CAFE standards apply only to new vehicles, fuel taxes and alternative fuel
use requirements have fleetwide impact. While introduction of more fuel
efficient technology might cost more initially, the rebates given to the more
fuel efficient vehicles can reduce the economic burden on consumers. At
the same time, the fees on vehicles with high fuel consumption will not
only discourage consumers from buying those vehicles, but also provide
incentives to the vehicle manufacturers to produce more fuel efficient vehi-
cles. While the cost of renewable alternative liquid fuels may currently be
higher than gasoline, regulations requiring increased renewable fuel content
along with government purchasing of the alternative fuel vehicles can
provide economies of scale and the learning needed to reduce the cost asso-
ciated with alternative fuels.
Rationales for Combinations of Policy Measures
Clearly, there is no single agreed upon policy measure that would signifi-
cantly reduce the fuel use of LDVs, and differences over policy measures
are likely to persist (McNutt et al., 1998). Our assessment is that the vehicle
fuel use problem can best be addressed by a carefully selected combination
of policy measures that shares the responsibility among all stakeholders.
There is a twofold argument for combining policy measures to reduce fuel
consumption of LDVs. The first is that increasing vehicle fuel consumption
is a market failure that necessarily requires regulatory and fiscal responses.
The second is that without such an integrated approach, a policy proposal
may not have the necessary broadbased support to move forward. Both of
these arguments are explored in the next two sections.
Market Failure or a Failed Market?
Greene (1998) claims that the market for fuel economy is inherently slug-
gish for two primary reasons. To start with, consumers have imperfect
information of the net present value of fuel savings achieved from
higher-fuel-economy vehicles and no reasonable way of comparing it to the
additional cost it imposes at the time of vehicle purchase. Moreover, fuel
consumption is only one of many characteristics that consumers care about
when buying a vehicle.
In addition, according to Greene, unless there are clear signals that
consumers demand better fuel consumption performance, manufacturers
are likely to be reluctant to invest in major technological changes aimed at
reducing fuel consumption. In other words, the risk of providing better fuel
consumption at an additional cost may be too high for the automobile
manufacturers.
More than two decades ago, the National Research Council’s Com-
mittee on Nuclear and Alternative Energy Systems (CONAES) noted the
following (NRC, 1980):
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