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An Internal Fuel Efficiency Credit Market Mechanism for Meeting the CAFE Standard: Internalizing a Regulation Caused Externality

Plott, Charles R. and Katz, Gabriel (2008) An Internal Fuel Efficiency Credit Market Mechanism for Meeting the CAFE Standard: Internalizing a Regulation Caused Externality. Social Science Working Paper, 1297. California Institute of Technology , Pasadena, CA. (Unpublished) http://resolver.caltech.edu/CaltechAUTHORS:20140224-133248343

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Abstract

The paper develops and analyzes an internal market based mechanism that enables a decentralized enterprise to meet the conditions of the Corporate Average Fuel Economy (CAFE) regulations. Divisions that produce vehicles with fuel economy (miles per gallon fuel) above the regulatory requirement receive Fuel Efficiency Credits (FEC). These credits can be sold in an internal FEC market to divisions that produce vehicles with fuel economy levels below the regulatory requirement. The FEC available for sale by fuel efficient vehicle production and the FEC needed as a condition of production of fuel inefficient vehicles are tied to the respective fuel efficiency levels. Experimental tests demonstrate that the enterprise can achieve near profit maximum levels while continuing to operate through decentralized profit centers. The FEC market “internalizes” the externality across divisions created by the CAFE regulation. The behavioral model supported by the data suggests that the policy can be successfully crafted to include multiple firms trading FECs.


Item Type:Report or Paper (Working Paper)
ORCID:
AuthorORCID
Katz, Gabriel0000-0001-5970-2769
Additional Information:The research support of Ford Motor Company and the National Science Foundation is gratefully acknowledged. Technical support was supplied by the Caltech Laboratory for Experimental Economics and Political Science. The authors express their thanks to Suzhou Huang and David P. Chock of Ford Motor Company for their help and suggestions.
Group:Social Science Working Papers
Funders:
Funding AgencyGrant Number
National Science FoundationUNSPECIFIED
Ford Motor CompanyUNSPECIFIED
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Record Number:CaltechAUTHORS:20140224-133248343
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20140224-133248343
Official Citation:Plott, Charles R. and Katz, Gabriel. An Internal Fuel Efficiency Credit Market Mechanism for Meeting the AFE Standard: Internalizing a Regulation Caused Externality. Pasadena, CA: California Institute of Technology, 2008. Social Science Working Paper, 1297.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:43948
Collection:CaltechAUTHORS
Deposited By: Susan Vite
Deposited On:25 Mar 2014 18:55
Last Modified:26 Apr 2019 22:07

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