The Council of Economic Advisers

December 2020

September 29, 2017

Estimating the Value of Deregulating 

Automobile Manufacturing Using 

Market Prices for Emissions Credits
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 1

Executive Summary

The Trump Administration’s Safer Affordable Fuel Efficient (SAFE) Vehicles Rule gives automakers 

greater freedom to build and sell vehicles consumers demand. It does this by revising the standards 

established in 2012 that require a certain average miles per gallon (mpg) in vehicle fleets produced. 

The Council of Economic Advisers (CEA) estimates that, by 2026, the SAFE Vehicles Rule will reduce the 

quality-adjusted price of a new vehicle by $2,200. By lowering vehicle prices, the Rule will increase the 

real incomes of Americans by $53 billion per year over the 2021-2029 period, making it one of the largest 

deregulatory actions finalized by the Trump Administration thus far. The savings from the SAFE Vehicles 

Rule disproportionately benefit lower income consumers, with the savings in the lowest income 

quintile exceeding those of the highest quintile by 66 percent. 

In addition, this analysis shows that the standards set by the SAFE Vehicles Rule better align 

environmental benefits and compliance costs. Based on our analysis of the available information, over 

the 2012-2016 period, automakers paid an average of $86 for each vehicle whose lifetime carbon 

emissions exceeded the standard by one ton. This cost per ton is more than 70 percent larger than the 

estimated worldwide benefit from avoiding a ton of emissions and more than ten times higher than the 

benefit to the United States. As with numerous other actions taken by the Trump Administration, the 

revised SAFE Vehicles Rule strikes a better balance between the costs of carbon emissions and the 

benefits of economic growth and prosperity. 
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 2

Introduction 

The Safer Affordable Fuel Efficient (SAFE) Vehicles Rule revises standards that require a certain average 

miles per gallon (mpg) in vehicles produced. Under the SAFE Vehicles Rule, the fuel economy standards 

grow in stringency through 2026, but do so at a lower rate than was prescribed by prior policy. 

The Council of Economic Advisers (CEA) estimates that, by 2026, the Rule will reduce the qualityadjusted price of a new vehicle by $2,200. By lowering vehicle prices, the Rule will increase the real 

incomes of Americans by $53 billion per year over the 2021-2029 period, making it one of the largest 

deregulatory actions finalized by the Trump Administration thus far. 

In addition, the SAFE Vehicles Rule brings in line the costs of compliance and its environmental benefits. 

Over the model year 2012-2016 period, automakers paid an average of $86 for each vehicle whose 

lifetime carbon emissions exceeded the standard by one ton. This cost per ton is more than 70 percent 

larger than the estimated worldwide benefit from avoiding a ton of emissions (the social cost of carbon) 

and more than ten times higher than the benefit to the United States.1 As such, the cost of the prior 

standards greatly surpassed the benefits. This conclusion holds even when including local health 

benefits of reduced fuel consumption.

The CEA’s approach in this analysis assumes that the price at which automakers buy and sell credits 

reveals the private cost of meeting the standards, as it should incorporate both the cost of building 

marginally more efficient vehicles and the willingness of consumers to buy them. To estimate prices, 

we draw from public records of nearly $700 million in credit transactions that occurred over seven years, 

which provide a simple and transparent basis for our cost estimates. 

The Federal Standard and Its Enforcement

Manufacturers of new vehicles sold in the United States are subject to two legally separate Federal 

standards: one for fuel economy (CAFE) and another for greenhouse gas (GHG) emissions. The Federal 

Corporate Average Fuel Economy (CAFE) standard is required by the Energy Policy and Conservation 

Act, as amended by the Energy Independence and Security Act, and is established by the National 

Highway Traffic Safety Administration at the Department of Transportation (DOT). The GHG standard 

stems from the Clean Air Act (CAA) and is established by the Environmental Protection Agency (EPA). 

Although the CAA is older, a Federal standard for GHG emissions did not begin until model year 2012, 

following a Supreme Court decision determining that the EPA has the authority under the CAA to 

regulate GHG emissions (75 FR 25327). GHG emissions, specifically those of carbon dioxide (CO2), are 

essentially proportional to fuel consumption and the two agencies coordinate their standards around 

 

1 The domestic social cost of carbon is used in EPA/DOT (2020) and is consistent with the guidance on regulatory 

analysis provided by OMB Circular A-4, which states that regulatory analysis should focus on benefits and costs 

accruing to citizens and residents of the United States. EPA/DOT (2012) and EPA (2017) used a global social cost 

of carbon.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 3

that proportion. As a result, a decision by a manufacturer that affects the fuel economy of its fleet also 

affects its GHG emissions and, therefore, compliance with both standards.2 That said, the cost of 

complying with each standard could differ because of standard-specific details such as compliance 

options, penalties, and the rules governing credits. 

