Are New Vehicle Emissions Standards Effective and Efficient?

What is a feasible and efficient policy to regulate air pollution from vehicles? Theoretically, optimal policy would apply a Pigouvian tax on emissions. Such a tax is technologically infeasible, and most countries instead rely heavily on exhaust standards for new vehicles that limit air pollution emissions per mile, such as carbon monoxide and nitrogen oxides. This paper assesses these standards’ effectiveness and efficiency. We show that the emissions rate of new vehicles in the US has fallen by more than 99 percent since exhaust standards began in 1967. Used vehicles have had comparable declines. We show that exhaust standards have caused much of this decline. Yet exhaust standards are not cost-effective in part because they give no incentive to scrap old vehicles, which account for a large share of total emissions. To study counterfactual policies, we develop analytical and quantitative models of the new and used vehicle fleets.