1. Air Pollution: CAFE Standards and Gas Taxes Mario Samano Department of Economics

2. CAFE Standards or Gas Taxes? Corporate Average Fuel Economy (CAFE) is an aggregate of the fuel economy (in mpg) of each car manufacturer. EPA establishes a minimum level of fuel economy (the CAFE standard) to reduce gas consumption. New standard approved in 2007: from 27.5mpg to 35mpg by 2020. Obama administration changed compliance date to 2016. How costly is this change for consumers?

3. Data and Economic Model Data on car characteristics, CAFEs, gas prices, individual data on driving and demographics. Economic model estimates manufacturers parameters and individual preferences.

4. Consequences of Increasing the CAFE standard Technology improvements -> higher prices. Higher fuel economy -> more driving for some Taxes on gas affect both new and old car models -> incentives to drive less for everyone. Least fuel economy cars sales would decrease by 18%. Annual reduction of gas consumption of 0.6%. An increase in gas tax of $0.78 would give equivalent gas reductions.