Manufacturers may comply with either standard by purchasing credits from manufacturers that exceed 

the corresponding standard (75 FR 25330).3 Absent frictions in trading credits among manufacturers, 

the fleet standard is effectively a standard for the average vehicle sold in the entire market regardless 

of the distribution of sales among manufacturers. 

We have data on the value of GHG credits but not on the value of CAFE credits. We therefore focus on 

the GHG standard going forward. If CAFE credits have independent value, indicating compliance costs 

unique to the CAFE standards, then our estimate understates the cost of jointly complying with the 

standards, which would be better approximated by the sum of the GHG and CAFE credit prices (Leard 

and McConnell 2020). 

Figure 1 shows the GHG standards by model year, expressed in miles per gallon (mpg) and averaged 

between passenger cars and light trucks.4 The levels shown for the SAFE Vehicles Rule are based on 

deviations from the levels originally reported for the 2012 Rule and hold the mix of models sold constant 

at the level in the 2012 final Rule.5 To be clear, the standards do not require that every vehicle achieves 

the standard, only that the manufacturer’s sales-weighted average vehicle achieves it (assuming no 

purchasing of credits).

 

2 A fleet is the aggregate sales of a manufacturer for a model year, separated by passenger cars and light trucks, 

which includes sport utility vehicles and pickup trucks.

3 CAFE credit trading began with model year 2011 (International Council on Clean Transportation 2014) and GHG 

credit trading began in 2012 (Leard and McConnell 2017). Trading and the existence of two closely related 

standards requires a different economic analysis than appears in much of the literature that examines CAFE 

standards prior to 2011 (Goldberg 1998, CBO 2003, Anderson and Sallee 2011, Jacobsen 2013). 

4 Given the relationship between CO2 emissions and fuel consumption and that the two agencies coordinate 

their standard around the relationship, Figure 1 also approximately represents the CAFE standards for model 

years 2012 and following.

5 The average mpg level associated with the 2012 Rule has changed since it was initially promulgated because of 

changes in underlying vehicle fleet, not because of changes in the actual standard. This is possible because the 

standards differ by vehicle type (i.e. passenger vehicles vs. light trucks) and footprint, so changes in the fleet can 

change the average mpg associated with the standard even if vehicle-specific standards have not changed. For 

consistency, we base our mpg levels for both rules using the fleet assumed in the original 2012 Rule. We note 

that this base fleet is different than what is used in EPA/DOT (2020).
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 4

The Economics of Compliance

More stringent GHG standards increase quality-adjusted automobile prices. In a supply and demand 

diagram (Figure 2) the gold line represents the marginal cost of producing another vehicle and the red 

line represents consumers’ willingness to pay for vehicles. The GHG standard drives a wedge between 

the marginal cost of producing a vehicle (excluding regulatory compliance costs) and the marginal 

willingness of consumers to purchase one, raising the price of the vehicle above the marginal cost of 

production. This increase in price is represented by ∆p. As will be shown, the 2012 Rule would have 

increased the cost per vehicle by roughly $2,200 by model year 2026 relative to the SAFE Rule. 

0

10

20

30

40

50

60

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

New SAFE Standard Increase without SAFE

Figure 1. Mpg-Equivalence of GHG Standards, MY2012–MY2029

Miles per gallon-equivalent 

Model Year (MY)

Sources: Environmental Proteciton Agency; National Highway Transit Safety Administration. 

Note: SAFE = Safe Affordable Fuel Efficient Vehicles Rule.The mpg-equivalent is calculated from the required stringency of grams of 

carbon dioxide per vehicle-mile standards imposed by the EPA's GHG emission rules. The graph contrasts the standards of the 2012

Rule and the standards under the 2020 SAFE Rule. Standards are calculated for the combined passenger car and light truck fleets.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 5

On average, the market complies with a tighter GHG standard by some combination of shifting sales 

from less fuel efficient vehicle models to more efficient ones and enhancing the fuel efficiency of each 

model. Compliance can be represented in an isoquant diagram (Figure 3), which represents a stylized 

market with just two kinds of new vehicles. The horizontal axis measures the number of high-emissions 

vehicles sold and the vertical axis measures the number of low-emissions vehicles sold. Along a ray from 

the origin, the market achieves the same average emissions and fuel economy performance, say 40 

mpg, because the two types of vehicles are sold at the same proportion. A GHG/CAFE standard of 40 

mpg therefore requires that the market make sales that are along or above the corresponding ray. 

Tightening the GHG standard requires the market to shift to the steeper ray representing fewer

emissions (greater fuel efficiency).

Figure 2. Vehicle Market Equilibrium with CAFE and GHG Standards

Price of new vehicles (quality adjusted)

Quantity of new vehicles (quality adjusted)

Price with more 

strict standards

Marginal cost 

(excluding 

compliance)

Price with less

strict standards

A B

C

Demand

∆p

Qhigh Qlow
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 6

Figure 3 also has an iso-value curve that shows the combinations of vehicle sales that give consumers 

the same value, including the values that consumers put on fuel savings, horsepower, safety, and other 

attributes.6 The iso-value curve is convex because the two types of vehicles are not perfect substitutes 

for each other, so inducing consumers to buy more of one type requires that its price (relative to the 

other type) decrease, and increasingly so as a larger shift is desired. 

