Abstract
Corporateaveragefueleconomy(CAFE)regulationsspecifyminimumstandardsforfuel
efficiencythatvehiclemanufacturersmustmeetindependently.Wedesignasystemof
tradeable fueleconomycreditsthatallowstradingacrossvehicleclassesand
manufacturerswithandwithoutconsideringmarketpowerinthecreditmarket.We
performnumericalsimulationstomeasurethepotentialcostsavingsfrommovingfrom
the currentCAFEsystemtoonewithstricterstandards,butthatallowsvehicle
manufacturersvariouslevelsofincreasedflexibility.Wefindthattheabilityforeach
manufacturertoaveragecreditsbetweenitscarsandtrucksprovidesalargepercentage
of thepotentialsavings.Asexpected,thegreatestsavingscomefromthegreatest
flexibilityinthecreditsystem.Marketpowerlowersthepotentialcostsavingstothe
industryasawhole,butonlymodestly.Lossinefficiencyfrommarketpowerdoesnot
eliminatethegainsfromcredittrading.
