1. Unintended Consequences: Why U.S. AFV Adoption Increases Fleet Gasoline Consumption & GHG Emissions under Federal CAFE/GHG Policy Jeremy J. Michalek Professor Engineering and Public Policy Mechanical Engineering Carnegie Mellon University Inês Azevedo Associate Professor Engineering and Public Policy Carnegie Mellon University Alan Jenn Postdoctoral Research Fellow Engineering and Public Policy Carnegie Mellon University (now at UC-Davis) AF V

2. 2 USAEE | 27 Oct 2015 Jeremy J. Michalek Motivation Transportation: 28% of U.S. GHG emissions  2 nd largest source after electricity sector Light duty vehicles:  62% of these emissions  118 billion gallons of gasoline in 2012 Main U.S. policy effort:  Corporate Average Fuel Economy (CAFE) standards (NHTSA)  Greenhouse Gas (GHG) Emission Standards (EPA)

3. 3 USAEE | 27 Oct 2015 Jeremy J. Michalek A brief history of CAFE 1975: response to oil crisis 1990: cars stagnant for two decades, then tightened under Obama administration 2012: following CA and 2007 ruling, joint NHTSA CAFE & EPA GHG standards 2012: attribute- based 2025: 54.5 mpg (on 2-cycle test)

4. 4 USAEE | 27 Oct 2015 Jeremy J. Michalek A binding constraint No manufacturer except Tesla would have satisfied the 2016 standards with their 2009 fleet

5. 5 USAEE | 27 Oct 2015 Jeremy J. Michalek Implications of a binding standard Congressional Budget Office (2012)  “With CAFE standards in place … putting more electric (or other high-fuel-economy) vehicles on the road will produce little or no net reductions in total gasoline consumption and greenhouse gas emissions.”  Binding standards must be satisfied by the overall fleet, regardless of whether or not alternative-fuel vehicles are sold Goulder et al. (2012): “Leakage”

6. 6 USAEE | 27 Oct 2015 Jeremy J. Michalek A binding CAFE/GHG standard Basic policyWith AFV incentives Total autos sold Sales volume of model j GHG target for model j GHG rate for model j Sales- weighted GHG target Sales- weighted GHG emission rate = Sales- weighted GHG target Modified sales- weighted GHG emission rate = GHG rate when operating on gasoline Portion of VMT operating on alt fuel GHG rate when operating on alt fuel AFV incentive weight AFV incentive multiplier Conventional vehicles Alt fuel vehicles

7. 7 USAEE | 27 Oct 2015 Jeremy J. Michalek AFV incentives in CAFE/GHG policy Weighting factors and multipliers incentivize sale of AFVs by relaxing the CAFE/GHG target when AFVs are sold

8. 8 USAEE | 27 Oct 2015 Jeremy J. Michalek Balancing vehicles Without AFV incentives With AFV incentives With AFV incentives in place, manufacturer can relax emission rates and/or change sales volume of some conventional vehicles and still comply

9. 9 USAEE | 27 Oct 2015 Jeremy J. Michalek Net effect Net Δ GHG emissions GHG emissions increase with  smaller weights w  larger multipliers m (if AFV GHGs < avg. GHGs)  lower AFV gasoline consumption r G  larger AFV sales volume n (if AFV GHGs < avg. GHGs) *Case shown assumes no change in sales-weighted vehicle footprint induced by CAFE/GHG AFV incentives. For general case, see working paper. Manufacturer’s CAFE target VMT AFV sales volume

10. 10 USAEE | 27 Oct 2015 Jeremy J. Michalek Net effect Net Δ gasoline consumed Proportional to GHGs if no AFV sales induced by policy  n j = n j ’ *Case shown assumes no change in sales-weighted vehicle footprint induced by CAFE/GHG AFV incentives. For general case, see working paper. (GHG/gal) -1

11. 11 USAEE | 27 Oct 2015 Jeremy J. Michalek Illustration Case of Chevy Volt with a single balancing vehicle model of equal sales volume

12. 12 USAEE | 27 Oct 2015 Jeremy J. Michalek Net effect per AFV sold GHGs increase of up to 60 metric tons Up to 6,700 gallons extra gasoline consumed Depending on vehicle model and year

13. 13 USAEE | 27 Oct 2015 Jeremy J. Michalek Cumulative effect Using AEO AFV sales projections:  30-70 million metric tons CO 2  3-8 billion gallons of gasoline consumed  Compared to no AFV incentives or no AFV sales  On-road effect may be 30-40% higher

14. 14 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy relevance CAFE/GHG midterm review and future policy on AFV incentives Rationale for ZEV policy Similar policies in other regions (e.g.: EU, China) AF V

15. 15 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy

16. 16 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy Tolerate near-term increases in gasoline consumption and GHG emissions in pursuit of long term gains of a fleet transition Long term gains of fleet transition likely far outweigh near term factors we estimate If CAFE AFV policy enables a transition that would not have happened otherwise, good If policy only accelerates a pending transition, not clear if benefits outweigh costs

17. 17 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy Would eliminate increase in fleet emissions per AFV sold but not emissions leakage effect Resulting standards may be more difficult for automakers, given low gas prices and consumer preferences for performance over fuel economy Negotiations in setting CAFE policy may have resulted in less stringent standards if incentives had been excluded

18. 18 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy Examples: ZEV mandate, subsidies, etc. Would reduce fleet emissions through 2025 However, could stall efforts to put fleet on a transition that would take decades even if the ideal technology and infrastructure were available today at competitive costs

19. 19 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy Fleet emissions increase proportionally to number of AFVs sold, and state ZEV policy mandates sale of more AFVs  Improved coordination of federal and state policy design could help reduce negative interactions Coordination is nontrivial  The new CAFE standards themselves were created as a federal compromise with California, which wanted to create more stringent standards

20. 20 USAEE | 27 Oct 2015 Jeremy J. Michalek Policy options 1.Do nothing 2.Eliminate CAFE AFV incentives 3.Eliminate other AFV sales incentives 4.Redesign policy 5.Replace policy Pricing externalities at a value equal to the estimated marginal damages to society among most efficient options US public support is dismal, even if tax revenues returned to households Alt policies more politically realistic  Regulating CO2 as a pollutant  Subsidizing fuel-efficient vehicles  Requiring high fuel efficiency Continue efforts to persuade public & lawmakers of benefits of externality pricing: target end goal rather than specific technologies

21. 21 USAEE | 27 Oct 2015 Jeremy J. Michalek Acknowledgements Contact Jeremy J. Michalek (CMU) jmichalek@cmu.edu Coauthors Alan Jenn (CMU, UC-Davis) Inês Azevedo (CMU) Support NSF-CMU Center for Climate and Energy Decision Making Toyota Motor Corporation AF V