The straight lines in Figure 3 are iso-cost lines: the combination of sales that involve the same cost of 

producing all of the vehicles. The slope of the iso-cost line reveals the relative private costs of producing 

low-emissions vehicles as it shows how, absent regulation, the industry can substitute high-emissions 

vehicles for each low-emissions vehicle at the same aggregate industry cost. Shifting the iso-cost line

to the right (but holding the slope constant) corresponds to greater total spending on vehicles. 

Raising the GHG standard (moving to a steeper ray as shown by the gold arrow) therefore increases the 

cost of delivering the same value to consumers as shown by the outward shift in the iso-cost line, from 

the solid red line to the dotted red line. This is the same cost increase shown in Figure 2 as an addition 

to the wedge between price and marginal cost. Figure 3 also shows how the first increase in fuelefficiency (moving from the blue square to the closest circle) is cheaper than later increases (moving 

from the closest circle to the further circle). That is, increasing the mpg standard from 40 to 41 adds a 

 

6 The analysis of companion Figures 2 and 3 is adapted from Chapter 18 of Jaffe et al (2019), which further 

explains why Laspeyres and other index number formulas used in national accounting would record the 

tightening of standards shown in Figure 3 as a reduction in real GDP. The standards drive up the price of H 

vehicles while L vehicles sell at a relative discount. As consumers shift from H to L vehicles, the latter sales 

contribute less in the quantity index because they are selling at a discount.

Figure 3. Substitution Among New Vehicles in Response to Tighter 

GHG Standards

Quantity of low-emissions vehicles, L

Quantity of high-emissions vehicles, H

Iso-value curve 

u(H, L) = 1

Tighter standard
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 7

bigger wedge to Figure 2 than increasing the standard from 30 to 31.7 The escalation of marginal costs 

for meeting progressively tighter regulations is relevant given the increases in the standard that have 

already occurred. 

Revealed-Preference Estimates of Net Private Benefits and Effects 

on Real Income

Inferring costs and benefits based on actual firm behavior—in this case the price at which automakers 

buy and sell GHG credits—eliminates a great deal of guesswork. Credit prices incorporate a wealth of 

otherwise hard-to-observe information, such as the extra cost of building a more efficient vehicle and 

the willingness of consumers to pay for such vehicles. This approach, also known as a revealed 

preference approach, differs from much of the existing literature on the costs of CAFE and GHG 

standards, which examines volumes of automotive engineering data and assess consumer’s driving 

habits, fuel-purchasing routines (including attempts to value consumer time spent pumping fuel), and 

decisions about when to scrap a vehicle.8

In the revealed preference approach, we replace engineering assumptions with economic assumptions 

such as cost-minimization and pass-through of costs, in which case credit prices convey the information 

needed to estimate the private costs and benefits of complying with the standards.9 To the extent that 

manufacturers minimize the cost of producing a given model and can freely trade credits, the observed 

credit price is equal to the marginal cost of reducing the manufacturer’s fleet-wide emissions.10 To the 

extent that the cost of GHG credits is reflected in the prices consumers pay for vehicles (pass-through), 

the cost also reflects consumers’ willingness to have vehicles with more weight or other attributes that 

produce additional emissions as measured by the GHG program. This includes many dimensions of 

consumer preferences, including the value that consumers place on fuel savings over the life of a 

vehicle. See the Appendix for further analysis of this point. 

The costs and valuations permit quantifying the private net costs of changing the standards because 

the market complies with a stricter standard through some combination of changing vehicle attributes 

and adjusting prices to shift sales to lower-emission vehicles. These private net costs are pivotal for 

understanding the effects of the SAFE Vehicles Rule. Prior analyses of the standards show that private 

costs and benefits dwarf environmental costs and benefits (Bento et al. 2018). 

 

7 Note that the costs shown in Figure 3 are convex in the wedge, which itself is convex in the GHG standard. As a 

result, costs are even more convex in the standards. 

8 See, for example, the Regulatory Impact Analysis in EPA/DOT (2012) and EPA/DOT (2020).

9 EPA/DOT (2016 and 2020) assume one-for-one pass through of compliance costs to consumer prices, as we do.

10 Note that trading was quite limited in the initial years of the program, that these data are not widely available 

for every trade, and that some companies announced intentions to not trade even when it represented a lower 

cost way to comply. 
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 8

GHG Credit Transaction Data

The price at which automakers buy or sell GHG credit prices is not publically available. However, 

because credit revenue is substantial for Tesla, it reports the revenues in its financial reports to the 

Securities and Exchange Commission. The reports indicate that Tesla earned $695 million in revenues 

(in 2018 dollars) from the sale of GHG credits from 2012 to 2018.11 Over the same period, EPA data show 

that Tesla was the second largest seller of GHG credits, after Honda, since GHG credit trading began in 

2012. Tesla’s sales have accounted for nearly a quarter of all sales in the U.S. credit market (EPA 2019). 

Combined, the revenue and sales numbers suggest that roughly $3 billion in credit transactions have 

occurred across the industry since the GHG credit trading program began. 

