Federal government is trying to fix your car-buying mistakes

Michael Giberson

One of the federal government’s first oil conservation ideas, initiated during the Ford presidency, was Corporate Average Fuel Economy (CAFE) regulation. Mostly the goal was to reduce U.S. consumption of oil as a way to reduce oil imports, though ancillary environmental benefits were also anticipated. Regulatory analysis of CAFE regulations over the near 40-year history of the regulation has come to mixed conclusions, but it is safe to say that most consumer conservation efforts since 1975 have been driven by changing fuel prices and CAFE has been a modest factor at best.

About a year ago the Obama administration announced significant increases in the fuel efficiency standards. On December 1, 2011 the EPA and NHTSA issued the formal regulatory proposal: “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards,” Federal Register 76 (December 1, 2011): 74,854.

What may be most interesting about this latest increase in standards is that the increase is justified by regulators only incidently by projected environmental or energy security benefits. Most of the government-projected benefits come from the government correcting mistakes it thinks consumers make when buying new cars. As an analysis by Ted Gayer and Kip Viscusi shows, the EPA and NHTSA believe that less than 13 percent of the benefit of the regulation will be from environmental and energy security improvements. The other 87 percent of the benefit, according to the federal government’s analysis, comes from the government helping to correct for consumer shortsightedness.

The Mercatus Center produced this chart summarizing the official analysis:

Mercatus chart: Environmental benefits from environmental regulations are negligible


The analysis by Gayer and Viscusi includes a look at clothes dryer and room air condition efficiency standards in addition to automobile fuel efficiency standards. In each case the purported private benefits from the regulations, that is to say the improvements to consumer well being that come from the regulator “fixing” consumers’ choices, is much higher than the calculated environmental benefits of the proposed regulations.

Gayer and Viscusi note that counting such “private benefits” from regulation represents a departure from the OMB’s usual methods for measuring regulatory costs and benefits. Perhaps it is the so-called “soft paternalism” influence of outgoing regulatory czar Cass Sunstein. (See also Chidem Kurdas at ThinkMarkets.)

See also Ken Green’s comments at the AEI blog, “Do energy efficiency regulations benefit consumers?

Well, in that case I favor higher automobile fuel economy standards

Michael Giberson

Gasoline prices are relatively high and we’re well into the 2012 political campaign, so that means we have presidential wannabees and a wannabee-reelected promising to pass out candy to voters faster than a newly split piñata.

In North Carolina yesterday President Obama announced a $1 billion initiative for a “National Community Deployment Challenge to help selected communities invest in necessary infrastructure.” That effort promises to subsidize the building of electric vehicle recharging stations, or natural gas vehicle recharging stations, or “other alternative fuels [whichever] would be the best fit.”

About the only thing encouraging about that line was the President was embarrassed to say “ethanol” out loud.

But I found this discussion of automobile fuel economy standards notable, from the Detroit Free Press:

Obama was in North Carolina to discuss what the White House called “Daimler’s commitment to increasing fuel economy standards.” The White House and automakers agreed to new fuel standards for model years 2011 to 2025 that will push average fuel efficiency to 54.5 miles per gallon in the next 13 years. The administration says that could save consumers $1.7-trillion in fuel costs, or roughly $8,200 per gallon.

The higher standards will save consumers roughly $8,200 per gallon???!!?

Well, in that case I favor the higher fuel economy standards.

Raising MPG standards, part 2: Morris well explains the relative advantages of raising the gasoline tax

Michael Giberson

At the Freakonomics blog, transportation scholar Eric Morris favors President Obama’s recent deal to dramatically raise CAFE standards (Corporate Automobile Fuel Economy standards) by 2025. A gasoline tax would be far superior public policy, he said, but it won’t work politically. Because he thinks CAFE standards do work, technically and politically, he said we should go with this “second-best solution.”

To keep the discussion here in manageable chunks, I’m responding in two posts. In part 1 of “Raising MPG standards,” I explained why I wasn’t persuaded by Morris’s evidence that CAFE standards actually work. In this post I highlight what Morris explained well: why a gasoline tax can be the superior regulatory approach.

Here’s Morris:

[E]conomists generally prefer to do things with price signals as opposed to regulatory standards. Why?

Price signals inflict pain on consumers, but let them figure out what form they want to take it in. They in turn force producers to respond to their (altered) demand, but allow producers leeway in how that demand is met. This allows consumers and producers to change behavior in the most efficient possible manner.

