CAFE standards

Featuring prominently in the new energy plan from President Bush is a call for changes in the corporate average fuel efficiency (CAFE) standards that the Administration claims could reduce U.S. gasoline consumption by 5% over the next 10 years. Here are some of the reasons I’m not thrilled by that suggestion.

CAFE standards are based on the premise that auto manufacturers and consumers are making inappropriate decisions about the kind of vehicles that get produced. The clearest way to motivate this from an economic perspective would be to suggest that there are costs to using gasoline beyond those paid directly by consumers, such as a geopolitical cost when the U.S. relies on imported oil or possible consequences for the world climate. But if that is the motivation, an economically more efficient way to accomplish the objective would be to tax the gasoline use itself so that the after-tax price paid by consumers completely reflects whatever these true costs are deemed to be. This has the benefits of providing an incentive not just to purchase more fuel-efficient cars, but also to encourage more fuel conservation in the use of the existing fleet through such measures as driving slower, driving less, or getting more of the existing mileage from the more fuel-efficient vehicles. And it allows consumers and firms the maximum flexibility to figure out how to do this in the least disruptive way.

When you force consumers to buy something other than their first choice, the consequences may not be quite what the policy-maker originally envisioned. One example sometimes given is the shift to SUVs. Because the initial CAFE standards were different for “light trucks” as opposed to “cars”, one way Detroit responded to CAFE was to create a new supersized vehicle that in practice is used the way a “passenger car” used to be, but that wasn’t similarly regulated. A second example of a possible unintended consequence of tightening CAFE is that if American cars no longer have the characteristics sought by consumers, they will buy more imports.

There is an interesting new study of this by Mark Jacobsen, an economics Ph.D. student at Stanford whom we’re trying to persuade to join our faculty at UCSD. Jacobsen notes that auto producers generally fall into one of three groups, as exemplified by Toyota, Ford, and BMW in the diagram below. The fleet of a Japanese producer like Toyota usually has an average fuel economy that is higher than the existing CAFE standard, meaning that a modest increase in the standard would not affect them directly. European producers like BMW fail to meet existing CAFE standards, and choose to just pay the fine that is required for any company that fails to comply. The third group is the U.S. producers like Ford, who feel that violating the CAFE standards would expose them to unwanted publicity, litigation, or further undesirable legislation, and therefore stay just inside the standard. It is thus the U.S. auto producers who do the adjusting when CAFE standards are tightened.



Source: Jacobsen (2006)
cafe_jacobsen.gif



Jacobsen builds a detailed model of the American new and used car market based on the choices consumers make between different kinds of cars. His simulations suggest that one consequence of tightening CAFE standards is an increase in the number of imported cars and a decrease in the fuel efficiency of those cars. Essentially the European producers have an advantage over the American producers in being more willing to flaunt their violation of the CAFE standards, and the Japanese producers have the advantage of selling enough compact vehicles to be allowed to expand less-efficient models such as the Acura. Thus, people who like bigger cars end up buying more of them from the importers when the standards are tightened.

Overall, Jacobsen estimates that a one-mile-per-gallon increase in the required average corporate fuel efficiency would increase the average fuel-efficiency of all new cars sold by 2.5%. However, since most of the older cars would still be on the road, Jacobsen estimates that during the first year, total U.S. gasoline consumption would decline by only 0.8%. He estimates the costs of this 1 mpg tightening of CAFE would be $20 billion in the first year, with these first-year costs shared about equally between U.S. consumers and producers. For comparison, Jacobsen claims that a gasoline tax could accomplish the same first-year effect at an efficiency cost of significantly less than $1 billion.

Over time, the fuel savings from tightening CAFE would of course increase, but even after 10 years, Jacobsen concludes that that a gasoline tax could accomplish the same thing at 1/6 the cost.

Although it is hard to motivate CAFE from sound economic principles, somehow it has political staying power. The public evidently sees the costs associated with CAFE as borne by “somebody else” whereas they know they pay the gasoline taxes themselves. But here’s another possible proposal that might be suggested by Jacobsen’s research. Why not start decrying the fact that some of those foreign companies are failing to comply with our existing CAFE standards, and claim that what we need to do is get more serious about enforcing these, and raise the payment required per vehicle of any company that fails to meet the standards? In practice, this would amount to either raising the tax on BMWs, or forcing the European importers to sell some more fuel-efficient vehicles. Ford and GM would be spared, as long as they continue to stay within the existing standards.