Using Tesla’s credit sales and revenues, we calculate the average credit price over the 2012-2016 

period.12 We associate this price with the standards of the 2012-2021 period because GHG credits earned 

during model years 2010 through 2016 can be used through the model year 2021. Because credits can 

be banked and traded across automakers and fleets, all model years 2012 through 2021 are effectively 

a single fleet for GHG compliance purposes.13 Focusing on the 2012-2016 price also has the advantage 

of being the period before President Trump’s election, which would have changed expectations about 

the value of the credits later in the 2012-2021 period.

When calculating the credit price, we adjust Tesla’s 2012-2016 credit revenues to incorporate their 

timing, using a 7 percent interest rate to standardize all revenues as if they were earned in 2016, which 

is when the industry’s fleet shifted from performing above the standard and accumulating credits to 

performing below the standard and drawing down credits. Dividing total revenues by the quantity of 

credits sold over the period gives an average price of $86 per ton of CO2 emissions, or $116 per mpg per 

vehicle (in 2018 dollars).14 15

The $116 credit price is a lower-bound estimate of the actual average price at which Tesla sold its 

credits. Automakers are not required to report the timing of transactions, which complicates efforts to 

identify credit sales in individual years. However, automakers cannot sell credits that they do not have. 

Over the 2012-2016 period, at most Tesla could have sold all the credits that it earned through model 

 

11 In several years, Tesla’s annual SEC filing did not report revenues separately for Zero Emissions Vehicle credits 

and GHG credits, but this breakout is available from the company’s quarterly SEC filings and was reported by 

Forbes (see the article “Tesla’s Lucrative ZEV Credits May Not Be Sustainable”). This allows us to ensure that we 

are not including ZEV revenues in our GHG revenues. 

12 We note that Leard and McConnell (2018) were the first to match Tesla credit revenue with trade volumes to 

infer credit prices.

13 Because the GHG standard increased in each of the years 2012-2021, we expect manufacturers to accumulate 

GHG credits in the early years and spend them in the later years. EPA records show this to be the case, with most 

manufacturers having a credit shortfall in model year 2017 (see figure 5.17 in EPA (2019)).

14 In 2014 Kia and Hyundai forfeited credits in a settlement with the EPA, which were valued at $51 per ton (in 

2018 dollars and with interest until 2016). Because the price is not based on a market transaction, we do not 

include it in our estimation of the 2012-2016 price. 

15 When calculating the credit price, we take into account the small number of GHG credits that Tesla sold in the 

Canadian GHG market and whose revenues would presumably be included in the credit revenues reported to 

the SEC.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 9

year 2015, which is the quantity that we used to estimate the 2012-2016 price. If Tesla sold any less, the 

estimated price would be higher because the same revenue would be divided by a smaller number of 

credits. 

The $116 price is a reasonable estimate of the industry-wide marginal compliance cost, even if 

manufacturers’ incur transaction costs to buy and sell credits. Because its models more than comply 

with the standards, Tesla has no use for credits except to sell them. If facing a transaction cost, the 

buyer of Tesla’s credits must have a compliance cost higher than the observed price in order to justify 

paying the transaction cost and the price of the credit. More broadly, transaction costs would create a 

range of per mpg costs where firms have no incentive to trade credits. This range, which encompasses 

the credit price, would include firms with costs above or below the price (but not above or below 

compliance costs plus per credit transaction costs). It is unclear, then, whether transaction costs would 

cause us to over or understate the marginal cost of complying with the GHG standard. As noted before, 

however, absent transaction costs, the GHG price clearly understates the marginal cost of complying 

with both standards since it ignores any compliance costs specific to the CAFE standard. 

Estimating the Marginal Cost of Compliance Curve

Our credit price data and a prior study provide two relevant points that allows us to project what the 

market equilibrium price of credits would be for any given standard.16 The Tesla credit data described 

above provide one observation on compliance costs: credits cost $116 per mpg per vehicle when the 

standard was about 35 mpg, the average over the 2012-2021 period.17 The second data point is for 

model year 2006, for which Anderson and Sallee (2011) estimate the average marginal cost of tightening 

CAFE standards by one mpg to be $18 per vehicle. The CAFE standard during that year was 24.8 mpg.18

With two observations on compliance costs at different standards, we can project the relationship 

between the standard measured in miles per gallon and the marginal effect of the standard on the 

marginal (production and opportunity) cost of manufacturing a vehicle (Figure 4).19 The horizontal axis 

measures the standard while the vertical axis measures additions to the marginal cost of each vehicle. 

