Regulating Untaxable Externalities: Are Vehicle Air Pollution Standards Effective and Efficient?

What is a feasible and efficient policy to regulate air pollution from vehicles? A Pigouvian tax is technologically infeasible. Most countries instead rely on exhaust standards that limit air pollution emissions per mile for new vehicles. We assess the effectiveness and efficiency of these standards, which are the centerpiece of US Clean Air Act regulation of transportation, and counterfactual policies. We show that the air pollution emissions per mile of new US vehicles has fallen spectacularly, by over 99 percent, since standards began in 1967. Several research designs with a half century of data suggest that exhaust standards have caused most of this decline. Yet exhaust standards are not cost-effective in part because they fail to encourage scrap of older vehicles, which account for the majority of emissions. To study counterfactual policies, we develop an analytical and a quantitative model of the vehicle fleet. Analysis of these models suggests that tighter exhaust standards increase social welfare and that increasing registration fees on dirty vehicles yields even larger gains by accelerating scrap, though both reforms have complex effects on inequality. JEL Codes: H21, H23, H70, Q50, R40 ∗We thank numerous colleagues for useful comments, our discussant Ashley Langer, and participants in seminars at AERE, ASSA, CREATE, ITS Davis, ETH Zurich, Georgetown, Grenoble, Harvard, Helsinki, Illinois, Mannheim, LSE, NBER Environmental/Energy, NBER Urban, and NBER Transportation in the 21st Century, Oxford, Stanford, Toulouse, UC Berkeley, UC Davis, UChicago, UEA, UPenn, Yale, the World Bank, and ZEW for useful comments; Kipper Berven, Adrian Fernandez, Lillian Holmes, Minji Kim, Kechen Liu, Vivek Sampathkumar, and Katherine Wong for excellent research assistance; Alberto Ayala, Rasto Brezny, Andy Burnham, Rob Dawson, John German, Dave Good, Tim Johnson, Jarod Kelly, Jim Sidebottom, Allen Lyons, Michael Wang, Tom Wenzel, and Ning Wigraisakda for sharing data and explaining institutions; and NSF SES-1850790 and SES-2117158, USDA NIFA-1021396, USDA NIFA-1010175, and the Kleinman Center for Energy Policy, the Mack Institute, the Wharton Dean’s Research Fund, and Analytics at Wharton for generous support. Affiliations: Jacobsen: UC San Diego and NBER, m3jacobsen@ucsd.edu; Sallee and Shapiro: UC Berkeley and NBER, sallee@berkeley.edu and joseph.shapiro@berkeley.edu; van Benthem: University of Pennsylvania and NBER, arthurv@wharton.upenn.edu