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.
[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.