3 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE
MODELING THE IMPACT OF FUEL ECONOMY STANDARDS ON GLOBAL OIL MARKETS UNDER ALTERNATIVE TRANSPORT DEMAND ASSUMPTIONS
Valerie J. Karplus, , Research Scientist, MIT
Paul Kishimoto, , M.S. Student, MIT
Sergey Paltsev, , Principal Research Scientist, MIT
Overview
Many countries have introduced new passenger vehicle fuel economy standards with the goal of reducing petroleum use and CO2 emissions from the transportation sector . In September of 2012 the current U.S. administration finalized standards for 2017 to 2025 that would raise the required new vehicle fuel economy to 54.5 miles per gallon (mpg) over the same period (EPA and NHTSA, 2012; ICCT, 2011). Of interest in this analysis is how the current standards (both in the United States and around the world) acting in concert will affect total quantities of transport fuel demanded as well as the price of these fuels. Also of interest is how such a policy could affect CO2 emissions on a global scale, given that some of the fuels promoted to meet the standard are not carbon free. More broadly an important question for policymakers involves estimating the magnitude of effects that could make the standard less effective in practice than policymakers originally anticipated.
This research considers in depth the impact of fuel economy standards on global oil markets and inter-fuel competition using a computable general equilibrium model of the global economy with detail in the energy system. Using the model we are able to simulate how fuel economy standards recently finalized in the United States and elsewhere will affect global demand for motor vehicle fuels, relative fuel prices, energy-related CO2 emissions, and economic welfare. We also consider how the projected impact of current standards changes under alternative assumptions about the stringency of standards and future vehicle demand growth in emerging economies.
Methods
This paper employs a computable general equilibrium model of the global economy, the MIT Emissions Prediction and Policy Analysis (EPPA) Model, which has been developed by the MIT Joint Program on the Science and Policy of Global Change (Paltsev et al., 2005). Using this model we are able to capture both the rebound effect (the tendency to increase vehicle use in response a reduction in usage cost that accompanies increased efficiency) and the leakage effect (the increased use of the targeted fuel in sectors not covered by the policy as a result of a decrease in its relative price). We also capture how the effectiveness of standards depends on regionally diverse levels and trends in the rate of motorization, vehicle utilization, and vehicle fuel efficiency. We represent the plug-in hybrid electric vehicle (PHEV) in the EPPA Model as described in Karplus et al. (2010).
Keywords: computable general equilibrium modelling, transport, passenger vehicles, fuel economy standards
Results
We find that fuel economy standards currently implemented will result in a 16% reduction in global refined oil use in passenger vehicles in 2050 under our baseline assumptions, while total global CO2 emissions in 2050 are reduced by around 4%. We also find that the global oil price is around 10% lower in 2050 if currently announced fuel economy standards remain in place through 2050. The net impact of standards at the global level may be quite different from estimates made by regulators in individual countries or regions if the effects of standards on energy and vehicle capital prices are not taken into account. The total global reduction in fuel use and emissions relative to a no policy reference scenario is quite sensitive to the stringency of the standards in emerging markets, given the large anticipated growth in demand for vehicle travel over the next several decades. Our results suggest that the costs of introducing vehicle efficiency could slow the growth of demand for vehicle ownership in these relatively cost-sensitive markets, offsetting projected growth in petroleum-based fuel demand.
Conclusions
This analysis underscores the importance of considering how vehicle fuel economy standards implemented at the national or regional levels will affect relative energy prices and vehicle capital prices, and how these effects will influence energy and CO2 emissions outcomes on a global scale. Fuel economy standards are shown to impose significant costs in the markets where they are adopted. It is therefore important to understand whether or not, and by how much, the effectiveness of these standards may be offset by the increased use of petroleum-based fuels and CO2 emissions in markets that are less constrained by fuel economy standards and are expected to account for a large share of passenger vehicle fuel use and CO2 emissions in the future.
References
EPA and NHTSA (2012). Final Rule: 2017 and later model year light-duty vehicle greenhouse gas emissions and Corporate
Average Fuel Economy Standards. Washington, D.C.: U.S. Environmental Protection Agency and National Highway Traffic Safety Administration.
Karplus, V., S. Paltsev, and J. Reilly (2010). Prospects for plug-in hybrid electric vehicles in the United States and Japan: A general equilibrium analysis. Transportation Research Part A: Policy and Practice. 44 (8), 620-641.
ICCT (2011). Global light-duty vehicles: Fuel economy and greenhouse gas emissions standards. Technical report, International Council on Clean Transportation. (http://www.theicct.org/info/documents/PVstds_update_apr2011.pdf).
Oliver, H., K. S. Gallagher, D. Tian, and J. Zhang. (2009). China’s fuel economy standards for passenger vehicles: Rationale, policy process, and impacts. Energy Policy. 37, 4720-4729.
Paltsev, S., J. Reilly, H. Jacoby, R. Eckhaus, J. McFarland, and M. Sarofim (2005). The MIT Emissions Prediction and Policy Analysis (EPPA) Model: Version 4. Joint Program Report Series #125, MIT JointProgram on the Science and Policy of Global Change, Cambridge, MA. (http://globalchange.mit.edu/research/publications/697).