Unintended Consequences from Nested State & Federal Regulations: The Case of the Pavley Greenhouse-Gas-per-Mile Limits

Fourteen U.S. states recently pledged to adopt limits on greenhouse gases (GHGs) per mile of light-duty automobiles. Previous analyses predicted that these limits will yield significant reductions in GHGs. However, these studies did not consider critical factors that can imply different results. First, because of the interaction between these state-level limits and the federal corporate average fuel economy (CAFE) standard, this initiative gives automakers incentives to offset emissions reductions in the adopting states with increased emissions in other states. In addition, the initiative induces substitutions of used cars for new cars and leads to reduced scrapping of used cars; this also counteracts the initiative's GHG emissions reduction goals. Third, the initiative could lead to beneficial "technological spillovers." To the extent that it induces more rapid technological change – in particular, the discovery of low-cost fuel-saving options – the initiative will promote improved fuel economy not only in adopting states but in other states as well, which works to further the original policy goals. This paper develops a multi-period numerical simulation model that accounts for these and other factors in assessing the impact of the proposed GHG-per-mile standards on U.S. gasoline consumption and GHG emissions. We find that while the state-level initiative would reduce significantly the emissions associated with new cars in the adopting states, it would give rise to very significant offsetting increases ("leakage") elsewhere, in both new and used car markets. Because of interactions with the federal CAFE standard, technology spillovers mitigate leakage only slightly. In the most plausible scenarios considered, the leakage is around 70 percent. Correspondingly, the cost per gallon saved under the GHG-per-mile limits is about 72 percent higher than for an equivalent increase in the federal CAFE standard. ((snipped))