Policy Watch: The Economics of Fuel Economy Standards

One of the most hotly contested of all energy policy issues involves Corporate Average Fuel Economy (or CAFE) standards for new cars and light-duty trucks. Tighter standards would reduce gasoline consumption, and hence both greenhouse gas emissions as well as this country's vulnerability to oil price shocks. But they would also increase the price of new vehicles, worsen traffic congestion and–depending on how they are phased in–possibly even reduce occupant safety. These effects are amenable to economic analysis, and we review the evidence to date bearing on this interesting and important question.