Instead of CAFE, why not just raise the gas tax and let drivers figure out whether they want smaller cars, lighter cars, less powerful cars, more expensive cars, shorter-range cars, or, crucially, cars that are just as heavy, powerful, and cheap—but which get driven less?

This raises the true problem with CAFE. It misses out on a potentially key part of the solution to reducing fuel use: driving less. In fact, ironically, increased CAFE standards will have a perverse and unwelcome effect; better fuel economy will increase the fixed cost of driving (i.e. vehicle prices) but will actually reduce the marginal cost (i.e. fuel expenditures). To a degree, less thirsty cars will actually cause people to increase the number of miles they drive (as I’ve written about here).

With increased gas taxes, on the other hand, less driving will be part of the consumer’s toolkit. Some who absolutely need vehicles with poor fuel economy will have the option of avoiding the tax by driving less instead. As long as their fuel use goes down, why not give them that choice? Greater economic efficiency would result. In fact, the Congressional Budget Office ran the numbers in 2004 and found that cutting fuel use through taxes was considerably cheaper in the long run than raising CAFE.

Reducing driving through a higher gas tax would have other important benefits that improving fuel economy does not, like congestion relief and accident reduction…

Another advantage of a gas tax increase is that it would start working today. Since the car fleet takes so long to turn over (according to the US Department of Transportation, automobiles these days stay on the road an average of about 12 or 13 years), it will be a very long time before the new CAFE standards actually translate into meaningful changes in emissions. But increasing the gas tax would have immediate effects.

Sure, we can counter a call for higher gasoline taxes with a long list of negative consequences. The point is that an energy tax is relatively speaking transparent and efficient. However harmful a higher gasoline tax is, a CAFE regulation aiming at the same effects would be ten times (rough guess) more costly.

The social costs of raising CAFE are surely greater than the social benefits, so “second best” policy or not, we ought not to do it.

RELATED: In part I, I criticized the evidence that Morris put forward in favor of the view CAFE actually works.

Kazman on CAFE regulations

Michael Giberson

Sam Kazman, of the Competitive Enterprise Institute, opines on the loss of spare tires in some new car models:

Fewer tires, higher taxes.

That may be what’s in store for drivers under the federal government’s spiraling fuel economy mandates (known as CAFE, for Corporate Average Fuel Economy). The Department of Transportation is floating 62 mpg as a possible standard for 2025, more than double the current 27.5 mpg standard. How the industry can meet that target, and at what cost, is anyone’s guess. A new study in mid-June by the nonprofit Center for Automotive Research in Ann Arbor, Mich. put the tab at about $10,000 extra per new vehicle, while admitting that even this estimate might be far too low.

And that’s not the only bad news; in the past few weeks there have been two other unwelcome developments. First, GM announced that several versions of its compact Chevy Cruze would no longer have spare tires; instead, they’ll have vehicle-powered sealant repair kits. This is a major jump in the trend toward eliminating spare tires, a trend due largely to CAFE’s drive to shed every possible ounce of car weight.

Some argue that spare tires are unnecessary, given the growing presence of run-flat tires, tire pressure monitors, and roadside assistance systems. But the fact that spares are being eliminated in the name of fuel economy, rather than market demand, demolishes one of the chief claims of CAFE’s advocates. For several decades, the need to reduce vehicle size and weight in order to raise mileage has been CAFE’s Achilles’ heel. Smaller, lighter cars not only hold fewer passengers and less baggage; they’re also less crashworthy. CAFE-induced downsizing causes several thousand additional traffic deaths per year.

I’m not sure how clearly the loss of spare times can be linked to CAFE, but clearly shedding weight improves fuel economy and therefore is CAFE-relevant. In fact, so long as an automaker is pressed up against the compliance limit, all decisions affecting fuel economy will involve trade offs between consumer demand and regulatory compliance. GM may be testing consumer reactions to elimination of spare times by introducing the innovation on just a few models.

And if there were evidence that CAFE regulation actually secured net public benefits in a cost effective manner, then stories about innovations in regulatory compliance would be good news. In such a case this development would be evidence of companies bringing down the cost of securing a public good. Unfortunately, it just ain’t so.

Christopher Knittel, now at MIT, has summarized the results of some of his recent work as ” performance standards – such as CAFE standards – may be more inefficient than previously thought, and that pricing instruments, such as a gas tax, would likely have a bigger impact on reducing greenhouse gas emissions.” Note that he says “more inefficient than previously thought,” and while the academic literature on CAFE is diverse and complicated, CAFE has never been seen as a particularly efficient set of regulations.

