Trends in Future Vehicle Fleet Mix in Response to CAFE Standards Using a Nested Optimization Construct

We examine the optimal pricing strategy and resultant mix of vehicle technologies and classes resulting from the implementation of the corporate average fuel economy (CAFE) standards in 2012 through 2025.  Our approach employs a nested optimization structure.  The outer optimization nest is a non-linear program consisting of an equilibrium structure where producers seek to maximize their profits while consumers maximize utility among ten different vehicle classes and six vehicle technology choices.  The inner nest describes consumer preferences for all vehicle alternatives using a nested logit structure with an alternative specific constant to control for issues with independence of irrelevant alternatives.  Our nested logit has tiers of vehicle class broken down by discrete price choices and is calibrated from model year 2010 vehicle sales data.

Most policy response studies for CAFE have focused on design-side management and lack consumer response to price and vehicle attribute changes.   Even accounting for uncertainty, consumer response yields significant decreases in vehicle sales and decreases in manufacturer profits as high as 30% under certain scenarios.  We are also able to observe responses to various incentive policies and their cost-effectiveness in reducing gasoline consumption and greenhouse gas (GHG) emissions.  We find that in general, the new CAFE standards yield savings for both gasoline consumption and GHG but less effectively than the Environmental Protection Agency’s (EPA) original estimates.