Abstract:For the past twenty years, energy and environmental analysts in the U.S. have been searching for ways to improve urban air quality and make the country less vulnerable to supply and price volatility in the world oil market. To improve urban air quality, the U.S. Environmental Protection Agency and a number of state air-quality agencies favor controls on emissions of non-methane hydrocarbons, which are one of the main contributors to ozone formation, and which are emitted along the entire fuel production-and-use chain, from drilling for oil through oil refining and gasoline marketing, to vehicle tailpipe emissions. To reduce oil consumption, some analysts and policy makers have suggested that the fuel economy of motor vehicles be increased substantially. These policies—to control emissions in order to improve air quality, and to increase fuel economy in order to reduce oil consumption—have always been considered separately in the U.S. In this paper we connect emission reduction policy with fuel-economy-improvement policy. We also examine a related issue: Does the side benefit of lower emissions due to improved fuel economy mean that fuel economy standards should be set even higher? Typically, when analysts estimate how high fuel economy standards should be, they compare the extra costs of efficiency-improving technology (including perhaps such things as reduced safety and performance) with the benefits of reduced fuel consumption. Such cost-benefit analyses have indicated an "optimal" level of fuel economy (where benefits balance costs) of between 30 and 40 mpg, depending on assumptions and methods. However, the analyses done to date have not counted the potential reduction in emissions as a benefit of improved fuel economy. We do so here, by assuming that the value of a ton of emissions eliminated by higher fuel economy is equal to the cost of controlling (eliminating) that ton by traditional control means. We find that adding the value of emission reductions to the benefit side of the cost-benefit analysis justifies raising fuel economy standards by an additional one mile per gallon only.