The area under the curve measures the additional per vehicle cost of the standard. The SAFE Vehicles 

Rule will raise standards for 2021-2026 at a rate of 1.5 percent per year. Using fleet data from the 2012 

Rule rather than the SAFE Vehicles Final Rule, the standards reach 45.6 mpg in 2026, while the 2012 Rule 

 

16 CEA’s theoretical analysis of models with constant elasticity of substitution between types of vehicles has 

shown a linear credit-supply schedule (with respect to mpg) to be a good approximation of the actual schedule, 

except when the standard is especially tight, in which case linear supply underestimates compliance costs. This 

suggests that our estimate of the marginal cost of complying with the 2012 Rule is likely conservative.

17 Some manufacturers let credits expire in 2014, which may suggest that the standard may not have been 

binding at that time. However, 2009 credits could not be traded among automakers. In addition, the credits that 

expired were 2009 credits that could only be banked for five years, unlike credits earned in model years 2010-

2016, which could be banked and used through model year 2021. 

18 Although this estimate of the marginal cost of compliance is for CAFE standards, it remains our best estimate 

of the cost of compliance of a GHG standard of 24.8 MPG as there was not a GHG standard at the time

19 Figure 4 is labeled with fuel economy standards rather than emissions standards because miles per gallon are 

more familiar to readers than tons of GHG.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 10

prescribed a standard of 54.5 mpg for model year 2025, which we assume will also apply to model year 

2026. 

If going from 24.8 to 35.8 mpg increased the marginal cost of tightening the standard from $18 to $116, 

then the marginal cost of further increasing the standard must be greater than $116. From the linear 

credit-supply assumption, CEA projects that the credit price would be $203 per mpg for model year 2026 

under the standards established in the SAFE Vehicles Rule (a standard of 45.6 mpg) as compared to 

about $283 per mpg for model year 2026 under the tighter standard originally put in place by the 2012 

Rule (a standard of about 54.5 mpg). For each year of the 2021-2029 period, we use the average of the 

two marginal costs, which can then be multiplied by the mpg difference in the standards to give the per 

vehicle savings from the SAFE Rule. The resulting value is equivalent to the green area in Figure 4.

Further Discussion of Assumptions

CEA does not make explicit assumptions about technological trends, fuel prices, or other factors that 

could affect the costs and benefits of a standard. Because credits can be saved and sold later, their 

current value depends on expectations about their future value. Manufacturers will hold credits if they 

expect them to gain value in the same way that an investor would buy and hold a commodity expected 

to rise in price. Credit prices over the 2012-2016 period, therefore, reflect longer-term expectations 

about the supply and demand of credits, which in turn depend on evolving consumer preferences, 

expectations about future fuel prices, and prospects for technological change, among other factors. 

A shift in preferences towards more efficient vehicles, for example, would cause manufacturers to make 

and sell more compliant vehicles, reducing the demand for credits and increasing their supply. In the 

extreme, if consumers had a sufficient willingness to pay for compliant vehicles, the standard would 

not bind and credit prices would be zero. Higher fuel prices would have a similar effect—sufficiently 

Figure 4. GHG-Credit Market Equilibrium for Various Standards

MPG-equivalent of GHG standard

$283 projected 

under previous rule

$116 measured 

from GHG trades

$203 projected 

under SAFE rule

36 45 55

$/MPG/Vehicle MY 2012-21 

average

MY 2026, 

SAFE rule

MY 2026,

previous rule

E

F

∆p

Area = ∆p =

Impact on unit 

cost

Marginal cost of 

tightening the 

standard

$18 measured by 

Anderson & Sallee 

(2011)

D

Sources: EPA/NHTSA; Leard and McConnell (2017); CEA calculations.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 11

high prices would increase consumers’ willingness to pay higher prices for more efficient vehicles, 

causing manufacturers to produce them even in the absence of standards. 

Similarly, technological change could make it easier to comply via manufacturing vehicles with higher 

fuel efficiency rather than via purchasing credits. If the cost of improving efficiency declines over time, 

it will lower the expected future price of credits by incentivizing compliance via manufacturing. The 

lower expected future price, in turn, will make manufacturers want to sell credits in the present, thus 

lowering their prices. Actual preferences, fuel prices, and technology in the 2020s could differ from 

expectations held by manufacturers in the 2012-2016 period. CEA’s estimates of the cost of more 

stringent standards should be viewed as conditional on expectations held at the time that credit prices 

were observed.

CEA also does not assume that credit markets are characterized by perfect competition, where no single

automaker can affect the credit price. An automaker who is a net buyer of credits could seek to lower 

the credit price by reducing the emissions of its fleet, and therefore the market demand for credits. This 

would cause the market credit price to fall below the automaker’s marginal cost of compliance through 

manufacturing. A similar divergence (but different in sign) would occur for a net seller who changes its 

fleet’s emissions to increase the credit price. The average automaker, however, is neither a net buyer 

nor a net seller of credits over the full period. The market price of credits therefore remains a good 

estimate of the sales weighted average marginal cost, which is the cornerstone of our analysis. It is an 

unbiased estimate of the average marginal cost if vehicle sales are uncorrelated with positions taken in 

the credit market. It would be a conservative estimate if larger manufacturers were net buyers, in which 

case the credit price would be less than the average marginal cost.