A problem with market-based approaches to emission reductions

Michael Giberson

Market-based approaches to regulating emissions are the new conventional wisdom, according to Robert Stavins, and it would be hard to disagree. Among proponents of regulating greenhouse gasses in the United States, the big debate is over which of two market-based approaches to regulating emissions should be pursued: emission tax or cap-and-trade. Is anyone proposing “best available control technology”? Market-based approaches have become favored in part because of some high profile successes, notably the cap-and-trade program for SO2, seen as achieving its goal at a considerable cost savings compared to alternative approaches to regulation.

The primary strength of market-based approaches comes from the decentralizing of compliance decision-making, which enables each entity responsible for compliance to pursue the lowest-cost means of meeting the requirement. This strength, though, may also be the biggest problem with market-based approaches, at least when proponents of regulation hope to achieve goals beyond efficiently addressing externalities associated with emissions.

At TNR’s THE VINE, Bradford Plumer asks, “If Carbon Caps Are Coming, Why Mandate Renewables?“, and reports some of the responses he received.  Rich Sweeny asked the same question at Common Tragedies a while back.  In both cases it appears to be the case that proponents of greenhouse gas regulation are worried we might achieve the targeted reductions too easily, i.e. while still burning a lot of coal, not cutting back on consumption, and not garnering enough market share for renewable power. That is to say, some proponents of regulating greenhouse gasses hope to not only to reduce externalities, they have additional preferences about other people’s future energy choices that they want to control through the public policy process.

From Plumer:

Hummel explained that in wholesale electricity markets, the price of carbon would need to get very high—around $60/ton—before pushing dirty coal out onto the margins. So a renewable standard is a good way to manage a steady transition away from coal long before reaching that point.

In the comments responding to Sweeny’s discussion:

Cap and trade purists don’t seem to understand that there is something out here in the real world called an electricity market, and that under any politically viable national cap, coal use is barely touched.

Once we get beyond “internalizing the externality” in economists’ language, or more plainly, once the third party effects of actions are taken care of, the further ambitions of these regulation proponents sound like a bad mix of industrial policy and meddlesome preferences. The problem with market-based approaches, from the point of view of some folks, is that they don’t help enforce these further ambitions for social reform.

Actually, in my view, this “problem” is another great strength of the market-based approach.

Martin Feldstein in WSJ on “Tradeable Gasoline Rights”

Lynne Kiesling

Martin Feldstein has a column in today’s WSJ (subscription required) in which he recommends that the government issue tradeable gasoline rights (TGRs) instead of either raising CAFE standards or imposing a gasoline tax.

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations … would be modified to read these new TGR debit cards… Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. … Businesses that use trucks would also get TGRs.

Feldstein goes on to argue that because they are tradeable, they will provide dispersed benefits to individuals, rather like cap-and-trade pollution markets. I am not convinced. My initial thought was that, notwithstanding the tradeability, this scheme sounds like WWII ration cards, digitally updated. Should the government be in the business of gasoline rationing? Isn’t this option more transaction-cost-laden and prone to political manipulation at state and federal levels (allocations, who sets the cap, where the cap is set, etc.) than a gasoline tax?

I can see his logic, although he doesn’t say it this way in the piece: isn’t a TGR scheme a way to define property rights and then enable parties to trade? But it is so potentially prone to political manipulation, and over such a large number of possible stakeholder organizations, that I think it would distort decision-making enough to generate bad outcomes and entrench special interests. If it’s meant to be a CAFE substitute, why not have a cap-and-trade system that applies to automobile fleets? Could be much less fiddly, much lower in transaction costs. But as stated in his piece, I think Feldstein’s recommendation is too Rococo in its design.

In any case, such a policy has to start from a primary objective: is the primary objective here to reduce emissions, or simply to reduce the use of gasoline? I contend that those different objectives have different policy implications.

Other commentary from Mark Thoma and Brad DeLong. Mark’s post provides substantial quoting from the article, for those without subscriptions. Mark is skeptical, Brad is optimistic. I’m with Mark and would go even further, as above.

UPDATE: see also Greg Mankiw’s comments, which are along the same lines as mine.

Still more from The Glittering Eye and Arnold Kling. Their comments get at both the transaction cost issue and the primary policy objective issue that I raised above.