How Do Gasoline Prices Affect Fleet Fuel Economy

Exploiting a rich data set of passenger vehicle registrations in twenty U.S. metropolitan statistical areas from 1997 to 2005, we examine the effects of gasoline prices on the automotive fleet’s composition. We find that high gasoline prices affect fleet fuel economy through two channels: (1) shifting new auto purchases towards more fuel-efficient vehicles, and (2) speeding the scrappage of older, less fuel-efficient used vehicles. Policy simulations based on our econometric estimates suggest that a 10 percent increase in gasoline prices from 2005 levels will generate a 0.22 percent increase in fleet fuel economy in the short run and a 2.04 percent increase in the long run. (JEL H23, L62, Q31) How the composition of the U.S. vehicle fleet responds to changes in gasoline prices has important implications for policies that aim to address climate change, local air pollution, and a host of other externalities related to gasoline consumption. 1 We investigate this response. Exploiting a unique and detailed data set, we decompose changes in the vehicle fleet into changes in vehicle scrappage and new vehicle purchase decisions, and analyze how gasoline prices influence each of these choice margins. We then recover the fuel economy elasticities wit