_A fuel efficiency standard: how it relates to fuel taxation_<sup>_20_</sup> The model of optimal fuel efficiency and the possibility of a rebound effect alerts us to the fact that based on first principles there is nothing better than fuel taxation to reduce fuel consumption, or to reduce externalities that relate to fuel use, such as CO2 emissions (with a tax base properly scaled by fuel types).<sup>21</sup> In part because the use of fuel taxes as a policy instrument often is politically constrained (Hammer et al, 2004, Buchanan and Tullock, 1974), it may be instructive to examine the use of fuel efficiency standards in combination with or as an alternative to fuel taxes. In figure 4, below, we have demonstrated how the use of a fuel tax increase Δ _t_ initially shifts the short run marginal cost curve sharply upwards (to _srmc_ ( Δ _t_ , _k_ ), but the shift is less sharp after the consumer has also adjusted the car’s efficiency ( _srmc_ ( Δ _t_ , _k_ ( Δ _t_ ) ), according to the new long run marginal cost curve ( _lrmc_ ( Δ _t_ ). In fact, when fuel efficiency adjusts, there is a slight ‘rebound’ in _vm_ from _a_ to _b_ relative to the initial contraction from _x_ * to _a_ , but _vm=b_ is still lower than its original value _x*_ . Fuel consumption has unequivocally contracted, since the consumer adjusts to the long run marginal cost curve, which has shifted outwards (not shown).

Now consider, in contrast, a fuel economy standard (the lower dotted horizontal line). The standard has shifted down the long run marginal cost curve except when _vm_ levels are 20 Accidents are very important amongst external costs of transport, and it should first be noticed that accidents can be responsive to many factors more well targeted than with crude instruments such as fuel taxes and fuel efficiency standards. In table 1, we have assumed that accidents such as damages external to the driver are related to miles driven. Kopits and Cropper (2005) analyse accidents worldwide. An important debate, however, is whether policies for fuel efficiency reduce a car’s resilience towards crashes (thus increasing the accident internal damage to the owner) while perhaps at the same time reducing external damages through impacts in crashes on others (pedestrians, other cars). We leave this topic without entering its details, by noticing that other instruments should be considered for this particular type of damage. Gordon et al (2007) analyse opportunities for fuel efficiency improvements that do not increase accidents.

21 An identical argument applies in theory for emission taxes in the case of other pollutants (these emissions are typically less strictly proportionally linked to fuel consumption): there is nothing better than emission taxes based on first principles. But for practical reasons, combinations of emission standards and fuel taxes can work well in that case. An important difference between the two cases is that fuel consumption is easily taxed in a cumulative fashion (the tax is applied in a linear fashion, and you pay a tax on your total consumption), whereas for emissions of pollutants, the ‘taxman’ can easily get a measure of your emission rate (per gallon or per mile), but cannot easily combine this with a measure of your cumulative gasoline consumption or vehicle utilization). See Eskeland, 1994.

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