September 25th, 2018


The fundamental fallacy in push for fuel-efficiency standards

Charles Lane

By Charles Lane The Washington Post

Published June 18,2018

The fundamental  fallacy in push for fuel-efficiency standards

In the course of providing benefits for individuals, such as making a car go, gasoline consumption also imposes costs on society, such as traffic congestion and air pollution.

Economists call these "negative externalities." In Europe, governments address them by imposing a stiff tax on fuel; Germany charges $3.29 per gallon. The higher price gives motorists something to think about each time they visit a filling station or buy a car.

In the United States, we have the lowest national gas tax in the industrialized world, 18.4 cents per gallon - and the federal Corporate Average Fuel Economy (CAFE) standards, first imposed in 1975 as a response to the 1973 global oil crisis.

And these regulations set the fuel-efficiency target for each car model according to this easy-to-use formula:

Target (mpg) = 1/Min [Max (c* footprint+d,1/a),1/b] where a is the function's upper limit (in mpg), c is line's slope, and d is an intercept added for correct scaling (as Georgetown University economist Arik Levinson helpfully summarizes it.)

There's a huge kerfuffle at the moment over Environmental Protection Agency Administrator Scott Pruitt's decision to suspend the scheduled tightening of the CAFE standards- initiated during the Obama administration- which would have required new vehicles, on average, to get the equivalent of 54.5 miles per gallon by 2025, as compared with the 24.7 mpg cars on the road actually got in 2016. Environmentalists are decrying the potential impact on the climate, and some state governments, led by California, are seeking a court order to block Pruitt's move.

Everyone is missing an opportunity to learn the lessons from 43 years of attempting to control automobile fuel consumption through detailed government manipulation of automobile production.

To use more economic jargon, CAFE standards represent a "second-best solution" to gas-powered transportation's negative externalities. The best solution - a substantial, permanent gas tax or other user fee that rises with inflation - would require explaining to the American people that their fuel-consumption habits reflect their own decisions, and not simply auto industry greed.

The results have been mixed. Per capita transportation energy use actually rose by 13.5 percent in the first 30 years after CAFE went into effect; at present it is hovering roughly at 1975 levels. So, obviously, a case can be made that drivers would have consumed even more without the regulations.

However, CAFE raises the price of new cars, so people drove older, less fuel-efficient vehicles longer. When cars got better mileage, people drove them more often, in effect spending their gas savings on more gas (the "rebound effect").

We are nowhere near European per capita gas consumption levels, let alone the small-cars-and-subways nirvana envisioned by green lawmakers. A 2007 federal statute embodied that goal by authorizing the stiffer CAFE standards imposed under President Barack Obama - and which Pruitt has just partially repealed.

Our roads and highways are clogged with pickup trucks and SUVs. In 1975, 20 percent of new vehicles sold were pickups and SUVs; in 2017, the figure was nearly60 percent. This trend is so powerful that Ford has announced it will soon make only gas-powered pickups and SUVs for the North American market, except the iconic Mustang and the Focus Active. Other companies are doing similar things. Electric cars, nifty but not popular with consumers, provide automakers with a bright green fig leaf.

Again, due to advances in technology, partly forced by CAFE, today's SUV behemoths are gas-sippers relative to their pre-CAFE equivalents.

Yet they use a lot more fuel than sedans and hatchbacks, and their prevalence reflects a little-known unintended consequence of CAFE. As of 2011, CAFE norms adjust according to each car's "footprint," i.e., the area under its four wheels. Bigger footprint cars must meet less ambitious fuel-efficiency targets than smaller ones, making their CAFE compliance costs relatively lower as well. The Obama administration did this in the interests of safety; larger cars may offer more protection in collisions. As long as gas is cheap, however, the approach also gives automakers an incentive to sell bigger - and more profitable - vehicles. (Also, U.S. automakers received a small edge over Japanese and Korean exporters, which specialize in smaller vehicles.)

Which brings us to a final economics nostrum: "regulatory capture." When you try to change behavior through regulation, you do not eliminate politics from decision-making.

You instead shift them from Congress to the less-transparent world of the regulatory agencies, where lawyers and lobbyists, all representing various interest groups, wage endless battle for bureaucratic favor. Sometimes it's not clear who's really won until years later.

And of course when there's an abrupt change at the top, as in the ascension of the petroleum-friendly Pruitt, policy can change abruptly, too. Next comes endless argument before judges over California's objections to the EPA administrator's objections.

So much complexity, so much conflict. Americans would rather go through all of it than face reality, which is simple: We can minimize gas prices, or we can maximize environmental protection, but we can't do both.