How Do Plug-in Vehicles Connect with Cafe Regulation?

Michael Giberson

The New York Times describes one of the hazards of doing new things: your new thing may not fit neatly into existing regulatory category. A case in point: Two new cars that can be recharged electrically are creating a puzzle for the Environmental Protection Agency, which must rate the “fuel economy” of passenger cars and light trucks sold by manufacturers covered by Corporate Average Fuel Economy standards.

How the Environmental Protection Agency rates the two cars, the Chevrolet Volt and Nissan Leaf, could have a big influence on consumers’ perceptions of vehicles that run on electricity. General Motors, which makes the Volt, and Nissan are anxiously awaiting the agency’s decision as they start production of the cars and complete marketing plans for rollouts in December.

Providing the customary city and highway miles-per-gallon information would make little sense for the Volt, which can drive 25 to 50 miles on battery power before its gas engine kicks on, and even less so for the Leaf, which is powered by only a rechargeable battery.

Another example of how hard it is to provide simple incentives in a complex world (a recent previous example here). My simple proposal: pull the plug on CAFE standards. Any half-way complete accounting of costs and benefits would find CAFE makes us worse off overall. To the extent CAFE standards were ever aimed at desired public policy goals, more economical policies must be available.

6 thoughts on “How Do Plug-in Vehicles Connect with Cafe Regulation?

  1. I agree CAFE standards are deeply flawed, but it’s a large step from that to saying they make us worse off overall. To say CAFE standards have a net cost is to say that they make the market for cars less efficient. We know that car buyers have an extremely high (and hence inefficient) discount rate when it comes to the costs of ownership of a vehicle, which is a cause of market inefficiency.

    CAFE standards are hardly the best way to correct this (I personally would prefer a feebate, where low MPG cars are taxed and the proceeds are used to subsidize the price of high MPG cars. That still leaves a problem with Jevons Paradox, but that that could be countered by replacing gas taxes with Pay-as-you-drive/per mile auto registration and insurance.)

    Despite the existence of superior options to CAFE, what is your reasoning behind the statement that CAFE standards bear a net cost to society?

  2. The obvious answer is miles per hundred thousand BTU of resource energy. It produces a number not grossly different in magnitude from the CAFE number, but takes into account the inefficiency of electricity production as well as battery storage in/out losses. It would also take into account compression losses for NGVs; and, separation and compression losses for hydrogen vehicles. It would also be “enlightening” for E85 vehicles.

    The number would get better for EVs, PHEVs and HEVs as the percentage of electricity produced by solar and wind increased, assuming that the resource efficiency calculation did not go back to the energy available from the sun or the wind.

  3. An Inquiry Into The Nature And Causes Of The Wealth Of Nations;
    By Adam Smith, LL.D. and F.R.S. of London And Edinburgh:
    Formerly Professor of Moral Philosophy in the University Of Glasgow
    Edinburgh: 1776

    BOOK II. Of the Nature, Accumulation, and Employment Of Stock.

    CHAPTER III. Of the Accumulation of Capital, Or Of Productive and
    Unproductive Labour.

    But though the profusion of government must, undoubtedly, have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is, undoubtedly, much greater at present than it was either at the Restoration or at the Revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater. In the midst of all the exactions of government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

  4. Thanks Mike.

    Here’s a quote from the executive summary of the paper: “a long-run 3.0 MPG increase in the CAFE standard would impose social welfare losses of $5.556 billion per year and save 5.1 billion gallons of gasoline per year. This amounts to a hidden tax of $1.09 per gallon conserved.”

    Is $1.09 a high price to pay to conserve a gallon of gas? Not if the gallon of gas costs $1.10 more than the car buyer anticipated when purchasing the car. Let’s assume that the car buyer is buying a car in late 2002, and expects prices to stay the same.

    In 2002, average gas prices were about $1.31 per gallon. So, if we accept the paper’s calculations that it would cost $1.09 to save a gallon of gas, and the car lasts about 10 years we will have a net benefit if the average gas price from 2003 to 2013 is higher than $1.31+$1.09 = $2.40. (There will be additional benefits from reduced volatility of fuel cost, but let’s ignore those for simplicity.)

    So far, from Jan 1, 2003 until today, gas prices have averaged $2.38 over a little less than 8 years. If gas prices stay at current levels ($2.80) for the next 2+ years, the average price will be over $2.40, and we will have a net economic gain, according to the AEI/Brookings paper.

    The calculation above only takes into account the internal benefits of saving a gallon of gas. There are also benefits from reduced externalities. The paper puts these numbers at $0.26, or $0.12 for climate effects, $0.12 for oil import effects, and $0.02 for emissions from oil refining. In a rising oil price environment, oil import effects will also rise because we are spending more to import oil. So in addition to the gains to the car owner from unanticipated savings due to higher gas prices, we also have additional positive externalities of more than $0.26 per gallon saved, or well over $1 billion.

    Further, I suspect that the externality costs used to calculate the benefits of saving gas used in the paper are too low for the simple reason that the paper came out of the American Enterprise Institute and Brookings Institute. Both are conservative think-tanks with a decidedly anti-regulation bent, and so I expect any research coming from them to use estimates that bias the results against regulation. For instance, did they consider the extremely high discount rates of car buyers I mentioned in my previous comment? I could find no reference to consumers’ discount rates using a text search of the paper (for the word “discount”).

    In other words, I find that paper shows that increasing CAFE standards by 3 MPG in 2002 would probably have led to net benefits for car buyers (because of unanticipated rising gas prices,) as well as significant societal net benefits (which the paper probably underestimates.)

    If you still think CAFE standards have a net cost on society, do you have a next-easiest answer as to why?

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