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December 7, 2007 / or4green

Fuel Economy Trading

Ford has a Business Systems Analytics Group devoted to business modeling and OR. OR/MS Today had a roundtable profile of the group in its August 2007 issue. The article mentions a project in experimental economics having to do with corporate average fuel economy (CAFE) standards. At present, the US Congress is trying to pass an energy bill with the first major increase in CAFE standards (35 miles per gallon by 2020) since 1975.

According to the profile, small fuel-efficient cars and large cars are typically run as two separate businesses. Small cars are less profitable but make it possible for the company to meet CAFE standards. In a sense, their production subsidizes that of the large cars. This subsidy was not represented in company financial systems. The project involved an internal trading scheme by which large cars paid a “tax” effectively transferring “profits” to the small cars. This calls to mind other trading schemes such as those for carbon emissions, a subject taken up by a session at EURO 2007.

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