MIT Study: Carbon Pricing More Cost-Effective At Reducing Carbon Emissions Than Fuel-Economy Regulations

Carbon pricing is a more cost-effective means of reducing carbon emissions than fuel-economy regulation, but fuel-economy regulations are notably more effective at reducing overall fuel use, according to new research from the MIT Joint Program on the Science and Policy of Global Change.

The new research was essentially just a comparison of various planned fuel-economy standards and carbon pricing schemes around the world, extrapolated through the year 2050. The new work found that strong fuel-economy standards would “cost the economy 10% of global gross domestic product (GDP) in 2050, compared with a 6% cost under carbon pricing” — thus supporting the idea that improving fuel economy will result in less carbon emissions reductions per dollar than economy-wide approaches (carbon pricing, etc).

Despite that, though, fuel-economy standards do (according to the new study) do far more to reduce fuel consumption than economy-wide approaches do, unsurprisingly. Strong fuel-economy standards would reduce passenger vehicle fuel use by 47% by 2050, as compared against a no-policy scenario. Carbon pricing would only reduce passenger vehicle fuel use by 6% by 2050.

The lead author of the study, Valerie Karplus, commented: “Many developed countries are choosing very expensive ways to reduce CO2 emissions, but if that’s a top priority, they should go with a price on carbon. If they’re more focused on energy independence, fuel economy standards can deliver, but a tax on gasoline would be more cost-effective. What makes our study unique is that we used a global model that captures market linkages around the world, rather than within a single nation, region or sector.”

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To arrive at their findings, the researchers used the MIT Emissions Prediction and Policy Analysis (EPPA) model to simulate the impact of fuel economy and carbon pricing policies. The fuel economy scenario simulated the impacts of extending current fuel economy mandates past their expiration dates through 2050. The carbon pricing scenario consisted of a patchwork of national and regional cap-and-trade policies designed to achieve the same CO2 emissions reductions by 2050 as the fuel economy standards produced in each market.

An important feature of the study was its ability to capture, via the EPPA model, two major effects of national and regional fuel economy standards: rebound and leakage. Adoption of more fuel-efficient vehicles, by decreasing fuel demand, also reduces the per-mile price of fuel as supply and demand balance in the market. This price reduction can lead to more driving in the market covered by the policy—known as the rebound effect—as well as in sectors and regions not covered by the policy—known as the leakage effect—because globally interlinked fuel markets cause prices to fall worldwide.

The model simulates not only rebound and leakage effects, but also the gradual adoption of new, more expensive vehicles and retirement of old ones; how vehicle owners navigate the tradeoff between using more fuel and purchasing a more efficient vehicle; the relationship between changes in household income and vehicle usage behavior; and the adoption of off-the-shelf and advanced, low-carbon technologies that increase miles per gallon.

The study also found that, in addition to being relatively expensive, strong fuel-economy standards simply won’t reduce carbon emissions by all that much — around 4%, as compared against a no-policy simulation.