The Bush administration’s proposed revisions of the Corporate Average Fuel Economy (CAFE) standards have been met with rather vocal scorn, and rightly so. Michael Giberson’s criticism is particularly interesting; he raises some good points, but it’s worth a critical analysis, as useful information can be teased out of the process.
“Of course, American consumers can already purchase vehicles that ‘get more miles to the gallon, requiring fewer stops at the gas station, and ultimately saving them money at the pump,’ and I suspect recent price increases are increasingly leading consumers to make such selections. If gasoline prices stay high, the proposal will be easy for manufacturers of SUVs, pickup trucks, and minivans to meet, largely because it will be irrelevant. If gasoline prices drop back to more typical levels, then manufacturers will have to become creative. In any case, the effects of CAFE on overall fuel consumption are likely to be miniscule.
However, just because the effects on fuel consumption are likely to be small, doesn’t mean that CAFE standards have no effects. Think ‘unintended consequences.’
I am amused that social critics of ‘gas-guzzling SUVs and minivans’ are so often supporters of CAFE standards, since it seems to me that CAFE standards drove auto manufacturers to produce such vehicles in the first place. Is it any suprise that Chrysler Corporation developed the minivan in the early 1980s? As gasoline prices declined from their 1979/1980 highs, consumers were buying bigger cars again. Good news for Chrysler, but for the CAFE standards which began to be a serious constraint for the company.”
There are a number of issues with this suggestion, not least among them the contradiction implied by the emphasized text.CAFE has in fact been effective in raising average fuel economy, even despite the slide towards “light trucks”, due in part to the looser standards applied to the light truck portion of a company’s fleet. According to a 2002 study by the National Academies, gasoline consumption would be about 14% higher than current levels were it not for CAFE. However, if Michael is referring to the Bush plan, he’s probably right that the additional effects of that particular plan would be miniscule– that’s not the same as the overall effect of CAFE on fuel consumption being miniscule, however.
The problem with the Bush plan is actually that it breaks the synergy between high gas prices and current CAFE standards. As it is right now, a passenger vehicle fleet that consists of many large, low-fuel-economy light trucks will suffer from extra fines. It’s therefore advantageous to offer a number of smaller, more efficient trucks to lower the fleet average; add in high gas prices, and the purchase of a gas guzzler from a corporation with poor average fuel economy looks a bit less attractive. A remarkably cute and agile example of this phenomenon, from a car rather than a truck fleet, is the Mini Cooper. The Mini only exists in the United States to raise BMW’s average fuel economy, which had been suffering due to its habit of providing cars with powerful engines, especially following the company’s discontinuation of the smaller-displacement 1.8 liter E36 cars in the States. By dividing the light truck category into six smaller categories based on size, the administration removes any penalty for automakers who sell mostly larger, more powerful trucks. Meanwhile, its plan fails to actually require any significant improvements in fuel economy and still excludes the largest trucks, like the infamous wanna-be off-road vehicle, the Hummer H2 (I say wanna-be because unlike its big brother the H1, it’s based off a Chevrolet Tahoe platform and lacks serious off-road capabilities). “Why the six categories of light truck and the exclusion of the very largest trucks,” one might ask? Forbes knows how to follow the money. As they put it, the plan “was clearly designed to help out the automakers most thirsty for profits, the struggling General Motors and Ford Motor.” These firms, which sell larger trucks than their fast-growing competitors at Honda and Toyota, are hit harder by current CAFE standards, and the new standards would actually ease the penalty for selling such inefficient vehicles.
Due to this dynamic, Michael is actually probably wrong when he states,
“Of course, American consumers can already purchase vehicles that “get more miles to the gallon, requiring fewer stops at the gas station, and ultimately saving them money at the pump,” and I suspect recent price increases are increasingly leading consumers to make such selections. If gasoline prices stay high, the proposal will be easy for manufacturers of SUVs, pickup trucks, and minivans to meet, largely because it will be irrelevant. If gasoline prices drop back to more typical levels, then manufacturers will have to become creative.”
This is due to the fact that any consumer currently driving a truck who chooses a smaller light truck for his next purchase will just be moving into a different bracket, and will thus have no effect on the ability of manufacturers to meet the new standards. This, coupled with the fact that consumers aren’t likely to alter their habits based on the higher gasoline prices (the prices just don’t seem to faze consumers, in part because they comprise a smaller proportion of household income than in the past, and in part because they’re simply not high enough to make hybrid technologies cost-effective), should be sufficient reason to find Michael’s analysis wanting on this particular topic (of course, he does disclaim it as speculation, so it’s fair).
