Little Sense in Setting Fuel-Efficiency Targets

Setting fuel-efficiency targets for vehicle fleets makes little sense

The New York Times, "Economic Scene" , December 06, 2001

Gasoline prices have fallen sharply, to below $1 a gallon in some places, encouraging Americans to drive more. The war on terrorism, meanwhile, is raising questions about relations between the United States and Saudi Arabia and the future of Persian Gulf oil supplies. In response, some activists and commentators are calling for government action to require more fuel-efficient automobiles.

Robert F. Kennedy Jr., a Natural Resources Defense Council lawyer, has argued that Congress should "immediately pass legislation to raise fuel-economy standards to 40 miles a gallon by 2012 and 55 by 2020."

Bill O'Reilly, the Fox News Channel talk show host, declared that "our greedy corporate system and our weak-willed politicians" are denying Americans 50-mile-a-gallon cars and strengthening Saudi Arabia.

More moderate analysts have focused on raising the federal fuel-efficiency requirements for light trucks, including sport utility vehicles, to the same level as those for passenger cars. All seem to agree that the Corporate Average Fuel Economy program, or CAFE, which took effect in 1978, is successful and should be extended.

Not so, say economists who study the program. The standards do not do a particularly good job at lowering consumption. And that goal itself is questionable.

Under the complex CAFE system, the federal government sets a minimum average mileage requirement for each manufacturer's fleet. Domestic and imported cars are averaged separately, and automakers that do better than the mandate, often because they make mostly small cars, can save credits for future use. Toyota and Honda used these credits when they introduced their luxury lines.

As a conservation measure, said Pietro S. Nivola, an economist at the Brookings Institution, CAFE standards did not work well because the requirements were "aimed at the vehicles, not at the consumer."

"They're basically aimed at redesigning vehicles, specifically new vehicles," he added.

Regulating new-vehicle mileage has little effect on gasoline consumption for two reasons. First, any increase in fuel-efficiency requirements takes a long time to make a difference on the road. Higher standards affect only new cars, which make up about 7 percent of registered vehicles.

While 1990 automobiles had to average 28 miles a gallon, for instance, "the total population of light-duty vehicles in 1990 averaged under 19 m.p.g., a gain of fewer than 5 m.p.g. over the average recorded 10 years earlier," wrote Dr. Nivola and Robert W. Crandall in The Extra Mile: Rethinking Energy Policy for Automotive Transportation (Brookings Institution, 1995). The delay is extended when CAFE mandates increase car prices, leading consumers to hold on to their old gas guzzlers.

The second, and more serious, problem with the regulations is that better gas mileage encourages people to drive more. You can go farther for the same amount of money. Or you may be able to buy a larger car and get the same mileage. Either way, total consumption does not change much.

In their book, Dr. Nivola and Dr. Crandall noted that in the 1980's, when CAFE standards were fully in force, the number of vehicle miles traveled by Americans "climbed as steeply as ever, at almost four times the rate of population growth." And when fuel prices dropped after 1981, drivers traded in their small cars for larger models.

For those worried about pollution, these results are not good news. "We have energy policy and environmental policy, and the two don't speak to one another," Dr. Nivola said. The way to reduce emissions, he said, "is through less driving rather than more efficient vehicles that people can drive much more."

There are alternatives, of course, like regulating emissions directly. Driving a clean car a lot pollutes less than driving a dirty car a little. Regardless, setting mileage targets for vehicle fleets makes little sense. Instead of regulatory mandates, economists generally prefer a gasoline tax. In a response to Mr. Kennedy, for instance, N. Gregory Mankiw, a professor of economics at Harvard University, suggested a gasoline tax coupled with income tax cuts. Dr. Nivola suggests offsetting a gas tax with payroll tax reductions.

A tax would allow consumers to make their own decisions about whether to respond to higher prices by buying more efficient vehicles, driving less or economizing elsewhere.

"I don't know of any other major industrial country that resorts to command-and-control regulations, rather than the price incentive, to conserve oil," Dr. Nivola said.

Unlike regulatory mandates, which hide costs in the price of new cars and allow politicians to blame Mr. O'Reilly's "greedy corporate system," gas taxes would make costs visible to consumers. That is politically dangerous, but it is economically efficient.

It is also fairer. A gas tax is the same for everyone. Fuel-economy rules allow for all sorts of exceptions, sometimes with unintended results. The most famous exception is the lower target for light trucks, now 20.7 miles a gallon, compared with 27.5 for passenger cars. That exception was meant to keep down the price of work vehicles. But it led to the proliferation of sport utility vehicles for personal transportation.

The real question, however, is not what policy would most efficiently encourage conservation. It is whether government policy should say anything at all about fuel economy, as opposed to emissions.

When the CAFE standards were established, federal controls kept gasoline prices artificially low. So when shocks like the Arab oil boycott and the Iranian revolution cut supplies in the 1970's, prices did not rise.

Instead, there were shortages and gas lines. The fuel-economy standards were a substitute for higher prices, an intervention to correct the ills of a previous regulation.

Those price controls were abolished back during the Reagan administration. Now when oil is short, prices rise and Americans cut back on their driving. The response is immediate, not delayed by a four-year car-design cycle. If a future upheaval in the Persian Gulf caused a sudden drop in oil supplies, consumers would still have to adjust to higher gas prices, regardless of what fuel taxes or mileage mandates were in place.

Today the main argument for CAFE standards appears to be aesthetic revulsion at big cars. Under the guise of conservation, regulation supporters can redesign the auto fleet and hammer people with bad taste.