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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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Why the Market for New Passenger Cars Generally Undervalues Fuel Economy

International Transport Forum

Passenger vehicles are a major source of greenhouse gas emissions and prodigious consumers of petroleum, making their fuel economy an important focus of energy policy. Whether or not the market for fuel economy functions efficiently has important implications for both the type and intensity of energy and environmental policies for motor vehicles. There are undoubtedly imperfections in the market for fuel economy but their consequences are difficult to quantify. The evidence from econometric studies, mostly from the US, is reviewed and shown to vary widely, providing evidence for both significant under- and over-valuation and everything in between. Market research is scarce, but indicates that the rational economic model, in general, does not appear to be used by consumers when comparing the fuel economy of new vehicles. Some recent studies have stressed the role of uncertainty and risk or loss aversion in consumers’ decision-making. Uncertainty plus loss aversion appears to be a reasonable theoretical model of consumers’ evaluation of fuel economy, with profound implications for manufacturers’ technology and design decisions. The theory implies that markets will substantially undervalue fuel economy relative to its expected present value. It also has potentially important implications for the welfare analysis of alternative policy instruments.

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