chris Severen and Arthur van Benthem

Project Overview

An individual’s formative experiences with a common good, such as gasoline, can shape their behavior for decades. In this project, Risk Center researchers study if people’s driving decisions later in life depend on their experiences with gasoline prices when they first learned to drive. We first document a striking feature about those who came of driving age during the oil crises of the 1970’s: they appear less likely to drive to work in the year 2000 (i.e., in their mid 30s). We then combine data on many cohorts to show that changes in gasoline prices experienced between the ages of 15 and 18 lead to changes in later-life driving and commuting behavior (driving to work, transit use, and vehicle miles traveled). Differences in driver license age requirements generate additional variation in the formative window. These effects seem to reflect the early formation of preferences for driving or persistent changes in the perceived costs of driving during a person’s formative years; a finding inconsistent with habit formation and experience-based learning, which suggest that recent experiences matter more than earlier ones. On the policy front, a large carbon or gasoline tax could have an ‘imprintation’ effect that persists into the more distant future.