Fuel Economy Standards and Public Transport

Fuel economy standards for cars decrease the marginal cost of driving and trigger a shift in modal choices from public to private transport and a rise in carbon emissions. In the long run, the modal shift exacerbates the increase in the commute lengths that results from lower driving costs, as well as road congestion. We examine and quantify the resulting novel welfare cost dimension. Based on a simulation for the U.S., the often neglected presence of public transport increases the welfare cost of a fuel economy standard targeting a 50 percent reduction in transport emissions by 7.2 percent (or 46 USD p.c.). A (larger) EU-level share of public transport increases this effect to 28.9 percent (or 183 USD p.c.). An alternative fuel tax policy, by contrast, induces a modal shift towards public transport and reduces the average commute, urban congestion and the welfare cost of emission reductions.