Posts Tagged ‘CAFE’

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Raising MPG standards, part 1: Morris is not persuasive in his claim that CAFE works

August 17, 2011

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, this first post argues that Morris is not persuasive in his claim that CAFE works. A second post will highlight Morris’s more insightful discussion concerning gasoline taxes.

The evidence Morris offers that CAFE standards work is, to put it politely, weak. Here is his chart and accompanying explanation:

 This is not because CAFE doesn’t work; it does. In 1975, a few years before CAFE was implemented, average MPG for new cars and light-duty trucks was 13.1. In 2010 it was 22.5. Can this be attributed to CAFE? To a large degree, yes, as this graph makes clear:

Source: Eric Morris, Freakonomics blog.

CAFE standards were aggressively increased from 1978 to 1984, and, as the chart above shows, fuel economy responded. However, from 1985 until 2007 CAFE standards were no longer raised meaningfully—and MPG flatlined. The table makes it pretty clear that the CAFE standards created a floor under MPG for a 25-year period, when low gas prices (remember those?) rendered consumers otherwise indifferent to fuel economy.

Yes, gas prices, remember them? Beginning around 1976, gasoline prices jumped from about $1.73 (EIA data, annual average price per gallon of unleaded regular gasoline in constant 2005 $) to about $2.65 by 1981, then they drifted back to around $2.00 in 1985. In 1986, gasoline prices dropped under $1.50 and stayed around that level until about 2003. From 2003 to 2008 gasoline prices moved up with crude oil prices, in 2009 they started coming down again.

The big moves in measured CAFE came when gasoline prices were high. The long low-price period saw both measured automobile and light truck CAFE levels drifting downward.

Now look at the chart again: the average of measured “car” and “truck” CAFE levels (labelled “both” in the chart) fell faster than either the car or truck level.

How is it possible that the average of two data series fell faster than either of the component data series? Because “both” is a weighted average, and as gasoline prices stayed low consumers limited by their options in the more-tightly-regulated automobile category simply switched into light trucks (i.e., minivans and SUVs). Automakers, too, feeling constrained by CAFE standards, pushed consumers to make that shift. What exactly are the policy benefits from driving consumers out of station wagons and into SUVs and minivans of similar fuel economy performance?

CAFE “worked” when it has a supporting high gasoline price environment, but I suspect that the gasoline prices were doing most of the heavy lifting.

RELATED: In part II, I highlight what Morris explained well about gasoline taxes.

Posted in Energy markets, Environmental policy, Regulation, Transportation | Tagged , , , | 1 Comment »

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Gasoline taxes and CAFE regulations

August 9, 2011

Michael Giberson

Most of the current 18.4 cents per gallon federal gasoline tax is set to expire at the end of September, and there are some indications that it may become the occasion for the next big political fight in Congress. See Politico and Platts for background. Grover Nordquist, of Americans for Tax Reform, says a vote to keep the current federal gasoline tax wouldn’t violate pledges some members of Congress have made not to raise taxes. Still, he’d prefer states keep the gasoline tax money they collect rather than have a portion flow into Washington, D.C., and come back with strings attached.

Now consider that recently that President Obama has been trumpeting a far-reaching agreement to raise CAFE standards over the next 14 years to levels about double the current mileage standard, and that nearly every serious analysis concludes that whatever CAFE can do would be achievable at much lower cost to the economy via an increase in the gasoline tax. A 2005 analysis published in the Journal of Environmental Economics and Management concluded a 12 cents per gallon increase in the gas tax would reduce fuel consumption as much as a 10 percent increase in CAFE, and achieve that reduction at a 70 percent lower cost.

I’d like to propose the following deal: Repeal CAFE, raise the gasoline tax in stages over the next several years, and offset the revenue increases with reductions in other federal taxes. That is “Repeal” with a capital R. Not delay the increases, not block the increases, not anything that keeps CAFE around in the slightest possible role. Repeal CAFE and raise the gasoline tax instead. No net increase in federal taxes, and we toss out a cumbersome, bureaucratic, inefficient regulatory system that has been burdening automakers and auto consumers for years.

UNFORTUNATELY, two problems:

First, hard line anti-tax views will let Members of Congress pretend to small government values for not increasing the gas tax while allowing the much more costly federal intrusion of super-sizing CAFE regulations. Hey Members of Congress, just because it isn’t labeled a tax increase doesn’t mean it is okay!

Second, fuel economy regulations have become more complicated recently, with the EPA assuming a role in regulating CO2 levels and subsequently granting California a waiver to pursue its own related air regulations. One reason automakers said they went along with the CAFE standard increases announced by the White House is that they were afraid of the complications that would come from separate California, EPA, and Department of Transportation regulations all addressing fuel economy directly (USDOT CAFE) or indirectly (California and EPA CO2 regulations).

So my wonderful idea faces challenges from right-wing politics-for-brains types and left-wing state interventionists, meaning repeal of CAFE is – relatively speaking – a radically moderate/centrist and probably sensible proposal.

Posted in Economics, Energy markets, Environmental policy, Politics, Regulation | Tagged , | 4 Comments »

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A problem with market-based approaches to emission reductions

April 29, 2009

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.

Posted in Energy markets, Environmental policy | Tagged , , , , , , , , | 3 Comments »

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“Congress didn’t intend to create SUVs”

December 29, 2008

Michael Giberson

From Two Billion Cars by Daniel Sperling and Deborah Gordon:

Ironically, it was the fuel economy standards adopted by Congress in 1975 that set the stage for the later surge of gas-guzzling SUVs and light trucks. As Congress was designing its fuel economy, safety, and emission standards, Detroit lobbied to exempt light trucks, which at the time were used mostly by businesses and farms for hauling goods and providing services. This loophole was written into law, with light trucks subject to less stringent requirements. They also were exempt from the large tax imposed on “gas guzzlers.” The light-truck loopholes were to be the industry’s savior for almost three decades. Chrysler recovered from its 1980 near-bankruptcy in part by taking advantage of those loopholes, producing the first modern minivan, a vehicle built on a truck platform but designed for family travel. Minivans became the new version of the station wagon, only “better” because they were cheaper to make and buy, thanks to the gentler energy, emissions, and safety regulations, and their exemption from the gas-guzzler tax.

Consumers flocked to these cheaper carlike trucks. The advent of the minivan was accompanied by a slow expansion of the pickup truck market and soon followed by a surge of SUVs in the 1990s. Chrysler was again the leader, building on its 1987 acquisition of American Motors Corporation and its Jeep vehicle line to pioneer the SUV market. Ford and GM followed. SUVs flourished.

I think this brief narrative puts too much emphasis on the role of Congress, and neglects the effects of rising incomes and changing gasoline prices on automobile industry developments over the “almost three decades” discussed. Nonetheless, the episode should serve as a warning to folks with grand policy ambitions about the weaknesses of piecemeal, ad hoc interventions into people’s lives.

Posted in Environmental policy, Liberty, Politics | Tagged , , , , , , | 1 Comment »

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