How Much Do Regulations for Fuel Economy and Emissions Incentivize the Production of Larger Vehicles?

Joshua Linn

Date

June 9, 2023

Image

Dominic Jeanmaire / Shutterstock

Auto manufacturers have skewed toward producing larger vehicles in recent years, in part because of vehicle regulations and consumer demand. Exactly how much have emissions standards incentivized a shift to larger vehicles?

In April, the US Environmental Protection Agency (EPA) proposed greenhouse gas (GHG) emissions standards for passenger vehicles, which would cut the emissions rates of new vehicles by about half between 2026 and 2032. Since 2012, manufacturers have faced GHG emissions requirements that depend on the mix of vehicles sold; a manufacturer that sells larger vehicles and light trucks rather than cars faces less stringent requirements for GHG emissions. This regulatory structure incentivizes manufacturers to shift their product offerings to avoid strict GHG requirements, which potentially increases emissions. Just how strong are those incentives?

Safety and technology rationales have driven GHG emissions standards to depend on vehicle size and class (e.g., car or light truck).

Prior to 2012, a single fuel economy standard of 27 miles per gallon applied to all cars, and about 20–25 miles per gallon applied to all trucks. Reducing a car's weight and size can both increase its fuel economy and reduce its GHG emissions—making a vehicle smaller and lighter could help a manufacturer meet both of these important standards.

But the US Department of Transportation was concerned that smaller vehicles are less safe in the event of an accident, and this department oversees Corporate Average Fuel Economy standards. Hence, the agency discouraged manufacturers from reducing vehicle size to meet the standards by ensuring that the Corporate Average Fuel Economy standards require higher fuel economy for smaller vehicles than for larger vehicles. In turn, EPA harmonized its GHG standards with the Corporate Average Fuel Economy standards by setting weaker GHG emissions standards for larger vehicles like trucks, given that GHG emissions are inversely related to fuel economy.

The Department of Transportation has made the car/truck distinction for statutory and technological reasons, since vehicle attributes that are common to light trucks, such as all-wheel drive, increase a vehicle's emissions rate and reduce its fuel economy.

Since the adoption of size-based standards in 2012, new vehicles have been getting larger, and sales have shifted from cars to light trucks. Between 2011 and 2022, the average vehicle footprint (roughly, the area defined by the four wheels) increased by about 4 percent, and the share of cars in total sales dropped from about 65 percent to 40 percent. In the GHG standards that EPA proposed in April this year, the agency notes that the increasing size and shift from cars to trucks has increased average emissions rates by about 10 percent.

What could have caused the size increase of vehicles and the shift to light trucks? The GHG regulations themselves could be a factor, since increasing a vehicle's size or converting a car to a light truck hypothetically would yield extra compliance credits, all else equal. (A car can be reclassified as a light truck if it has all-wheel drive and satisfies a few other conditions.) Consumer demand also could play a role, if consumers want big cars and light trucks and manufacturers respond to consumer preference. Production costs also may affect vehicle size; for instance, lower production costs for larger vehicles may motivate manufacturers to make more large vehicles.

Disentangling these explanations is not easy, since we’d have to predict what sizes and car/truck mix that manufacturers would have offered if, say, consumer demand were different or if emissions and fuel standards did not depend on vehicle footprint. But we can get a sense of the relative incentive of the existing standards by comparing them with incentives that instead are created by consumer demand.

From a regulatory standpoint, the value of making a vehicle larger or converting a car to a light truck depends on how many compliance credits are generated and the value of those credits. In recent research, I estimated those credit values. (Some other research has used the few publicly observed trades to estimate those credit values.) Table 1 shows how much a manufacturer would have profited by increasing a vehicle's size or converting a car to a light truck, based on the credit values and crediting rules from 2022. Note that these calculations hold all else equal, so the numbers don't account for the decrease in fuel economy that typically results from making a vehicle larger (and heavier) or converting a car to a light truck.

Table 1 shows that increasing a vehicle's footprint from 45 to 55 square feet generates about $2,700 in additional credits per vehicle. For reference in terms of smaller vehicles, a Toyota Prius v has a footprint of 45 square feet, and the Mercedes S-Class (a large luxury car) has a footprint of 55 square feet. For light trucks, the Honda CRV (a small crossover) has a footprint of 45 square feet, and the Range Rover has a footprint of roughly 55 square feet. These examples are meant to contextualize the footprint numbers—remember that the $2,700 refers to hypothetically taking the Prius v or CRV and increasing its footprint from 45 to 55 square feet without changing the vehicle's fuel economy or performance. The table also shows that converting a car to a light truck, again without changing fuel economy or performance, yields about $3,100 per vehicle.

Consumers also incentivize manufacturers to offer larger vehicles and convert cars to light trucks. Consumers tend to prefer larger vehicles because of the additional cabin and cargo space. They also may prefer light trucks to cars (all else equal) perhaps because of some of the attributes that trucks tend to offer, such as all-wheel drive or extra towing capacity, or because of differences in style or perception. I’ve estimated consumer preferences for vehicle size and all-wheel drive, which can provide a sense of how much consumers have incentivized manufacturers to offer larger vehicles or convert cars to light trucks. Table 1 shows that consumers value a car or light truck that has 55 rather than 45 square feet to the tune of about $12,000, which is more than four times the value of the additional credits derived from selling a larger vehicle. Likewise, consumers are willing to pay about $8,900 extra for all-wheel drive, which captures some of the value of a light truck over a car, which is about three times larger than the value of the additional credits for reclassifying the vehicle.

Do these numbers represent a big or small incentive for a manufacturer to increase a vehicle's footprint or convert a car to a light truck? The calculations in Table 1 show that the standards for GHG emissions and fuel economy have provided a substantial incentive to increase vehicle size or convert cars to light trucks. The incentives from the regulations are smaller than the incentives of consumer demand, but several thousand dollars per vehicle could be sufficient to change how manufacturers approach vehicle size or classification.

Sometime next year, EPA will finalize the GHG standards that will go into effect after 2026. In the final regulation, the agency could reduce the importance of vehicle footprint or the difference in credit value between cars and light trucks. Such changes would affect the incentives for increasing vehicle size or reclassifying vehicles, not just for gasoline-powered vehicles but also for plug-in electric models. Any changes in the final standards also could affect the demand for batteries and critical minerals indirectly, given that larger plug-in vehicles require larger batteries, which in turn increases vehicle weight and the need for critical minerals.

This article also appears on the University of Maryland's Transportation Economics and Policy Blog, which is supported in part by funding through the Maryland Transportation Institute.

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