The estimates of private costs based on revealed preference assume that consumers understand fuel 

savings and other attributes of fuel efficient vehicles as well as the offsetting costs of reduced vehicle 

safety and higher purchase prices. The estimates do not incorporate costs or benefits not directly borne 

by consumer or producers such as those related to GHG emissions.

Findings for Aggregate Private Costs, Automobile Prices, and Real 

Income

CEA estimates that Figure 2’s areas A, B, and C represent $26 billion per year in costs to new 

automobile consumers and producers. Relative to the SAFE Vehicles Rule, the 2012 Rule results in 

roughly 300,000 fewer new vehicles delivered to consumers every year at a similar total cost, including 

fuel costs and opportunity costs of vehicle features. 

The rectangular area A accounts for the largest portion and is the product of the number of vehicles 

sold and the effect of changing the standards on costs per vehicle. The marginal cost of compliance 

curve shown in Figure 5 allows us to calculate the per vehicle cost of the 2012 Rule (for model year 

2025) relative to the cost the SAFE Vehicles Rule. Doing so indicates that phasing in the higher 
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 12

standard would eventually increase average quality-adjusted prices by about $2,200.20 For the years 

2021-2029, the average annualized quality-adjusted price increase would be about $1,600. This 

amount corresponds to ∆p in Figure 2.21

Applying the $1,600 average annual savings to the more than 16 million new vehicles sold annually in 

the United States gives an annualized average increase in consumer benefits of $25 billion each year 

for model years 2021-2029, equivalent to the area A in Figure 2.22

Figure 2’s areas B and C are also part of the cost of increasing the standards. Estimating them requires 

an estimate of the impact of increasing the standards on vehicle sales. To identify the new quantity of 

vehicles sold annually, CEA uses a price elasticity of demand for new vehicles of -0.4 (Berry, Levinsohn, 

and Pakes 2004), model-year specific increments to vehicle costs (derived as above) relative to the 

average 2018 vehicle sales price, and model-year specific projections of vehicle sales.23 The sales 

impact is roughly 300,000 vehicles per year, which makes area B about $0.3 billion per year. The area C 

requires an estimate of the effect of the SAFE Vehicle Rule standards, relative to no standards, on per 

vehicle costs. This baseline private cost per vehicle is shown in Figure 4 as the areas D, E, and F. 

Applying it to the change in vehicle sales gives an estimate of Figure 2’s area C at about $0.4 billion per 

year.

Because the emissions and fuel-efficiency requirements are imposed on the supply chain rather than 

on the final consumer, it follows from the pass-through assumption that costs of the regulation are 

reflected in consumer prices. The $26 billion in annual private costs in the market for vehicles is 

therefore measured as a productivity loss in the sense that the economy produces less private value 

when assessed at market prices, using the same factors of production (capital and labor). 

The productivity loss is experienced by market participants who supply less capital in the long run and 

less labor in the short run.24 This means even less real income and, to the extent that factor markets 

are distorted by taxes, additional private costs. Using a marginal cost of public funds of 0.5, the 

decline in labor and capital supplied adds $13 billion in private cost (0.5 x $26 billion). If the full 

market value of the factors supplied is considered, assuming a marginal tax rate of 0.48 (CEA 2019), 

the total GDP loss in factor markets is about $27 billion ($13 billion / 0.48). 

 

20 To the extent that compliance with tighter standards is achieved entirely by adding or changing model designs 

in ways that reduce emissions and increase fuel economy without other perceptible effects on consumers’ 

valuation of the vehicles, the average price increase is the same as the average quality-adjusted price increase.

21 If we assume a flat $116 per mpg per vehicle in compliance costs, the SAFE Rule saves consumers $1,032 per 

car, which is similar to the EPA/DOT (2020) RIA estimate. 

22 We use a 7 percent real discount rate for the purposes of annualizing ten-year cost profiles. All of the dollar 

amounts are in 2018 dollars.

23 The average vehicle price is from the Kelley Blue Book. Model year 2020-2029 sales forecast are from Table VI189 of EPA/DOT (2020).

24 We adopt the “balanced growth” assumption that productivity has income and substitution effects on labor 

supply that offset in the long run. As people earn more they demand more leisure (the income effect) but rising 

wages has the opposite effect by increase the value of work relative to leisure, which encourages more work and 

less leisure (the substitution effect). 
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 13

In total, the higher standards reduce real income and GDP by $53 billion per year ($26 billion in the 

regulated market and $27 billion in factor markets), about 0.3 percent.25 This makes the SAFE Vehicles 

Rule one of the single most impactful deregulatory actions that the Trump Administration has finalized 

thus far (CEA 2019). 