Maybe not a proposal that an economist would love. But a politician might. And it seems that’s the name of the game here.

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63 thoughts on “CAFE standards

  1. Joseph

    Because of the toxic anti-tax atmosphere generated by the Republicans, a gas tax increase would be political suicide for anyone proposing it, despite the advantages you cite.
    On the other hand, the CAFE standards are both politically possible and phenomenally successful. In the first 10 years of CAFE standards, mileage for passenger cars almost doubled from 14 mpg to 27 mpg. In the 20 years since then they have stagnated because CAFE standards were frozen. Just imagine what we could have accomplished in those 20 years if CAFE hadn’t been gutted. In 1995 the Republican Congress made it illegal for the EPA to even study CAFE standards.
    The fact that SUVs have become such a problem because they were exempted would be an argument for removing that exemption rather than removing CAFE standards. This is no minor exemption since 40% of gasoline in America is used by these vehicles.
    Why should the laws be changed to accommodate the obstinate and ignorant Detroit three who have spend hundreds of millions of dollars to lobby congress and on advertising to promote the macho image of their gas guzzlers compared to the effeminate Japanese cars? The American demand for overpowered cars didn’t come about in a vacuum. I guess the economist solution to smoking would be to allow cigarette advertising on TV but raise the cigarette tax.

  2. Robert Schwartz

    Well of course, CAFE is useless. It was designed as a gesture not as a policy.
    First of all it is a sales tax on some low mileage vehicles. It is not, as many people suppose a command of the sovereign enforceable on criminal penalty.
    Second, it affects only one term of the equation that determines total fuel consumption, which is:
    mpg * miles_driven = total fuel consumption.
    Ceteris paribus, if only the first term changes, drivers may simply drive more miles, because their rate of expenditure for fuel has declined proportionately.
    Thirdly, even if it does function as intended, it cannot result in anything other than a slow incremental change in the composition of the national vehicle fleet. First, it takes several years to design, and build, new cars. Second, at present only about 7% of the fleet turns over each year. So it would take at least 15 to 20 years to achieve a CAFE compliant fleet. Moreover CAFE, by taxing the sales of new vehicles, explicitly or implicitly, makes them more expensive. Therefore it will slow down the adoption of new technology.
    Did I leave anything out?

  3. Brett

    All new cars should have instantaneous MPG readouts like those found on the Prius and a few other cars. This perportedly adds $10 -$20 to the manufacturer’s cost, but can improve the drivers fuel efficiency easily by 20% without any other changes to the auto. The article “This Guy Can Get 59 MPG in a Plain Old Accord. Beat That, Punk” in the Jan/Feb issue of Mother Jones reports people getting over 100% mpg gains just by altering their driving habits, for example, how fast they accelerate and how hard they brake. While their tactics are extreme and at times unsafe, they illustrate what is possible with our current fleet, without any tax hikes, CAFE changes or other forced measures. No one is forced to change how they drive, but the readout gives one feedback which can allow for tremendous savings if desired. I’m sure 20% savings are obtainable in any conventional auto without sacrificing safety (safety is probably increased as you learn to drive more defensively.) Many people will not change their driving and for them, their car’s performance will be unchanged. However, the knowledge given by the meter can be a powerful incentive to change.

  4. Jack Evans

    Surely what this shows is that the “US” manufacturers are the best optimised for the current CAFE standards and therefore that current regulations fall most heavily on the “European” and “Japanese” manufacturers. Is there a WTO case here? What about a little creative destruction here? Nibody minds that their laptops are made by Taiwanese firms, why the fuss about cars?
    Is there any just reason that BMW should face more opprobrium for accepting high taxation on its niche market cars than GM should for diverting customers towards Hummers and Suburbans? Clearly the US manufacturers are subsidy junkies and cutting the tax system to support them just delays the moment they have to rationalise or become competitive given a level playing field.
    I see no reason to set-up CAFE standards as being in opposition to fuel tax. They would work well together because the CAFE standard would tend to reduce the pain caused by the fuel tax by subsidising efficient cars. They also provide some security for car companies in planning. If they know they are less likely to be disadvataged by investing in efficiency, it is cheaper for them to do so.
    Annoying scare quotes because all the companies are multinationals that manufacture in the US too.

