Government Should Steer Clear of the Fuel Economy Issue

Congress is about to consider increasing the “corporate average fuel economy,” or CAFE, standards--provisions first enacted in 1975 as a policy response to the 1973 oil shock. The idea is to conserve gasoline by making automobiles more fuel-efficient. But why is it important to reduce gasoline consumption? As long as consumers pay the market price for gasoline, why should the government dictate how much a vehicle uses?

The CAFE standards now mandate that the fuel economy of new cars sold by companies equal or exceed 27.5 miles per gallon for passenger vehicles and 20.7 mpg for light trucks, a category that includes minivans and SUVs, vehicles that didn’t exist in 1975. These standards are enforced by imposing large fines on automobile manufacturers.

Sen. John Kerry (D-Mass.) has proposed increasing the standard to a 35-mpg average for all vehicles by 2013, and Sen. John McCain (R-Ariz.) has proposed a 36-mpg standard by 2016.

The Bush administration opposes Congress mandating fuel efficiency, preferring to let the Transportation Department set fuel standards.

The underlying premise of the existing system, as well as the new proposals, is that it is important to reduce gasoline consumption and that increased CAFE standards can achieve that.

Supporters of CAFE have argued that it would reduce our vulnerability to oil shocks.

But disruptions in world oil markets affect prices everywhere regardless of our level of imports because oil is traded in world markets.

Besides, increased fuel economy has not led to reduced dependence on imported oil. Since the CAFE standards were introduced, the average fuel economy has increased by 114% for new cars and by 56% for new light trucks, but the U.S. consumption of imported oil has increased from 35% to 52%.

A more relevant impact is the effect of gasoline consumption on air pollution or global warming. But if Congress believes that gasoline costs are too low because they do not include funds to pay for environmental damage, then it should increase the gasoline tax and leave decisions about vehicle design and gasoline consumption to the normal interplay of car manufacturers and consumers.

In contrast to a tax on gasoline, CAFE standards are an imperfect and inefficient method of signaling drivers about the true costs of the gasoline that they consume.

First, the standards put a damper on new car sales by increasing vehicle price or reducing size, and they reduce the per-mile cost of using cars because the vehicles use less fuel per mile. The lower sales of new cars means longer retention of existing cars. These older cars pollute more and use more gasoline, undermining the purpose of the CAFE standards. The new cars would use less gasoline per mile, which leads people to drive more. The current best estimate is that every 10% increase in the mpg standard results in a 2% increase in vehicle miles traveled.

A second inefficiency of the CAFE standards arises from the interests of the auto unions. The United Auto Workers does not want unionized U.S. auto makers to comply with CAFE by importing small cars that use less gasoline. Under CAFE rules, gas-frugal imports only offset the gasoline use of other imports. To offset the gasoline use of low-mpg U.S. cars, high-mpg cars must be made in the United States, presumably with higher-cost UAW labor that would increase the price to consumers.

A third effect of CAFE has been to reduce the weight of small cars and subsidize their sales (because those are cheaper techniques of improving mileage than retooling engines), which, in turn, has increased auto fatalities. It has been estimated that the 500-pound reduction in auto weight that coincided with the introduction of CAFE has increased the fatality risk by up to 27%.

A final effect of CAFE is to tax the production of low-mileage vehicles differently depending on the product mix of the company. Low-mileage vehicles, for example, produced by a company that does not exceed the standards or has accumulated mileage credits face a different tax than identical mileage vehicles produced by a company with a different vehicle mix.

Our conclusion is simple: If we want drivers to pay for the costs of their pollution, increase the gasoline tax. CAFE standards are an inefficient method of reducing gasoline consumption and have undesirable side effects.