The Impact of the Corporate Average Fuel Economy Standards on Technological Changes in Automobile Fuel Efficiency

Abstract This paper empirically examines the effect of the U.S. Corporate Average Fuel Economy (CAFE) standards on the technological progress in automobile fuel efficiency. Using detailed vehicle attributes data from 1978 through 2018, we find that more stringent fuel economy standards increase the rate of technological improvements in new passenger cars, and this effect is primarily driven by the response of U.S. automakers. We do not find evidence that CAFE standards have a similar effect on the technical change in light-duty trucks. Our results also indicate that higher gasoline prices have a significant and positive effect on the improvement of fuel-saving technology in both passenger cars and light trucks. Using our empirical estimates, we project that the recent rollback of Obama-era CAFE standards would forego an approximately 2-percent increase in cars’ fuel economy over the 2021-2025 period as a result of technological progress.