This isn’t to say that there aren’t any problems with CAFE. Michael is dead-on in his statement that the car/light-truck distinction and lighter standards applied to light trucks has led to an increase in the number of SUVs on the road. In fact, these rather arbitrary distinctions have served as quite perverse incentives. The abominable PT Cruiser, in addition to being ugly and of poor quality, is somehow classified as a light truck, even though it is built off the Neon platform. Similarly, a number of SUVs have been specifically designed to weigh in just over 6000 lbs, to avoid CAFE standards entirely. More brackets certainly won’t solve the problem. Fuel economy standards based on a formula using weight as the sole input variable could solve this problem by eliminating the advantage to adding a few pounds to a vehicle, and actually requiring significant fuel economy increases for light trucks would be particularly helpful.
The definition problem aside, CAFE is probably responsible for a small increase in fatalities, particularly as manufacturers have a strong incentive to build cars, but not trucks, lighter. This makes car v. truck accidents more dangerous, as one might imagine. Newton never rests. CAFE has also failed to adapt with technologies, hence the fall-off in its effects after the initial years following its enactment– this is a common problem with this type of government regulation. Likewise, CAFE is simply an inefficient way to accomplish the goal of reducing gasoline consumption. Does this mean that we should do away with CAFE altogether, though?
In a perfect (economist’s) world, yes. In the real world, probably not. Ideally, CAFE would be scrapped, and more taxes placed on the sale of gasoline. For each gallon of gasoline consumed, there are significant costs imposed upon society by the consumer that aren’t currently reflected in the price: greenhouse gas, smog precursor, and carbon monoxide emissions; national security issues, including a dependence on a resource provided by regimes like those in Iran, Saudi Arabia, and Venezuela; a contribution to the nation’s current account deficit; and many others. The easiest way to cause consumers to internalize these external costs is to levy a tax proportional to the total of these costs per gallon. The revenues from such a tax could then be divided equally among taxpayers and provided as a rebate come April 15th. Of course, there are problems created by the shock to the economy this would create, particularly from the amount of money that would be sitting in government coffers all year rather than in consumer hands, but even these problems can be handled, for the most part. The real problems with such a tax are a distrust by the citizenry that the government would actually honor the rebate in coming years, and a general dislike of taxes and love of cars that would make such a plan political suicide.
The point of this idea, though, is that it’s fundamentally equitable, which the current system is not. It makes no special exceptions and creates no special penalties for any individual or class– each person pays for the costs his choices impose upon others, and each person receives his share of compensation for the costs imposed on him by everyone’s actions (well, it would be more equitable if those exposed to more pollution were compensated more greatly, etc, but such a plan would be overly complicated).
It’s actually this idea of internalizing negative externalities that is behind the use of the world “punish” several paragraphs back. The point behind CAFE isn’t really to punish auto manufacturers for producing inefficient cars, rather, it’s just a clumsy way of trying to see that these costs are at some point reflected in consumer decision-making. Under CAFE, a company can totally ignore fuel economy standards– they’re just hit with fines that end up making the cars more expensive. Unfortunately, this makes the car more expensive up-front, but it doesn’t provide any extra incentive for the consumer to drive less. Thus, why CAFE sucks.
Under the taxation system, if an individual “needs” or just wants an SUV, fine– he can have it, hopefully without receiving grief from others, and he’ll pay for the costs they impose upon others. And if he wants to drive a fuel-efficient vehicle down to the corner (while his SUV-owning friend bicycles when he doesn’t have to use his SUV for towing his trailer full of tools for habitat restoration), he’ll pay for that, too. While some would complain, for example, that they really do need SUVs for business (not just soccer-child hauling), or that they need to live in the middle of nowhere, they’d be wrong in claiming that they were unfairly burdened– rather, they’d be paying for the extra burden they were imposing on others.
Of course, given that this plan has as much chance of flying as swine, we’re stuck with CAFE for now. It’s far from perfect, but it’s better than nothing, and could be made much better if it were updated properly. Real increases in fuel economy for both cars and light trucks, an entirely different system of definition that did not encourage cheating, and a removal of the upper weight limit on the vehicles to which CAFE applies would be a good start. If we agree that the amount of oil imported and its effects on the environment once it’s used are problematic, it would be wise to take serious measures to address it as efficiently as possible. CAFE, while laden with problems, is probably the most efficient solution that is politically viable.