Standards that Strike a Better Balance

The SAFE Vehicles Rule is a good example of the Trump Administration’s regulatory approach that 

strikes a better balance between the incremental costs and benefits of regulation. Building a vehicle 

that complies with a binding emission standard is more costly than building a non-compliant vehicle. 

Holding vehicle quality constant, the higher costs of manufacturing must be weighed against the 

social benefit of less emissions or other social benefits or costs. 

Prior to deregulation, transactions in GHG credit markets show that emissions standards for vehicles 

cost the private sector roughly $86 per ton (converted to 2018 dollars) of GHG emissions avoided over 

the life of the vehicle.26 According to the 2016 Technical Support Document for the Proposed 

Determination of the 2022-2025 standards, the global economic cost from emissions released in 2020 

was $50 per ton in 2018 dollars (EPA 2016). The SAFE Vehicles Regulatory Impact Analysis uses a $7 

domestic damage from emissions in 2020 (EPA/DOT, 2020) as required by EO 13783 and Circular A-4. 

Lowering emissions standards should therefore strike a better balance between the marginal cost of 

reducing greenhouse gas emissions and the marginal social (and in this case global) benefit of those 

reductions. 

The balance is illustrated in Figure 5, which shows the net private and social costs of fuel efficiency 

standards. The approximate cost includes the cost of manufacturing more efficient vehicles as well as 

the global cost from greater GHG emissions and the health cost from burning more fuel. Increasing the 

fuel efficiency standard by one mpg leads to higher compliance costs and reduces GHG and 

particulate emissions over the lifetime of the vehicle. Less fuel consumption also reduces particulate 

emissions, leading to health benefits.27

We do not include private fuel savings or the private value of a vehicle’s safety attributes, which 

should already be reflected in the credit prices used to determine the private cost of compliance. This 

is because the value that consumers place on fuel savings affects their willingness to pay for a more 

 

25 As with many of the other regulations that CEA has analyzed previously (CEA 2019), the SAFE Vehicles Rule has 

an effect on real income whose dollar amount significantly exceeds the dollars of net (private and social) 

benefits. This is primarily because net benefits account for opportunity costs—for example, the value of leisure if 

not working—while real income does not. 

26 In contrast, reforestation can reduce carbon in the atmosphere for $10 (Gillingham and Stock 2018). 

27 For both environmental and health benefits, we assume values that underscore the conclusion that the SAFE 

Rules generates benefits in excess of cost over a range of assumptions. For GHG emissions, we use the global 

benefit from emissions reductions. For health benefits from burning less fuel, we use values from EPA (2016), 

which are larger than those in the SAFE Rule Regulatory Impact Analysis.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 14

efficient vehicle and, therefore, whether automakers prefer to build vehicles that are more efficient or 

instead buy more credits.28

As shown in Figure 5, the 2012 Rule had a fleet standard of 54.5 miles per gallon, which results in 

consumer costs that exceed global environmental benefits by around $1,800 per vehicle. However, 

the SAFE Vehicles Rule standard of 45.6 miles per gallon balances environmental and health benefits 

with consumer costs. 

The Distribution of Savings among Consumers

The estimated $26 billion in consumer savings from the SAFE Vehicles Rule can be distributed among 

different household income groups. We allocate the savings across income quintiles based on each 

quintile’s share of aggregate spending on new vehicles as reported in the Consumer Expenditure 

Survey. Figure 6 depicts the savings as a percentage of the post-tax income of each group. The savings 

from the SAFE Vehicles Rule disproportionately benefit lower income consumers, with the savings in 

the lowest income quintile exceeding those of the highest quintile by 66 percent. This is because a larger 

share of the post-tax income of lower income consumers goes towards the purchase of new vehicles. 

 

28 In a similar manner, credit prices should also capture the private value of a vehicle’s safety attributes to the 

extent that more fuel efficient vehicles have different safety attributes than less efficient vehicles. That is, if 

greater fuel efficiency is associated with less safety, it will reduce consumer willingness to pay for such vehicles, 

thereby affecting the supply and demand of credits. Damages inflicted upon others in an accident may also be 

captured if liability insurance premiums (paid by the vehicle owner) are correlated with the expected damages 

that a vehicle model would inflict on others in an accident. We also exclude energy security benefits from 

reduced fuel consumption. With the United States now exporting as much oil and petroleum products as it 

imports, the benefits of marginal reductions in domestic oil consumption are unclear.

-$1,250

-$750

-$250

$250

$750

$1,250

$1,750

$2,250

$2,750

22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60

Figure 5. Private and Social Cost of Emissions Standards

Private and social cost of emissions standards relative to no standard (dollars per vehicle) 

Sources: Environmental Protection Agency; National Highway Transit Safety Administration; CEA calculations.

Note: Costs per vehicle are relative to a non-binding 23 MPG-equivalent fleet GHG standard. Lifetime MPG-equivalents are calculated 

assuming a lifetime VMT of 195,264 miles and 0.008887 MT of carbon dioxide per gallon of gasoline. A value of $50 is used for the social 

cost of carbon. Non-GHG health benefits are $0.095 per gallon and are based on EPA (2016). 

