Overview
Overview: Increasing automotive fuel economy has multiple benefits, including reducing the amount of money consumers need to spend on gasoline and improving air quality. In this homework assignment, you will do a simplified benefit-cost analysis examining the social benefits associated with the fuel efficiency standards for new automobiles set by the Obama administration and then revised by the Trump administration. You should start from the template provided below. Submit both your write-up and your Excel file to Canvas; and don't forget to enter your name and PID into the Excel spreadsheet and press the button to start.
Model: Your homework model is a simplified version of the very complex benefit-cost analyses in the real Final Regulatory Impact Analyses (FRIAs), and is meant to capture the major features of the costs, benefits and differences between the Obama and Trump analyses while making the analysis manageable for an introductory BCA homework assignment. These simplifications include:
- Quantifying and including only the three largest costs components (technology costs, rebound traffic, accident increases) and three largest benefit components (fuel savings, rebound consumer surplus, CO2 emissions reductions)
- Conducting analysis for cars only (no “light trucks”)
- Using simple fixed parameters: We will assume a fixed gas price ($3.50/gallon) and fleet size (120 million) that is constant in time, and uniform across the country, and assume and a lifetime of 15 years for all cars. Please make sure to change these values in your template as you get started.
- Vastly reducing the complexity of the technology cost model to simply represent the different assumptions between the two administrations in terms of two parameters, a marginal price premium on more fuel efficient cars, and a cost to improve technology by 1mpg.
- Only projecting costs and benefits out 25 years (the time horizons in the real FRIAs was longer)
To get you started the Fuel Savings and Benefit have already been calculated for both the Obama and Trump preferred fuel economy schedules relative to a No Policy (39 mpg) baseline. Please complete the model and answer the following questions:
1. Examining the consequences of different model parameter values: The Obama and Trump rulemakings propose different fuel efficiency schedules, but the reason that the two administrations identified different policies as optimal (preferred) is because of their different modeling assumptions and parameterizations. The two biggest modeling differences were in technology costs (Trump’s NHTSA said they were higher than previously estimated) and climate benefits (Obama’s NHTSA put a higher value on avoided CO2 emissions, which are represented in the template in the form of three different parameters:
Calculate the (a) total technology costs and (b) total climate damages avoided for four scenarios: the Obama preferred schedule (‘Obama option’) with the Obama model parameterization and the Trump model parameterization and the Trump preferred schedule (‘Trump option’) with the Obama model parameterization and the Trump model parameterization – all relative to a “no policy” (39mpg) baseline. Present the results of your calculations in a table and explain: are the differences in the magnitudes of technology costs and climate damages estimated for the Obama versus Trump options due primarily to the differences in the proposed fuel economy schedules or the modeling choices (parameterizations)?
2. Quantifying rebound effects (costs and benefits): Some of the biggest costs and benefits of the new fuel efficiency standards are associated with the rebound effect, i.e., the reallocation of the consumer cost savings (benefits) generated by the rulemaking towards more driving:
“The rebound effect refers to the increase in vehicle use that results when an increase in fuel efficiency lowers the cost of driving, which encourages people to drive slightly more... For example, a 10 percent rebound effect means that a 20 percent increase in fuel efficiency or reduction in fuel cost per mile is expected to result in a 2 percent increase in VMT.”
The Obama FRIA used a rebound rate of 10% so we will use this as our preferred rate as well. Use the output from your Fuel Saving & Benefit tab to calculate: the rebound miles driven per year under the Obama and Trump standards (both relative to a constant 39mpg baseline), the consumer surplus (benefit) and the additional congestion and traffic fatalities (costs) associated with the rebound effect for the two rulemakings. Make a 2-D stacked column plot of the costs and benefits of the rebound effect under the Obama rulemaking’s schedule (don’t forget to consider the sign of these effects). Paste this plot into your write-up. Is the rebound effect overall beneficial or detrimental to society from a cost-benefit standpoint?
3. Calculating net benefit: Calculate net benefit of (1) the Obama CAFE standards with the Obama model parameterization, (2) the Obama CAFE standards with the Trump model parameterization, (3) the Trump CAFE standards relative to the 39mpg baseline with the Trump model parameterization and (4) the difference between (2) and (3) all with 3% and 7% social discount rates. Explain why (4) is the net benefit of the Trump CAFE standards. Which rulemakings pass the cost-benefit test (make sure to clearly state under which parameterizations and discount rates)? Make a table of your results and provide a short paragraph (~150 words or less) interpreting them.
4. Thinking more carefully about rebound: The Technical Support Document for the Biden Administration’s FRIA for 2024-2026 CAFE standards (linked in Module 3) contained a review of the recent empirical evidence about the magnitude of the rebound effect (see p 482-489 of the linked document if you’re interested in seeing more). This review makes it clear that the magnitude of the fuel economy rebound effect is very uncertain and may be considerably higher than the preferred value of 10%. For example, the figure below shows probability distributions of rebound effects for different entities:Calculate how big the rebound effect would need to be (to the nearest whole percent) for the Obama option (under the Obama parameterization) to not pass the cost-benefit test under a 3% discount rate. How big would the rebound effect need to be for the Trump option (under the Trump parameterization) to not pass the cost-benefit test at a 3% discount rate? Document your calculations and comment on your findings given the empirical evidence about the rebound effect in the table and figure above.