Wednesday, May 02, 2007

Fuel Economy Policies

A column in today's Wall St. Journal takes on proposed increases in the Corporate Average Fuel Economy standards (CAFE) but unfortunately fails to offer a better alternative. The author, Mr. Jenkins, regards CAFE as anti-Detroit, anti-consumer, and ultimately poor policy. He may be right about the latter, but at the heart of his critique is the question of whether doing nothing about automotive efficiency--other than waiting for better technology--remains an option. If you believe that climate change is a serious concern, then you end up with a slate of policy choices, none of which seems likely to appeal to Mr. Jenkins' previously-expressed skepticism on the subject. The right question to be asking here is how CAFE stacks up to the other options for reducing the greenhouse gas emissions from transportation.

Last week's Economist (subscription required) offers some worrying insights. Apparently the high level of European fuel taxation, which yields prices for gasoline and diesel fuel that are roughly double what we pay here, has not created sufficient incentives for Europeans to buy cars that are frugal enough to meet the EU's emissions reduction targets. The EU is looking to congestion charges, higher registration fees for gas guzzlers, and even bigger fuel taxes, under the rubric of shifting the tax burden from labor to pollution. European vehicles already average much better gas mileage than US cars, so the hurdle for further reductions is higher. But it should give all of us pause that the equivalent of a $3 gas tax hasn't delivered the 40+ mpg that California is targeting in its proposed state CAFE.

We also can't forget that a reasonable protection for commercial vehicles in the original 1970s CAFE framework became the well-known "SUV loophole", which has boosted US oil consumption by more than the 6 billion gallons per year that ethanol will supply this year. The true impact of new CAFE standards on consumers and US car manufacturers will depend heavily on how "light trucks", "flexible fuel vehicles" and advanced technologies like plug-in hybrids are treated. Nor is it apparent that Americans would pay as much attention to a ramped-up CAFE standard as they did in the 1970s. As illustrated in this chart from the Agoraphilia blog, the gasoline price increases of the last several years have not been very dramatic in terms of purchasing power for most Americans, other than those with the lowest incomes. For the portion of the population that buys most new cars, effective fuel prices--and thus fuel economy worries--are still much lower than they were in the last energy crisis.

CAFE is only one of many policy options for addressing climate change, and it's one of the weaker ones, because it only affects the mix of cars that is offered for sale, not what consumers actually choose. Even if the political environment were right for tackling one of the tougher options, such as a carbon tax on fuel, the European experience suggests that the results might not be as dramatic as policy makers would expect. Until we have a comprehensive framework for greenhouse gas emissions, in which vehicle fuel economy is only one aspect of a broader approach on transportation emissions, higher CAFE standards are at best a symbolic step. If they are indeed a given, as appears likely, then let us hope that they are at least crafted to minimize unintended consequences along the "SUV loophole" line. Otherwise, they could further distort the market for alternative fuels and create lock-in for a marginal improvement like ethanol.

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