Fleet average mile per gallon standard

Obama-Era Standard (costs $1,816 per vehicle)

SAFE Vehicles Rule (costs $27 per vehicle)
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 15

Conclusion

This Report concludes that the SAFE Vehicles Rule will lead to $26 billion in consumer savings while 

appropriately balancing the costs and benefits of vehicle fuel economy and greenhouse gas. 

Nearly $700 million in GHG credit transactions reveal the price that automakers were willing to pay for 

permission to produce and sell one vehicle with lifetime emissions one ton in excess of the standard. 

These transactions give an average price of $86 per ton for the period 2012-2016. The price indicates 

that the 2012-2021 standards cost automakers and consumers far more than the environmental 

benefits that would result from burning less fuel. This cost is 70 percent higher than even the 

estimated worldwide damages from a ton of carbon emissions and ten times higher than the domestic 

damages from a ton of carbon emissions. The Trump Administration’s SAFE Vehicles Rule will strike a 

better balance between total costs and benefits than did prior policy.

Using this valuation, we estimate that the more gradual increase in the standards under the SAFE 

Vehicle Rule will reduce prices for consumers by almost $2,200 per vehicle by 2026. Over the 2021-

2029 period, the Rule will increase GDP and the real incomes of Americans by $53 billion per year, 

making it one of the single most impactful deregulatory actions finalized by the Trump Administration 

thus far. 

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Lowest

20

percent

Second

20

percent

Third

20

percent

Fourth

20

percent

Highest

20

percent

Figure 6. Consumer Savings from the SAFE Vehicles Rule as a Percent of 

Income, by Household Income Group

Reduction in new vehicle expenditures as a percent of income (%)

Sources: Consumer Expenditure Survey; CEA calculations.
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 16

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CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 18

Appendix

Credit prices should reflect the value that consumers place on fuel savings, with greater preferences 

for fuel savings leading to lower credit prices. This is because a shift towards buying fuel efficient 

vehicles reduces the demand for credits by increasing average fleet performance. 

Formally, let q denote a vector of market quantities of vehicle models, which differ in many 

characteristics including fuel consumption. The GHG and CAFE standards affect quantities, including 

setting some of to zero as vehicle models leave the market and moving others off of zero as new 

models enter. Let p, c, and g denote the corresponding vectors of retail prices, marginal production 

costs, and GHG emissions, respectively. The one-for-one pass through assumption relates retail prices 

to marginal costs: 

p = μ + c + (g − G)λ

where G and  are scalars denoting the emissions standard and the equilibrium price of a GHG credit 

and  is a vector of markups that, by the pass-through assumption, are independent of the GHG 

standard. The market price  of a GHG credit and the retail prices p of vehicles are related but are 

conceptually distinct: the costs of acquiring GHG credits to bring a model into compliance are passed 

through to consumers in the form of higher retail prices.

If the GHG standard is binding and dot indicates vector dot product, then g ∙ q = Gq, which means 

that specific vehicles can deviate from the standard but the market sales-weighted average emissions 

does not. The standard G has a retail price effect that varies across vehicles: 

dp

dG = −λ + (g − G)

dλ

dG

Observe that the first term is a scalar that is common across vehicles. The sales-weighted retail price 

impact is simply that scalar: 

q ∙

dp

dG

q ∙ 1

= −λ + q ∙ (g − G)

dλ

dG

q ∙ 1

= −λ

where q∙1 denotes the total quantity summed across vehicles. We have therefore found the average 

retail price effect of marginal changes in the standard without assuming anything about the features 

of consumer demand for vehicles. Moreover, the average price effect of a stricter standard (lower G) is 

exactly the credit price .

Of course, consumers care not only about the retail prices p but also fuel economy f (also a vector). 

But the GHG and CAFE standards have no effect on f, rather they affect the quantities associated with 

f. So we have: 

q ∙

d(p + f)

dG

q ∙ 1

= −λ
CEA • Estimating the Value of Deregulating Automobile Manufacturing Using 

 Market Prices for Emissions Credits 19

In words, the sales-weighted average marginal effect of the standard on full prices (purchase plus fuel) 

is given by the credit price .

These results can also be described in terms of price indexes: the purchase price index and the full 

price index for vehicles each falls by  when the GHG standard is relaxed. This is exactly what is 

required by the usual (and theoretically grounded) national accounting standards, with no additional 

fuel-cost term, for calculating real GDP effects and private net benefits.
ABOUT THE COUNCIL OF ECONOMIC ADVISERS 

The Council of Economic Advisers, an agency within the Executive Office of the President, is 

charged with offering the President objective economic advice on the formulation of both 

domestic and international economic policy. The Council bases its recommendations and 

analysis on economic research and empirical evidence, using the best data available to 

support the President in setting our nation's economic policy. 

www.whitehouse.gov/cea 

December 2020