Economic Impacts of Increased Corporate Average Fuel Economy (CAFE) Standards

Authors

Ann K. Hunter-Pirtle, University of Nebraska-LincolnFollow

First Advisor

Lilyan E. Fulginiti

Second Advisor

Richard K. Perrin

Date of this Version

8-2014

Document Type

Thesis

Citation

A thesis presented to the faculty of the Graduate College at the University of Nebraska in partial fulfillment of requirements for the degree of Master of Science

Major: Agricultural Economics

Under the supervision of Professors Lilyan E. Fulginiti and Professor Richard K. Perrin

Lincoln, Nebraska, August 2014

Comments

Copyright 2014, Ann Hunter-Pirtle

Abstract

The Renewable Fuel Standard (RFS) mandates that U.S. transportation fuel producers blend specific volumes of ethanol and other biofuels with fossil fuels to spur U.S. biofuel production and to minimize foreign oil imports. Ethanol is more corrosive to auto engines than gasoline, and although vehicles manufactured since 2001 are approved to use up to a 15% ethanol blend (E15) (Naylor & Falcon, 2011), E10 is much more widely available. Ethanol producers therefore face a so-called blend wall at 10 percent—a maximum amount of ethanol that is usable domestically based on the demand for gasoline.

Meanwhile, gasoline demand in the U.S. has declined since 2008, when high gas prices and the onset of the recession abruptly led Americans to drive less and to buy more fuel-efficient vehicles. The Environmental Protection Agency (EPA) has since updated Federal Corporate Average Fuel Economy (CAFE) standards to double fuel efficiency in cars and light duty trucks by 2025 to 54.5 miles per gallon (mpg) on average, further diminishing gasoline demand.

Until now, RFS and CAFE have mostly been examined separately or compared to hypothetical carbon cap and trade policies. Analyzing how the RFS and CAFE interact is important because unlike cap and trade, these two policies exist in the U.S. already, and they affect each other in ways unanticipated when each was created.

This research uses a comparative statics model to examine the interactions between RFS and CAFE, first in 2013, then in 2025, when updated CAFE standards have been fully implemented and average gas mileage for model year 2025 is 54.5 mpg.

This analysis finds that if both policies are implemented simultaneously in 2025, the outcome is incompatible with even an E15 blend wall. While motor fuel consumers’ gains are 50 percent of their 2013 expenditures, gasoline producers lose surplus equivalent to 20 percent of their 2013 receipts.

Advisors: Lilyan E. Fulginiti and Richard K. Perrin