Thursday, November 09, 2006

Changing the Equation

One of the comments on yesterday's posting--actually a comment on a comment--cited the importance of higher efficiency standards, reminding me that I had focused mainly on energy supply, both conventional and alternative. Demand-side measures such as an increase in the Corporate Average Fuel Economy (CAFE) standards will likely also be in play in the new Congress. For these to be successful, we need to understand the limitations of such measures, and why the existing CAFEs worked to the degree they have. As I've tried to demonstrate periodically through analysis of constraints such as the size of the vehicle fleet and how long it would take to push even modest fuel economy improvements through it, changing standards without changing consumer behavior won't shrink our addiction. It may not even halt its continued growth.

Here's an example of the hurdles we face. The other day, I was surprised by a Wall St. Journal article suggesting that, for those who want one, now is the time to buy an SUV. Unfortunately, on a purely rational economic basis, they're right. Gas prices have fallen, and even if they were to go up again, the discounts offered on large SUVs are sufficient to cover all but the most extreme fuel increases for the life of the vehicle, or at least as for the duration of the car loan. If we can't come up with the arguments or policies that make that calculation much less attractive to consumers, then we face a long wait, indeed, before technology can dig us out of the hole we are creating at the rate of 8 million new SUVs per year.

When the CAFE standards were first introduced in the 1970s, the average fuel economy of the US car fleet stood at roughly 14 mpg. From 1977 to 1985, new cars improved to an average of 28 mpg (highway). Over that period the total number of cars on the road also grew from 125 million to 165 million. The net of all that improved average fuel economy for the whole US car fleet to 20 mpg by 1990, ignoring the growing SUV segment, which achieved 16 mpg. (The current figures are 22 and 16, respectively.) So before they stalled out, CAFE standards increased overall fleet fuel economy by about 5 mpg over 15 years. But that's not the whole story; we need to ask whether they did this by themselves, or required some other factor to achieve even this fairly modest improvement.

The answer is that carmakers didn't simply force more economical cars on consumers; consumers had real incentives to drive thriftier cars. Not only had fuel prices almost doubled in real terms between 1973 and 1980--actually tripling in nominal dollars--but motorists had also experienced periodic disruptions in fuel availability, with stations closed, subject to long queues, or employing rationing techniques such as the odd/even license plate system. In other words, buying a car that used less fuel and went farther on a tank was worth both money and convenience. Once deregulation erased those inefficiencies, and collapsing oil prices brought gasoline prices back to earth, the incentives to drive "econoboxes" dried up and progress on CAFE stalled.

So if we increased CAFE standards by phasing in more stringent targets, closing the "SUV loophole", or both, what would motivate consumers to change their habits and buy the efficient cars that automakers will be required to make available? For that matter, what would prompt someone today to buy a 30 mpg car--of which there are plenty to choose from--rather than an SUV getting 16 or 18? What are the economic and convenience factors necessary to balance the current cost-benefit ratio that favors SUVs, while we await the arrival of future vehicles conforming to stricter CAFE standards? And how much better must these new cars be, in order to boost overall fleet fuel economy by more than 5 mpg in 15 years? The history of this program suggests that it can't be effective in isolation; higher CAFE targets must include carrots and sticks for consumers, not just carmakers.

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