The effect of vehicle fuel economy standards on technology adoption

Many countries are tightening passenger vehicle fuel economy standards. This paper provides the first empirical evidence on the effects of fuel economy standards on technology adoption. We investigate changes in the rate and direction of technology adoption, that is, the extent to which technology is used to increase fuel economy at the expense of other vehicle attributes. We find that recent changes in U.S. and European standards have both increased the rate of technology adoption and affected the direction of technology adoption. Producers reduced horsepower and torque compared to a counterfactual in which fuel economy standards remained unchanged. We estimate opportunity costs from reduced horsepower and torque to be economically significant relative to the gains from fuel savings. •We analyze four recent changes in fuel economy standards in the U.S. and Europe.•Manufacturers respond by changing both the rate and direction of technology adoption.•We compare results for the U.S. and Europe.•We find opportunity costs as measured by consumers' valuation of lost horsepower.•Faster change in technology allows for lower opportunity costs than in the literature.