Overlapping Strategies for Reducing Carbon Emissions from the Personal Transportation Sector∗

We develop a numerical model to simulate the impacts of overlapping energy policies on carbon emissions in the U.S. personal transportation sector. Consumers in our model demand fuel based on their underlying demand for miles and choices about car fuel economy; firms supply fuel by blending gasoline with corn, sugarcane, and cellulosic ethanol. We find that the current fuel tax, size-based fuel-economy standard, and percent renewable fuel standard together lead to a 9% reduction in carbon emissions at an average surplus cost in the fuel market of $44/tCO2. A carbon tax, in contrast, costs just $15/tCO2, followed by a fuel tax, traditional fuel-economy standard, low-carbon fuel standard, sizebased fuel economy standard, and renewable fuel quantity standard, all of which are less costly than the current policy mix. We also consider impacts on unpriced externalities associated with car size and miles traveled, e.g. external accident fatality risks and traffic congestion. We find that fuel-economy standards greatly exacerbate these externalities, while taxes on fuel and carbon mitigate them. Thus, fuel-economy standards have higher abatement costs even when consumers undervalue fuel economy, e.g. due to myopia. ∗ We acknowledge financial support from the U.S. Environmental Protection Agency Grant #83413401 and the Swedish Foundation for Strategic Environmental Research (MISTRA) INDIGO program. Fischer is also grateful for the support of the European Community's Marie Skłodowska-Curie International Incoming Fellowship, “STRATECHPOL—Strategic Clean Technology Policies for Climate Change,” financed under the EC Grant Agreement PIIF-GA-2013-623783, and for the hospitality of the Fondazione Eni Enrico Mattei (FEEM). We thank Louis Preonas for valuable research assistance and many seminar participants for helpful comments and suggestions. † Associate Professor at Michigan State University and Resource Associate at NBER. Email: [email protected]. ‡ Senior Fellow at Resources for the Future (RFF) and Senior Researcher at FEEM. Email: [email protected]. § Research Assistant at Resources for the Future (RFF). Email: [email protected].