Quantitative Policy Evaluation of the Top Runner Method Regulations for Fuel Consumption Standards for Passenger Cars in Japan by Cost-benefit Analysis

Author Name KAINOU Kazunari  (Fellow, RIETI)
Creation Date/NO. March 2007 07-J-006
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The Ministry of Economy, Trade and Industry (METI) has been employing measures to address energy and environmental problems. One of these has been to impose, under the Law Concerning the Rational Use of Energy (Energy Conservation Law), regulations on companies manufacturing, importing, and selling vehicles that make it obligatory for them to ensure that the fuel consumption of gasoline engine passenger vehicles sold in Japan attains or exceeds certain standards before a target year.

These regulations for fuel consumption standards have been revised repeatedly since they were instituted in 1979, but since numerous factors contribute in a complex manner to the energy consumption of passenger vehicles, for example fuel consumption and weight distribution, problems exist that only the amount of energy-saving has been assessed and the costs and benefits of the regulations have not been quantified.

One method of overcoming these problems is explored in this paper. Taking privately owned gasoline engine passenger cars as an example, I analyze purchasing and usage behavior by different generations based on statistical values such as those in the Family Income and Expenditure Survey by the Ministry of Internal Affairs and Communications, estimating changes in amounts of gasoline consumption in each generation as a result of the regulations, also analyzing trends in recommended retail prices of passenger cars, and estimating the additional cost of coping with the regulations for different categories of car according to weight. By extrapolating these results for the period until fiscal 2030 and making estimates for the future, I have attempted to make quantitative policy evaluations by means of cost-benefit analysis with regard to the first top runner method regulations for passenger car fuel consumption standards, which began in fiscal 1998, and the second regulations, which began in fiscal 2007.

This estimation demonstrated that these policy measures were highly beneficial, since benefit exceeded cost when the cost-benefit differential under the first regulations was converted to present value terms at a discount rate of 3%, giving a positive differential of approximately ¥440 billion, and causing a reduction of approximately 18 Mt-CO2 per year on average. In the case of the second regulations, however, I estimated that the cost-effectiveness was markedly less than under the first regulations, as the saturation of the improvement in fuel consumption under the first regulations, the price effect, and other factors meant that a reduction of some 6 Mt-CO2 incurred costs of some ¥13,000 per t-CO2. To confirm the accuracy and stability of these estimation results, the paper also conducts sensitivity analyses with regard to factors such as the real economic growth rate, gasoline prices, and the purchase prices of family cars. These showed that the results of the first regulations were stable, but that costs and benefits under the second regulations were very similar to each other, and therefore the effects fluctuated substantially and were thus unstable.

In addition to these results, no significant price elasticity with regard to gasoline prices was observed in household car use. Therefore, as regards the future form of energy-saving measures for passenger cars I consider it necessary to introduce measures to improve the fuel consumption of cars, such as the imposition of heavy taxation and usage restrictions on cars with relatively high fuel consumption, and exceptions for light vehicles, while monitoring cost and effect.