Macroeconomic Assessment of Higher CAFE Standards

One of the key policy elements that differentiates the NCEP case from the Cap-Trade case is the raising of CAFE standards. In the CAFE case, the CAFE standards are raised by 10 mpg for cars and by an equivalent percentage for light trucks relative to the reference case. It is assumed that the new standards for cars and light trucks are phased in between 2010 and 2015.

To meet the new CAFE standards, additional resources are employed for new technologies, retooling, and design by the auto manufacturers to produce the more fuel-efficient LDVs. It is assumed that the additional manufacturing and resource costs for these new LDVs are fully added to the average price of new LDVs in the reference case. As these additional costs represent product improvements (more fuel-efficient vehicles), the incremental price of new LDVs is not considered inflationary.²⁷

This macroeconomic analysis assesses the change in LDV sales in the aggregate, but it cannot assess shifts between cars and light trucks within the macroeconomic framework. The transportation model in NEMS estimates the shares of car and light truck sales, and there are minor shifts in light truck sales shares between the various cases (the most extreme difference is about 0.5 percentage points). The average LDV incremental cost calculation includes the price impact associated with the shift in light truck market share. Because the new CAFE standards raise the average new LDV costs relative to the reference case, fewer LDVs are sold in the CAFE case (Figure 25). Between 2010 and 2015, the average nominal price of LDVs increases steadily to $1,740 (approximately 5 percent) above the reference case price as standards are met. After 2015, new LDV efficiency is no longer required to increase, moderating further increases in vehicle prices.

In 2025, the average price of new LDVs is approximately 4.2 percent above the reference case projection, a slightly lower impact than in 2015 due to technological progress and the ability to use more conventional vehicle technologies to meet the CAFE standard. Sales of LDVs fall in proportion to the price increases, and in 2015 there are 910,000 fewer units sold (approximately 5 percent below the reference case level). Between 2016 and 2025, the decrease in LDV sales is commensurate with the increase in vehicle prices. In 2025, sales of new LDVs are approximately 4.3 percent below the reference case level. Nominal and real expenditures on new LDVs are not expected to change significantly.

At the aggregate level, there are benefits and costs to the economy because of the new CAFE standards. On the benefit side, with more fuel-efficient LDVs sold, petroleum consumption and expenditures for LDV transportation are lower than in the reference case. The decline in energy use reduces petroleum imports. As a result of a decrease in energy demand, energy prices decline slightly relative to the reference case. The relative decline in energy prices sets into motion deflationary forces that in turn stimulate aggregate demand for all goods and services, including energy.

Figure 26 shows the percentage change in real consumer expenditures on gasoline and motor oil and aggregate consumer expenditures on energy relative to the reference case. It shows a continuing decrease in these real concepts, relative to the reference case, as the total LDV stock becomes more fuel efficient. In 2025, consumer expenditures on gasoline and motor oil are 9 percent lower, and aggregate real consumer expenditures on energy are 5 percent lower, than in the reference case. Figure 26 also shows the result of lower energy demand on prices. In 2025, the chained price index for consumer gasoline and oil is 2.4 percent below the reference case level, and the aggregate consumer price index for energy is 1.1 percent below the reference case level.

The costs to the economy of raising CAFE standards involve transition costs as the product mix in the economy changes and resources move toward the production of more expensive, higherfuel-economy LDVs and away from less expensive, lower-fuel-economy vehicles. This shift forces a change in the optimal mix of factor inputs of capital, labor, and energy. Moving to this new factor input mix involves dislocations, idling of the old capital stock, employment changes, and the accumulation of new capital stock with the requisite technologies. This is reflected in the decline in potential output, relative to the reference case, with the existing resources and state of technology. Reduced energy demand in the short run is reflected in a reduction in real GDP (aggregate demand). As energy prices decrease, real demand for all goods and services increases, and real GDP temporarily goes above potential output; however, this position cannot be sustained given that potential output has not completely adjusted to providing the goods and services that are demanded. Over time, both concepts adjust and move toward each other. In 2025, both concepts are down by 0.1 percent relative to the reference case.

In 2025, both real GDP and potential GDP are approximately $26 billion (0.1 percent) less in the CAFE case than in the reference case; however, the loss to the economy does not significantly alter the overall average annual growth rate of the economy between 2003 and 2025 in terms of either real GDP or potential GDP.

Caveats in Assessing the Impacts of R&D and Other NCEP Recommendations

Two types of uncertainty characterize proposed Federal R&D investments. First, while Congress often authorizes R&D, the timing and level of the actual R&D appropriations often are different from the authorization. Moreover, appropriation bills may also contain language that direct funding to specific activities or projects without regard to merit-based criteria. Second, a statistically reliable relationship between the level of R&D spending on specific technologies and the outcome of that R&D spending has not been developed. Even if both of these uncertainties were resolved, the analysis still would be complicated, because the levels of private-sector R&D spending usually are unknown and often exceed Federal R&D spending. Moreover, the relationship between private and Federal spending is unclear. Consequently, EIA cannot estimate the impact on technological change of a doubling of Federal R&D spending. EIA can, however, provide the results of the sensitivity cases specifically requested for this report, using the two AEO2005 high technology cases as starting points.