  5. Valuethinker

    Economists like gas taxes.
    *however* empirically gasoline is a price inelastic good. I believe this has been discussed here, before.
    0.1 – estimated short term price elasticity of gasoline (10% rise in price, 1% fall in consumption, ceterus paribus)
    0.3 to 0.5 – long term price elasticity of consumption
    The reason gasoline taxes are an efficient way of raising government income is they are price inelastic– there is little change in consumer behaviour as a result of an increase in gasoline taxes. that meets the definition of a good target for taxation in a welfare sense (low change in the final consumer behaviour) and in a fiscal sense (ditto, so increasing the tax increases revenues).
    So for the Chancellor of the Exchequer here, petrol taxes are 20bn a year, or about 1.8% of GDP and 6% of government revenues. Unsurprisingly, tobacco is another excise tax favourite– an addictive substance is highly price inelastic!
    I would conclude, for the same reasons, that as a CO2 tax, a gasoline tax fails. Since one is trying to discourage the emission of a harmful pollutant, there are many activities in an economy (like electric power generation) where low or no CO2 emission alternatives are widely available, and the price elasticity of emission of CO2 will be quite high (consider the compact fluorescent lightbulb, or more home insulation which even at current electricity prices, are NPV positive investments for the consumer).
    Whereas with transport, the price elasticity of carbon emission will be very low (there are no good cheap substitues for oil).
    CAFE to my mind has a number of advantages:
    - it doesn’t trigger the political fault lines that gasoline taxes do
    - if it is legally clear that the manufacturers may just pay the fines (the US manufacturers have taken a legal view that this would imperil their Boards as breakers of the law, whereas the European manufacturers have taken a view that it would not)
    *and*
    manufacturers can trade amongst themselves (so a manufacturer in deficit can buy credits from a manufacturer in surplus)
    then
    many of the inefficiencies of CAFE are abolished. Those inefficiencies arise from the microeconomics of different car manufacturers: some are more able to make cheap fuel efficient cars than others.
    Now to the benefits of CAFE:
    - even if gasoline prices subsequently fall, more fuel efficient cars are still part of the US car ‘park’. So consumption doesn’t rise as fast as it would.
    In a sense, you have decoupled gasoline consumption from the largest tax of all, the ‘tax’ that markets impose on the use of petroleum– highly volatile gasoline prices.
    - cars that are driven less, last longer. Even if not in the hands of the original owners. Most cars are probably scrapped when they reach a certain mileage, rather than a certain age. So the benefit of greater fuel economy extends out into the future.
    - CO2 emissions by cars will be lower. In this sense, the tax works, whereas a gasoline tax, as I have argued above, is a poor way of reducing CO2 emissions.

  6. odograph

    I think the main problem with CAFE is that it is always, by it’s nature, a “future” requirement. No one wants to move CAFE mileage today. Instead they want to propose a new number, or a set of new numbers, for future years.
    This makes the whole system too easily gamed. Detroit had plenty of time to finagle the ethanol-adjustment to CAFE (a ‘dual fuel’ car is counted as having much higher MPG than it actually does). Detroit would have time to finagle-back requirements that start to look to scary.
    I like the gasoline tax, but another fast method, would be to put ‘guzzler taxes’ back on the window sticker. Then BMW (and Tahoe) buyers would see them, understand their decision, and pay them if they so chose.
    I’m not totally enthralled by hybrid credits, etc., but I’d think some moderate plans could be funded out of such guzzler taxes, without furthering general government debt.
    Putting the guzzler tax on the vehicle license renewal would speed retirement of inefficient cars, but that might be a harder sell.

  7. Barkley Rosser

    Both taxes and CAFE standards are long term policies. They do nothing in the near term. As noted, taxes have a hard time going anywhere in the current environment, and they are regressive. However, as the record in Europe shows, they do work over time.
    OTOH, it is clear that the main problem with CAFE has been the exemption of SUVs. So, a tightening of CAFE without zapping the SUVs is indeed pretty much a waste of time.

  8. odograph

    Barkley, I see a difference between “long term” and “long lead time.”
    Gasoline taxes, and at-sale guzzler taxes do not require long lead time for implementation. Given will they could be done next week.
    On the other hand, CAFE with its promise of a better future, a long ways off, hinges on a long lead time. And sadly, it dilutes support for immediate action because “just wait for CAFE and everything will be OK.”

  9. Anup

    JDH,
    CAFE is recognized as far from perfect, but as you note it has political appeal. I agree that a gasoline tax increase is an economically more efficient tool. I will also note, however, that people rarely purchase based on the type of economic welfare loss analysis that economists do to show the superiority of gasoline taxes over CAFE. The point being that such welfare loss calculations, IMHO, are not very accurate.

