President Obama and CAFE Standards

President Obama campaigned as a post-partisan politician who could work with Republicans as well as Democrats, and make decisions based on empirics rather than politics. His directive to ensure that the U.S. auto fleet (the cars we choose to drive) averages 35 miles per gallon by 2020 is not a good example of empirical based decisions.

Bryan Walsh of Time (Jan. 26, 2009) reports in "Obama's Move on Fuel Efficiency: A Clean Win for Greens,"

President Barack Obama made the first big green move of his Administration by simply getting out of the way. Speaking from the White House, the President on Monday announced that he was directing the Environmental Protection Agency (EPA) to reconsider an application by California and 13 other states to set stricter limits on greenhouse-gas emissions from cars and trucks, opening the way for tighter fuel efficiency standards nationwide. Obama is also directing the Department of Transportation to issue guidelines that will ensure the U.S. auto fleet reaches an average fuel economy of 35 miles per gallon (m.p.g.) by 2020 at the latest. Together the directives — the first official memorandums issued by the new President — signal Obama's willingness to take on America's disastrous auto sector, which is bleeding money even as it contributes heavily to climate change and the country's addiction to foreign oil. "The days of Washington dragging its heels are over," he said. "It will be the policy of my Administration to reverse our dependence on foreign oil while building a new energy economy that will create millions of jobs."

Mr. Obama's policy shift is a "clean win for greens," but it is not a clean win for the environment. Corporate Average Fuel Standards (CAFE standards) have many flaws.

They impose an unnecessary burden on the auto industry at a time that Congress has used taxpayer dollars to prop up GM and Chrysler. Improving fuel efficiency of the cars that we choose to drive, comes with a price. There is no hidden technology that automakers can roll out that dramatically improves fuel efficiency. Profit incentives would have compelled automakers to use it in Europe and Japan were gas prices and demand for fuel efficient cars is higher. Automakers will meet new CAFE standards by reducing vehicle weight, slowing acceleration, employing new technology as it becomes available, and decreasing the price of fuel efficient cars while increasing the cost of less fuel efficient cars.

Ronald Bailey of reasononline in "Obama's Fuel Economy Follies, "quotes Mary Nichols, California Air Resources Board Chair, who claims that the state's new CAFE standards would add about $400 per car, and Bob Lutz, General Motors Vice Chairman, who claims the new standards would add about $6,000.

Bailey makes a more telling point, Americans prefer to drive less efficient vehicles.

In 2007, the Pew Campaign For Fuel Efficiency released a poll in which 89 percent of respondents said that it was important for Congress to pass higher automobile fuel efficiency standards. Whatever Americans might tell pollsters, they voted quite differently with their pocketbooks. For example, CAFE standards on passenger vehicles had a big unintended consequence—the rise of sport utility vehicles (SUVs). Mileage standards for light trucks were set lower at 20.7 mpg and SUVs and minivans qualified as light trucks. In 1975, only 20 percent of vehicles sold were light trucks, but by 2002, that had risen to more than 50 percent of vehicles. In 2002, the San Francisco Chronicle reported that the EPA's 10 most fuel efficient models constituted less than 2 percent of auto sales. As recently as 2007, none of the top 10 vehicles chosen by consumers voting at the popular website CarGurus.com had an average gas mileage that met current federal CAFE standards

Although CAFE standards increase the cost of a vehicle, they lower the marginal cost of driving by increasing fuel efficiency. We will drive more because we will spend less at the pump, but not as much as we would have driven in absence of the increase in the CAFE standards.

Increasing CAFE standards only results in increased fuel efficiency of new cars that meet higher standards. It does nothing to increase the efficiency of cars we already drive. Furthermore, to the extent that drivers resist buying efficient cars as they have in the past, the higher CAFE standards will result in an older U.S. fleet. Crandall (1992),[1] estimates that the full impact of the higher standards would not be realized for eight years after implementation.

An increase in the gasoline tax would decrease the impact on automakers compared with increasing CAFE standards. People would drive less, reducing the demand for new vehicles. Demand would shift from less fuel efficient vehicles to more efficient vehicles. More subtle market signals for increased efficiency would replace heavy handed mandates.

All drivers, including those with older vehicles, face incentives to drive less with an increase in the gasoline tax. Gone is the adverse impact of the CAFE standards which incentives people to drive more by reducing the marginal cost of driving. Less driving also lowers pollution and congestion.

Crandall concludes that

The existing empirical literature suggests that CAFE costs about 7 to 10 times as much as a petroleum tax that would induce comparable reductions in oil consumption, because CAFE fails to equate the marginal costs of reducing fuel consumption across all uses, including usage of older vehicles and nonvehicular consumption.

CAFE is an even less efficient mechanism to reduce greenhouse gases. To reduce CO2 emissions, a carbon tax is much more efficient than a petroleum tax, which in turn is decidedly more efficient than CAFE standards. The empirical evidence suggests that CAFE would cost the economy at least 8.5 times as a carbon tax with equivalent effects on carbon emissions.

Why might President Obama prefer CAFE standards to an increase in the gasoline tax? It might be an example of politics as usual. CAFE standards are popular, even if people that support them fail to buy high efficiency vehicles. The costs are also more difficult to spot. Increase the gas tax, and every voter knows about it the next time they fill up. Increase CAFE standards, and voters may never trace back the increase in vehicle costs to the standards. If President Obama is concerned about energy independence and carbon emission, I recommend that he join Mankiw's Pigou Club.

[1] Crandall, Robert W. Journal of Economic Perspectives, "Policy Watch: Corporate Average Fuel Economy Standards," Vol. 6, Num. 2, Spring 1992.

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