Working Papers

Do Credit Constraints Explain the Energy Efficiency Gap? Evidence From the U.S. New Vehicle Market

(Job Market Paper)

The “energy efficiency gap” refers to a puzzle characterized by consumer under-investment in energy-efficient products (e.g., hybrid vehicles). These products cost more upfront than less efficient alternatives but would likely pay for themselves in the form of future energy savings. The energy efficiency gap serves as justification for regulations such as U.S. new vehicle fuel economy standards, the thinking being that mandating increases in energy efficiency is a “win-win” – consumers use less energy and save money.

But if pricier fuel-efficient cars would eventually pay for themselves, why don’t more consumers purchase them in the absence of regulation? One common explanation is that credit constraints – prohibitively high borrowing costs or a lack of access to credit – hinder consumers’ ability to make energy efficiency investments. However, limited evidence exists corroborating credit constraints as an explanation for the energy efficiency gap.

This paper provides evidence of the relationship between credit constraints and fuel economy demand in the U.S. new vehicle market. I use actual auto loan terms and self-reported credit histories from a survey of new vehicle buyers to estimate the relationship between consumer credit constraints and fuel economy choices. I find a statistically significant but economically minor relationship between auto loan interest rates and purchased vehicle fuel economy, indicating that credit constraints play little role in explaining why consumers fail to purchase fuel-efficient cars. On average, increasing a consumer’s auto loan interest rate from 2% to 5% APR is associated with a 0.09 mile per gallon decrease in fuel economy purchased. For a typical auto loan, this 2-to-5 percentage point increase adds $2,313 in interest payments (a 156% increase), but 0.09 miles per gallon only saves $97 in lifetime fuel costs. This disparity calls into question the suggestion that credit constraints are a meaningful contributor to the energy efficiency gap.

How much do consumers value fuel cost savings? Evidence from the passenger vehicle leasing market

with Benjamin Leard

Vehicle leasing involves a consumer renting a car for an average of three years. Given the typical lease length, we show that estimating valuation of leased vehicle fuel costs is fundamentally different from estimating valuation of purchased vehicle fuel costs. We find that new vehicle lessees and buyers both undervalue lifetime fuel costs. But because leasing periods last about three years, new vehicle lessees fully value lease-specific fuel costs. Our estimates also imply that leasing companies set residual values, defined as the post-lease expected value of the vehicle, with the expectation that used vehicle buyers undervalue post-lease fuel costs.

Resources for the Future press release

Work in Progress

EVs for Clunkers? An Analysis of the Clean Cars for America Climate Proposal for Mass Electric Vehicle Adoption

Non-Peer Reviewed Publications

What Should Federal Agencies Assume for How Much Consumers Are Willing to Pay for Fuel Cost Savings?

with Benjamin Leard, Joshua Linn, and Virginia McConnell

Resources For the Future's Common Resources Blog, September 22, 2021

Do Credit Constraints Explain the Energy Efficiency Gap?

Kleinman Center for Energy Policy blog, July 26, 2021

Subsidy Structure Could Be a Speed Bump for Chuck Schumer's Clean Car Adoption Plan

with Benjamin Leard

Resources For the Future's Common Resources Blog, August 24, 2020

Nature-Based Recreation: Understanding Campsite Reservations in National Parks

with Margaret Walls and Casey Wichman

Resources For the Future Report, November 2018