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Stimulating Low-Carbon Vehicle Technologies

image of Stimulating Low-Carbon Vehicle Technologies

Governments around the world are increasingly intervening in automobile markets to improve fuel economy and reduce emissions of CO2 from new vehicles. This report reviews the rationale for such intervention and examines measures for maximum effectiveness and minimum cost.

The Round Table brought together economists, policy makers and auto engineers with the aim of advancing understanding of why car markets currently fail to deliver sufficient fuel economy. It started by questioning whether any additional measures would be necessary once an appropriate price for carbon dioxide is established via fuel taxes. It confirmed that there are indeed market imperfections that merit additional government intervention. Fuel economy and CO2 regulations are an essential part of the package. The key to maximising the benefits of such regulations is long-term planning. The longer the timeframe, the less industry investment is handicapped by uncertainty.

Subsidies to electric vehicles are more problematic because of the risks of prematurely picking winning technologies and creating subsidy dependence. And electricity production has yet to be decarbonised. However, intervention to steer innovation in this direction is merited so long as the risks of not attaining climate policy targets are seen as higher than the risks of intervention.

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The Demand for and the Supply of Fuel Efficiency in Models of Industrial Organisation

International Transport Forum

This report organises and discusses empirical estimates of the effects of fuel prices and fuel emissions standards on consumer and firm behaviour. Model-free estimates are only briefly touched upon. The focus is on results based on explicit models, taken mostly from the industrial organisation literature. First, studies are reviewed that identify the willingness to pay for fuel efficiency using static and dynamic models of vehicle demand. Next, the fact that firms will adjust their product portfolios and the characteristics of the vehicles they offer is taken explicitly into account. These decisions will have an impact on the choice set from which consumer demand is estimated and on the trade-off that consumers face between fuel efficiency and other desirable characteristics. Finally, models are discussed where firms choose to invest in innovations to achieve fuel efficiency gains without sacrificing characteristics.

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