Climate and energy security concerns have prompted policy action in the United States and abroad to reduce petroleum use and greenhouse gas (GHG) emissions from passenger vehicles. Policy affects the decisions of firms and households, which inevitably react to changing constraints and incentives. Developing and applying models that capture the technological and behavioral richness of the policy response, and combining model insights with analysis of political feasibility, are important agendas for both research and policy. This work makes four distinct contributions to these agendas, focusing on the case of climate and energy policy for passenger vehicles in the United States.

First, this work contributes to econometric studies of the household response to gasoline prices by investigating whether or not U.S. households alter their reliance on higher fuel economy vehicles in response to gasoline price changes. Using micro-level household vehicle usage data collected during a period of gasoline price fluctuations in 2008 to 2009, the econometric analysis shows that this short-run vehicle switching response, while modest, is more pronounced for low income than high income households, and occurs on both a total distance and per trip basis.

Second, this work makes a methodological contribution that advances the state of empirical modeling of passenger vehicle transport in economy-wide macroeconomic models. The model developments include introducing an empirically-based relationship between income growth and travel demand, turnover of the vehicle stock, and cost-driven investment both in reduction of internal combustion engine (ICE) vehicle fuel consumption as well as in adoption of alternative fuel vehicles and fuels. These developments offer a parsimonious way of capturing important physical detail and allow for analysis of technology-specific policies such as a fuel economy standard (FES) and renewable fuel standard (RFS), implemented individually or in combination with an economy-wide cap-and-trade (CAT) policy. The new developments within the model structure are essential to capturing physical system constraints, interactions among policies, and unintended effects on non-covered sectors.

Third, the model was applied to identify cost-effective policy approaches in terms of both energy and climate goals. The RFS and FES policies were shown to be at least six to fourteen times as costly as a gasoline tax on a discounted basis in achieving a 20% reduction in cumulative motor gasoline use. Each of these policies was shown to have only a small effect on economy-wide carbon dioxide emissions. Combining a fuel economy standard and a renewable fuel standard produced a gasoline reduction around 20% lower than the sum of forecasted reductions under each of the policies individually. Under an economy-wide CAT policy that targets GHG emissions reduction at least cost, obtaining additional reductions in passenger vehicle gasoline use with RFS or FES policy increases the total policy cost, and does not result in 4 of 225 additional reductions in GHG emissions. The analysis shows the importance of integrated assessments of multiple policies that act on separate parts of a system to achieve a single goal, or on the same system to achieve distinct goals.

Fourth, a political analysis shows how, in the case of climate and energy policy for passenger vehicles, sharp trade-offs exist between economic efficiency and political feasibility. These tensions are shown to exist at the level of policy justification, policy type, and design choices within policies. The pervasiveness of these tensions suggests that economically-preferred policies will face the greatest barriers to implementation.

This work concludes by integrating the findings from each of the individual parts to make recommendations for policy. Recognizing the heterogeneity of household responses, the prescriptions of the economic analysis, and the tensions between these prescriptions and political considerations, policy options should be evaluated not only based on cost effectiveness, but also on their ability to serve as stepping stones toward desirable end states by providing incentives to revisit and increase policy cost effectiveness over time.