    Given that it is very difficult to get rid of a firmly entrenched policy such as CAFE, we may need to tinker around the edges so that there is enough political support for any of the policy proposal. Some of us suggest that rather than gasoline tax OR CAFE, we should really talk about gasoline tax AND CAFE.

    Also, if you look carefully at the Bush proposal to raise car CAFE, he is also asking for flexibility to trade CAFE permits along the lines suggested in NRC report. Allowing trading of CAFE permits will necessarily require that the congress remove any doubts about the legal liability of car companies in meeting CAFE, thus lowering the cost of meeting CAFE standards substantially for the domestic car manufacturers.

    What is missed from this type of analysis is that the UAW hates the idea of CAFE trading. They fear, appropriately, that Detroit will stop making small cars altogether if they are not forced to make them to comply with CAFE.

    Finally, car companies may also like the idea of integrating them in an economy wide cap-N-trade system for climate policy purpose in exchange for getting rid of CAFE!

  10. Martin

    Professor Hamilton,
    Surely the best way to ensure these standards are observed would be to shift the compliance burdens from the manufacturer to the buyer?
    The possible disappearance of its US export market would surely be a great incentive to BMW to clean up its act.
    Caveat emptor and all that…

  11. Heiko Gerhauser

    One good side of CAFE is that it favours poorer car owners. CAFE can be met by technological improvements like hybrids, or through smaller cars.
    A $5000 car is not going to have many problems meeting CAFE, and manufacturers might choose to discount small cars. Think of in the extreme, offers like “Buy this SUV for $60,000 and you get this $5000 eco box for free”.
    That may mean a very modest impact on fuel consumption, but a zero financial impact, or even a positive impact for poorer consumers.

  12. Doug

    As Europe has shown for 3 decades, petrol taxes are the way to go. CAFE regs force carmakers to build more efficient vehicles but don’t give consumers any incentive to buy them. It’s true that demand is somewhat inelastic over short periods of time and over small changes, but a large tax phased in over a decade would allow peeps to, well, “see your future, be your future”.
    As for blaming the Republicans, I can’t see Democrats proposing a petrol tax, either. Aside from being political suicide, it would be opposed by their own consituencies as “regressive”. While the GOP might well enjoy flogging the Dems over the issue, fact is most of them wouldn’t give a rat’s arse over paying a bit more at the pump; the main focus of the GOP’s anti-tax ire is income taxation. Fact is, regardless of political stripe, Americans believe cheap fuel is a God-given right. Only way that changes is if both parties get together and provide some leadership on the issue.

  13. RoySV

    False dilemma anyone?

    Yes let’s raise CAFE standards a bunch and close the SUV and light-truck loophole. That way in future all reductions in miles driven pay extra benefits ’cause the fleet mileage is better.

    Let’s also advocate a tax on fuel because it goes to the heart of the security/ecology problem.

    Gee was that hard? No. but it does obviate a bunch of show-off analsysis by economists and irrelevance truely scares the breed more than anything else including world climate catastrophy.

    Roy (not impressed by group clucking)

    BTW: how about some reporting on ethanol production vs food prices? any winners and losers in that arena? Or would you all prefer to shoot sitting ducks?

  14. DickF

    Good analysis by Mark Jacobsen as far as it goes. It is a good example of how unintended consequences of foolish, useless, and ineffective government regulations (thank you Robert Schwartz) are destroying domestic industries.
    I know congress is very concerned with keeping tax revenue neutral, at least when we talk of cutting taxes. Based on this I do have one question. What taxes are going to be cut to PAY for the increased tax on gasoline?

  15. Don

    How about one set of CAFE standards for vehicles up to 10,000 lbs and lower the Federal Excise Tax of trucks’ threshold to 10,001 lbs (presently it is at 32,000). That gives a boost to economy (even if the standard was the same as the present passenger car standard) and provides a disincentive to go higher in weight to evade the standard. Also it would discourage the use of “1 ton” pickups as personal vehicles. On the other hand, if the big 2.5 go the way of the Europeans and just pay the tax on the new Suburban HD we recoup some of the external cost imposed by that decision.
    Obviously to get from point “a” to point “b” is going to require a bailout of the big 2.5, but I think that is more a matter of changing the timing rather than the reality. The Democrats won control of the Congress in large part due to the Rust Belt (Ohio, Inidana) swinging their way last time and I just don’t see them letting the pain get out of hand (which it will eventually CAFE increase or not).

