Essays on fuel efficiency and vehicle demand dynamics

Reducing automobile-based gasoline consumption has been a major U.S. public policy issue recently. A key driving force behind policymakers' desire is the concern of environmental externalities and national security. Currently, there are three public policies towards reducing automobile gasoline consumption: raising federal gasoline tax, raising the Corporate Average Fuel Economy (CAFE) Standards and vehicle scrappage subsidies of government to retirement of old vehicles. My research studies the effectiveness of these policies in the United States.

Among all polices, economists often argue that higher gasoline tax would be more effective in improving fuel economy efficiency. In my first chapter, I ask how gasoline prices influence households' automobile replacement decisions and thus market fuel economy efficiency, which is measured by average mileage per gallon in a city. I specify and estimate a structural dynamic model of consumer preference for new and used vehicles following the methodology proposed by Gowrisankaran and Rysman (2009). Since gasoline costs accounts for 65% of total operating costs, the current and future gasoline price must need to be taken into consideration for rational forward-looking consumers when they are making vehicle choices. Besides, the replacement decision for vehicles is dynamic as well: facing depreciation as the automobile ages and the improving features for new products, consumers need to decide whether to replace the vehicle in the current period or later. Therefore, a dynamic model of consumer choice would be crucial to correct policy evaluation of fuel economy efficiency, while previous literature fails to consider the dynamics. By taking dynamics into consideration, I am able to capture the inherent dynamic nature of a forward-looking consumer's decision, with rational expectation on the evolution of vehicle attributes and retail gasoline prices. I estimate the model using a rich dataset combing vehicle registration data on different cities, vehicle characteristic data, average gasoline price, etc. Although a high gasoline tax is never put in practice in the U.S. and may not be political feasible, I further conduct an experiment of raising gasoline tax to test how fuel economy efficiency is affected based on my model estimates. Experiments suggest that keeping a $4 gasoline price would result in a steady trend for a city's fleet fuel efficiency increase, while doubling current rate will only increase fuel efficiency in the first several years, but experience drops over time.

The Corporate Average Fuel Economy (CAFE) are regulations in the United States that intended to improve the average fuel economy of cars and light trucks sold in the US. However, it is long been realized that with a more fuel efficiency car, consumers may be induced to drive more which partially offsets the original energy saving by the policy. Therefore, to assess the effectiveness of CAFE standards, it is crucial to ask: how fuel economy efficiency, which is measured by mileage per gallon (MPG), affects households' vehicle mileage traveled and its distribution. In my second chapter, I answer the question by estimating a structural model for joint determination of vehicle fuel efficiency choice and vehicle mileage traveled each year with a detailed micro-level data of National Household Travel Survey 2001. I further study the distributional effects on vehicle miles of fuel efficiency using instrumental quantile regression. Comparison on results and tests of weak instruments between my method and literature suggest that my model and choice of instruments provide consistent estimates, while using choice probabilities as instruments is not valid. My results support some earlier findings of rebound effects with a more precise quantitative estimation. In addition, I find new evidence that costs associated with raising CAFE standards vary across different quantiles of annual mileage driven and are especially high for those with below-average vehicle mileage driven. These findings also provide rationale in support of a tax on mileage, which is more effective in reducing gasoline consumptions, comparing to the costs of CAFE standards.

My third chapter focus on 2009 CARS Program (Cash-for-Clunker). The 2009 CARS program attempted to boost the sale of new fuel efficient vehicles to replace old gas guzzlers. The program established a two-tier incentive system depending on whether buyers purchased a passenger vehicle or an SUV. The result is that many of the new purchased vehicles are indeed SUVs. The CARS program collected information about the old scrapped vehicles and linked it to the actual purchase of the new vehicles. It is thus possible to analyze the effect of preference inertia in choices by comparing the characteristics of old and new vehicles. The fact that effective prices that consumers face are determined by the mileage class of the old car also allows us to evaluate the distribution of valuation trade-offs between mileage and other characteristics such as size, performance, and vehicle class. My findings suggest that the 2009 Cash-for-Clunker is not very effective in terms of affecting consumers' choice of SUVs and big cars. For transactions under the program, consumers still prefer SUVs and large cars. The extra $1000 rebates actually increase consumers' tastes towards SUVs.