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Brooks Wilson's Economics Blog: Akerson on Gas Tax and CAFE Standards

Wednesday, June 8, 2011

Akerson on Gas Tax and CAFE Standards

In an EconTalk podcast of Milton Friedman hosted by Russ Roberts, Friedman explains that businesses leaders do not usually support policy that strengthens markets.  They do what is best for them.
[I]t's always been true that business is not a friend of a free market...It's in the self-interest of the business community to get government on its side. It's in the self-interest of a particular business...But the real puzzle—puzzle isn't quite the right word—the real problem here is where do you find the support for free markets? If free markets weren't so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that's wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there…
With Friedman’s admonition in mind, I read the following interview of GM’s CEO, Dan Akerson (David Shepardson and Christina Rogers, “GM's Akerson pushing for higher gas taxes,” The Detroit News).
Detroit — General Motors Co. CEO Dan Akerson wants the federal gas tax boosted as much as $1 a gallon to nudge consumers toward more fuel-efficient cars…Akerson would like to see it (the federal government) step up to the challenge of setting a higher gas tax, as part of a comprehensive energy policy.

A government-imposed tax hike, Akerson believes, will prompt more people to buy small cars and do more good for the environment than forcing automakers to comply with higher gas-mileage (CAFE) standards.
If you believe that Americans should consume less oil, Akerson’s statement holds up pretty well.  GM does sell an electric car, the Volt that is highly subsidized by the government and the cost of driving the Volt would be much less sensitive to gas prices than a car that is only powered by gas.  They also make a number of fuel efficient cars that might do well relative to competitors if the cost of fuel rises due to a $1.00 per gallon tax.  Consumers would face a tradeoff.  They would substitute new car purchases toward more fuel efficient cars but the increase in gas prices is the same as a decrease in income.  The income effect would lower the overall sales of new cars.CAFE standards have several disadvantages relative to increasing the gas tax.  They increase the cost of making a vehicle, but 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.

Increased CAFE standards only result 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.  Old cars also pollute more than new cars.

An increase in the gasoline tax would decrease the impact on automakers and consumers 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.
[1] Crandall, Robert W. Journal of Economic Perspectives, "Policy Watch: Corporate Average Fuel Economy Standards," Vol. 6, Num. 2, Spring 1992.

1 comment:

  1. One concern is that auto makers will produce much lighter cars in order to meet the CAFE regulations. Lighter cars are great for mpg but not so great in case of an accident.