  16. spencer

    How did the plunge in the real price of gas in the 1980s impact the results you got?
    CAFE standards were passed on the assumption that real gas prices would remain high.
    Once this assumption was violated the mix of vehicles demanded and produced changed dramatically. If gas prices had remained high the US would not have shifted to SUV and other large vehicles the way they did.
    So were the results you found due to the combination of CAFE and low gas prices
    and/or would the results have been very
    different if gas prices had remained high?
    CAFE is based on the premise that it is a less
    expensive approach to improving gas efficiency
    then high gas prices alone. But since we never ran the experiment to test this premise we do not the results we would have obtained.

  17. DickF

    Why not do both. Set CAFE standards at 100mpg and raise the federal gas tax to $10 per gallon. Oh is that unreasonable? Why? Has there ever been a study on what CAFE standards are reasonable or are they just pulled out of the air? Has there ever been a study done on a federal gas tax to see how much additional revenue we would receive with a $10 per gallon tax. With static analysis it should be a windfall.

  18. M1EK

    Here’a a vote for raising both, slowly. There’s also little evidence that the gas tax is as regressive as suburban Republicans like to claim, when disingenuously exhibiting a heretofore unseen concern for the economic welfare of the poor.
    Poor people don’t drive SUVs; and the vehicles they DO drive don’t get driven as much as you think. They also ride the bus, carpool, and walk.
    The first ‘victim’ of higher fuel prices is Patio Man driving his Expedition 200 miles a day to his exurban home; not the poor guy driving a 10-year-old Mazda.

  19. Adam Ricketson

    It’s a real dichotomy: gas tax vs CAFE.
    It’s real because we have limited resources. Even if you say “let’s do both”, the fact is that we could probably just do “twice as much of one” and accomplish the same results at a lower price.
    Unless there’s some reason to think that we can get “the best of both worlds” by enacting both policies, then there really is a dichotomy.

  20. Freedom Democrats

    The impact of fuel efficiency standards

    The corporate average fuel efficiency (CAFE) standards are often denigrated as being less efficient than a gasoline tax at increasing the overall efficiency of fuel use (and reducing greenhouse gas emissions). Part of this inefficiency is that CAFE amount

  21. Kevin

    Robert Schwartz,
    Not to be rude, but a couple things:
    first of all, the total consumption equation is Total Miles/ MPG = total consumption. Plug some numbers into your equation and it will make sense. Secondly, I think we are overlooking that (generally speaking) the wealthier people by the SUVs, and so there might be a higher rate of turnover in this group. So maybe the turns needed to get CAFE significantly in effect would come quicker.
    I strongly disagree with the added burden on Americna auto producers in such a financially dificult time for them. Undoubtedly, they will not be able to pass on all of their added cost to consumers. I guess if we are trying to destroy the American auto industry then… go CAFE!
    At least a tax on gas would be less hurtful to the Big 3, and could still get the same effect (theoretically). The problem is not the car companies. The type of car that sells is the type that gets made, and until the cost becomes prohibitive enough for consumers, the car companies will continue making the high-priced SUVs to satisfy them.

  22. bakho

    Why object to CAFE standards for cars, when we have energy efficiency standards for air conditioners, water heaters, refrigerators, washing machines, dryers and even toilets. If energy efficiency standards are so worthless why do we have so many? Why does my electric coop promote energy efficiency as a way to hold down costs?
    If CAFE standards are so ineffective, why did the average fleet fuel efficiency in the US increase from under 12 mpg to over 20 mpg after the first CAFE standards in the 1970s? If pricing is so effective, why is the fleet fuel efficiency not increasing even though fuel has gone up from around a dollar per gallon to the $2-3 dollar range?
    You people don’t seem to be familiar with the literature on energy efficiency standards and why they work.

  23. bakho

    Why start the graph at 1983? Isn’t this misleading? Don’t most of the efficiency gains from CAFE standards come prior to 1983? How is that supposed to be a fair analysis of the CAFE effect if the years with the most gains are not included??????
    What is wrong with you people at Stanford?

