California seeks to sharply increase the fuel economy of the next generation of vehicles. There are social benefits of this policy (ignoring the rebound effect), GHG emissions will decline from driving. There would be private benefits from this policy such as lower household expenditure on gasoline as a Hummer driving household now buys a Prius but rational households should have already take this money savings into account when choosing between a Hummer and Prius. Implicit in some energy efficiency regulation is a strong belief in behavioral economics. Gayer and Viscusi explore this point here.
Back in 2008, I made a similar point. See the bottom of page 20 of my report posted here.
"Today, there are vehicles such as the Toyota Avalon whose fuel economy is
way below this standard. While, I cannot know for sure how Toyota would respond to this
regulation, I predict that they would produce fewer Avalons if they faced this regulation.
Families who own the Toyota Avalon today are revealing themselves to be a type of consumer
who values this type of vehicle. If the Pavley Bill means that they can no longer buy such new
vehicles in 2020, then they have been made worse off.
To suggest that the Pavley Bill offers
“negative costs”, the ARB must be implicitly assuming that today’s buyers of big fuel inefficient
vehicles (including Governor Arnold Schwarzenegger and his Hummer collection) will suffer no
happiness loss from having their consumption choices shrunk by this regulation. To repeat my
point, there is an implicit assumption here that the set of vehicles produced in 2020 will be
identical along all dimensions except that they will be more fuel efficient. I hope that this is the
case but I’m not sure that I believe this. I predict that those households who have a taste for
large vehicles will suffer because of this Pavley rule. Their costs from having their choice
opportunities shrunk do not appear to be included in row T-1. The vehicle manufacturers will
also have to change their production processes and re-direct their research and development
efforts to meet this regulation’s mandate. How do we estimate their expected costs of this new
regulatory mandate?"
