Bridging the Energy Efficiency Gap: EPA’s Tailpipe Emissions Standards and the Transition to Electric Vehicles
The Environmental Protection Agency’s (EPA) proposed tailpipe emissions standards are the latest stride in an ongoing regulatory effort to curb greenhouse gas pollution from the transportation sector, the largest source of such pollution in the United States. While the proposed rule does not explicitly mandate a level of electric vehicle (EV) adoption, it sets such stringent standards that producing more EVs will likely be automakers’ least costly compliance option. As a result, EPA expects the rule to significantly boost EV adoption, with EVs potentially accounting for 67% of new light- and medium-duty vehicle sales by 2032.
EPA anticipates remarkable benefits from this transition to EVs. Consumers are projected to enjoy total fuel savings of $890 billion and reduced maintenance and repair costs of $580 billion through 2055. Beyond these savings, the rule’s climate benefits are profound, with EPA estimating at least $1.4 trillion in avoided climate damages from reduced greenhouse gas emissions. While the total costs associated with meeting these standards are significant, on the order of hundreds of billions of dollars, the benefits outweigh these costs by an order of magnitude.
The benefits of the proposed rule may in fact be even larger than these estimates, given that EPA’s analysis of the “energy efficiency gap” is somewhat limited.
The energy efficiency gap refers to a situation where consumers adopt energy-efficient products at a slower rate than would be expected if they were maximizing their net investment returns. This gap can result from various market failures, such as consumers’ lack of information or “consumer salience,” when a buyer assigns disproportionate significance to one obvious factor (like a car’s sticker price) over another hidden factor (like fuel efficiency). While EPA has been assertive in the past about the role of market failures in contributing to the energy efficiency gap, it is less forthright in the proposed standards. Rather, the agency is ambiguous about whether the energy efficiency gap is relevant for electric vehicles.
EPA’s approach in the proposal could stem from the nature of existing empirical evidence. Most evidence for the energy efficiency gap comes from consumer decisions between gasoline vehicles with different fuel efficiencies. It may seem unclear how such evidence applies to EVs. Moreover, the available evidence on EVs largely reflects the decisions of early adopters who might have bought EVs even without any regulations. This rather limited economic evidence may make it challenging to extrapolate findings to the broader population and future market conditions. However, as the Institute for Policy Integrity highlights in our comments to the agency, the energy efficiency gap remains highly relevant and applicable in the EV era.
Given the evolving landscape of EVs, the energy efficiency gap remains a critical consideration. The shift to EVs could not only intensify existing market failures seen in gasoline vehicles but also bring different types of market failures into play. In its last tailpipe standards, EPA recognized several additional market failures that can contribute to the energy efficiency gap, each of which is relevant for EVs. These market failures include manufacturer market power, where large producers can influence prices and choices; information asymmetries, where dealerships’ incentives, biases, and poor training can prevent consumers from optimizing fuel efficiency; and institutional myopia, where corporate managers favor short-term profits over long-term investments. As EPA moves to finalize the proposed standards, a nuanced analysis of these economic factors is essential.
The transition to EVs introduces additional complexities that may exacerbate the energy efficiency gap. For instance, network externalities, such as the reluctance to purchase EVs until adequate charging and maintenance infrastructure is available, can contribute to the gap. Moreover, the first-mover disadvantage, wherein early-entrant EV manufacturers must pay to educate consumers about their product, may be especially prominent. And research on dealership biases, incentives, and information asymmetries often pertains specifically to EVs. A study finding that homeowners — who have greater incentives to invest in charging infrastructure than renters — purchase EVs at a far higher rate supports this hypothesis.
Consumer salience is also likely an issue in gap-related purchasing decisions. Consumers often pay their electricity bills automatically, and with a time delay. And since charging costs are consolidated with other electricity usage, many potential EV buyers may not be aware of how much they can save on fuel costs. The Department of Energy has consistently recognized evidence that consumers undervalue future energy savings from more efficient electrified appliances, including because of an excessive focus on the short term. This evidence from electric appliances may also apply to electric vehicles.
By setting standards that effectively make EVs the most cost-effective route for automakers, the rule has the potential to transform the transportation sector. The projected benefits, both in terms of economic savings and environmental impact, underscore the importance of addressing market failures. A more comprehensive analysis of the energy efficiency gap would further clarify the rule’s merits.
