The Fuse

How Much have Fuel Economy Standards Boosted the Price of Cars?

by Leslie Hayward | August 23, 2018

The Notice of Proposed Rulemaking (NPRM) by NHTSA and EPA on fuel economy standards for U.S. cars and trucks is currently in a review period during which market watchers, advocacy groups, and trade associations can provide feedback on its provisions. One of the core concerns outlined in the document is the idea that fuel economy regulations are having a significant impact on the increase in vehicle purchase price that has been observed in recent years.

The Claim

From the NPRM, beginning on page 21:
“The Consequence of Unreasonable Fuel Economy and CO2 Standards: Increased vehicle prices keep consumers in older, dirtier, and less safe vehicles.”
“Higher vehicle prices, which result from more stringent fuel economy standards, have an effect on consumer purchasing decisions. As prices increase, the market-wide incentive to extract additional travel from used vehicle increases.”
Citing increase purchase prices from Kelly Blue Book: “New vehicles become increasingly unaffordable—with the average new vehicle transaction price recently exceeding $36,000—up by more than $3,000 since 2014 alone.”
The analysis estimates that the previously issued standards through 2025 would increase vehicle purchase prices by between $2,100 and $2,700 for MY 2025, and concludes “A pause in continued increases in fuel economy standards, and cost increases attributable thereto, is appropriate.”

It is true that vehicle purchase prices have increased. But there are additional assumptions in this argument that warrant inspection. Specifically:

  • Are fuel economy standards the cause of vehicle purchase price increases?
  • Is the increase in vehicle purchase prices disproportionate to either inflation or other consumer goods?
  • Have increased purchase prices kept older cars on the road for longer, or reduced vehicle sales?

Each of these questions is examined below.

Has Fuel Economy Increased the Price of Cars?

The price estimates in the NPRM, that fuel economy standards will add $2,100 to $2,700 to the price of vehicles through MY2025, are higher than a January 2017 EPA analysis that forecast tailpipe emission standards would add a cost of $875 per vehicle, and another estimate from the Alliance of Automobile Manufacturers that approximated the cost of compliance at $1,249 per vehicle.

The range between these estimates speaks to the uncertainty about how much fuel economy standards add to vehicle prices. Responding to a reporter inquiry on a press call for the release of the NPRM, Deputy NHTSA Administrator Heidi King stated:

“You asked if the primary vehicle costs are associated with fuel economy—I couldn’t say, I doubt it quite frankly as an economist, but there are a lot of things going on with cars, a lot of changes in design that consumers are demanding. In addition to fuel economy there’s safety innovations, and they’re complicated machines. Certainly, fuel economy is an important part of the cost structure but has it historically been the primary driver—typically that’s labor and materials and manufacturing.”

Other factors, including tighter credit markets, higher interest rates, and metal tariffs are also understood to be pushing up the price of vehicles.

The base model for the iconic Ford F-150 is about the same price today as it was in 2004 in real terms.

Auto industry analyst Rebecca Lindland with Kelly Blue Book said fuel economy is “certainly a part” of the increase in vehicle prices, but noted, “Vehicles manufacturers have also begun offering more features as standard in order to appeal to consumers, and those features are trickling down into lower trim levels faster than ever. For instance, just a few years ago, heated seats were confined to luxury brands. Today, they’re optional on even the most basic vehicles and standard on most middle and upper trim levels across all sizes, segments, and brands.”

Are Cars More Expensive on a Relative Basis?

On a similar note, the price data cited in the NPRM is vehicle transaction prices—or what a new car buyer is choosing to pay—without isolating the changes in performance and other features, some of which can be added at a premium. When isolating the base price of vehicles, or the starting MSRP, prices have also increased. But when adjusted for inflation, not necessarily by much. For example, the iconic Ford F-150 is about the same price today as it was in 2004 in real terms.

This raises questions about if the price of new cars has increased more than other necessities. Inflation adjusted new car purchase prices have actually fallen by three percent since 2013 even as the total Consumer Price Index has risen by eight percent. In contrast, housing has increased by 15 percent, food has risen by seven percent, and prescription drugs have risen by 19 percent over the same period.

Vehicle Sales Remain at or Near Record Highs

The NPRM argues that the costs associated with fuel economy compliance have prevented people from buying cars. However, the United States has seen surging new vehicle sales over the past decade. During the Great Recession, sales dropped to 10.9 million vehicles sold in 2009, and rose steadily, reaching a historical record of 17.9 million units sold in 2016 and 17.6 million vehicles sold last year.

The implication is that cars are not being replaced because fuel efficiency standards are making new cars too expensive for many drivers, but in reality, improved quality and durability have kept them on the road.

The NPRM also states that cars are staying on the road longer with the average age of cars on the road approaching 12 years, also a historical high. The implication is that cars are not being replaced because fuel efficiency standards are making new cars too expensive for many drivers, but in reality, improved quality and durability have kept them on the road. A longitudinal survey from J.D. Power and Associates finds that vehicle dependability has significantly improved, with the industry research group finding it is currently at its “best level ever.” Consequently, vehicles are holding their value for longer, and there is higher demand for used vehicles.

Longer vehicle lifetimes combined with record sales mean that there are more cars in the U.S. than ever before.

It’s true that cars are more expensive than ever, but this fact doesn’t exist in a vacuum. Cars today are more efficient, more durable, safer, and have better features than ever before, and higher prices are simply not that high once adjusted for inflation and compared to price increases of other consumer goods. Fuel economy regulations are just one factor: Labor and material costs, other technologies being added to vehicles, increasing interest rates and changes in lending terms are all contributing to higher sticker prices. But more efficient vehicles have the additional benefit of saving drivers money at the pump.