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How the used-car market could undermine Obama’s fuel-economy rules

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Back in August, the Obama administration announced strict new fuel economy standards for all new cars and light trucks. By 2025, automakers in the United States will need to sell passenger vehicles that get, on average, 54.5 miles per gallon.*

But those rules only apply to new cars. There will still be millions of used cars out on the roads. And, as it turns out, the fuel regulations may have an unintended effect on that used-car market. A new study suggests that older, gas-guzzling vehicles will likely stay on the roads even longer — and reduce the effectiveness of the fuel rules by 13 percent to 23 percent.

The idea here is that stricter fuel-economy rules will make new SUVs, pickup trucks, and other inefficient vehicles more expensive. That will spur more people to turn to the used-car market, which will raise the price of older SUVs and pickup trucks. And that, in turn, will give people reason to drive their gas-guzzlers for longer and postpone scrapping them.

The authors, Mark Jacobsen of the University of California-San Diego and Arthur van Bentham of Wharton, tried to get a sense for the size of this effect by studying vehicle scrappage rates. They found that the least-efficient cars tend to hang around the longest before getting sent to the junkyard:

Not surprisingly, all cars are more likely to get scrapped the older they get. But the least efficient cars (Quartile 1) tend to hang around a lot longer than the most efficient cars (Quartile 4).

And, by studying how these scrappage rates can shift in response to changes in the price of new cars, the authors could get a sense for how much longer people will hang onto their older cars under the new fuel-economy standards.

So what does this all mean? Jacobsen and van Bentham estimate that between 13 percent to 23 percent of the expected fuel savings could "leak away" through the used vehicle market. The Obama administration thinks the new rules will save the United States 2.2 million barrels of oil per day by 2025. The real number may be lower than that.

Note that this is one reason why so many economists think higher gas taxes are a far more effective way to reduce gasoline consumption than regulations and mandates. The latter can have all sorts of unintended side effects. (By the way, van Bentham and Jacobsen found that higher gas prices actually increase the scrappage rate for gas guzzlers.)

*Note: The official target for new cars and light trucks is 54.5 miles per gallon, on average, in 2025. In practice, however, those cars will likely only average around 35 miles per gallon, for reasons explained here.