  24. bakho

    “CAFE standards are based on the premise that auto manufacturers and consumers are making inappropriate decisions about the kind of vehicles that get produced. The clearest way to motivate this from an economic perspective would be to suggest that there are costs to using gasoline beyond those paid directly by consumers, such as a geopolitical cost when the U.S. relies on imported oil or possible consequences for the world climate.”
    This is both wrong and stupid. Consumers are very good at comparing purchase price. Consumers are very bad at understanding operating costs. Consumers prefer lower sticker which they can easily compare price to lower lifetime operating costs which are difficult or impossible to calculate. Future fuel prices are not predictable and many buyers are over optimistic that prices (and operating costs) will be lower than anticipated. Companies can and do compete by undercutting purchase price. Absent standards, energy efficiency goes out the window in a mad race to the bottom.
    As for raising fuel prices- It might work if fuel were the only cost of transportation. However, vehicle replacement costs also factor into the equation. Consumers do not say, oh, my car is costing too much to operate, I will trade my old car in for next to nothing and pay $30K for a new efficient one. Consumers say, my transportation costs are going up. I can save on transportation costs overall by hanging onto my current vehicle for an additional year or so. Consumers balance their transportation budget, they don’t respond to fuel pricing. Consumers have a certain number of trips they have to make. They may travel less miles.
    The knock against the CAFE standards (better mileage = more miles driven) can be fixed by targeting fuel prices in addition to CAFE standards. Gas prices would have to hit about $10 per gallon to force people to buy efficienct cars. The same effect can be had by increasing CAFE standards and targeting gas prices at a high enough level to maintain support for CAFE standards and minimizing driving. This strategy has fewer dislocations than just raising gas prices high enough to force conservation.

  25. JDH

    Bakho, Although it is true that CAFE was adopted in 1975, the levels were phased in, rising quickly up until 1983, since which they have been fairly stable. In the early phases, realized fuel efficiencies were well above the required minimums. I am guessing that is why Jacobsen began his graph in 1983.

    In any case, I believe that you may be missing the point of the graph. What the graph shows is that companies like BMW are typically in violation of the standard, companies like Toyota are typically well within the standard, and companies like Ford follow the standard.

    As for your reference to the history, you might want to examine the role of gasoline prices. I notice that Wikipedia has a graph of what the averages were doing prior to 1983, and a discussion you might find interesting.

  26. Joseph

    I dunno, James. I look at that Wikipedia graph and I see fuel economy going up both with gas prices and CAFE standards. Hard to tell which is the most important factor. Then as the bottom drops out of prices, fuel economy is propped up by the floor of CAFE standards. It suggests to me that if CAFE standards had just kept increasing for the last 20 years instead of flatlining we would be enjoying much more fuel efficient cars today. And of course if the SUV exemption had be corrected maybe we would sitting in a pretty nice place right now instead of killing thousands in Iraq.
    Regarding BMW’s violations, it simply means the penalties are trivial to their customers. $50.50 per mile per gallon isn’t going to deter someone buying a $60,000 car. Since it hasn’t been adjusted for inflation in all these years, I’m surprised that all manufacturers aren’t just ignoring CAFE.

  27. bakho

    Yes. The auto companies had to start improving their fleet efficiency straight away in order to meet the targets when they phased in.
    OK. So the graph plots the behavior of auto companies. However, the graph does NOT plot the effect of CAFE standards because it leaves out the most important years. The effect of CAFE standards was that by 1983 everyone was making 20 mpg+ cars. In 1972, the fleet average was around 12 mpg. This is a huge increase, almost all due to CAFE. Recent increases in fuel prices have failed miserably to substantially increase fleet fuel efficiency in US cars. This is because the price needed to drive fuel efficiency is well above $5 per gallon and that is not politically tenable.
    This is the way the car market works. If you add $5000 to the price of your car and it reduces operating costs by $5000 over 5 years, you will get beat by the competitor that sells the car for less. Fuel economy is not very high on the list of most car purchasers.
    The point of the graph is just plain stupid. Before CAFE, US cars got about 12 mpg. Without the CAFE standards, cars would still be getting not much better mileage. There is little incentive from buyers and pricing to adopt expensive fuel efficient technology. Yes you can make incentives with high enough fuel prices, but how high would that fuel price be and how realistic is it? In terms of economics, would consumers be better off with CAFE standards and lower fuel prices or no CAFE and higher fuel prices. Consumers are much much better off with the efficiency standards. The power companies know that and that is why they support efficiency standards.
    At $2/gal a 20 mpg vehicle takes 5000 gallons to go 100,000 miles. 40 mpg would save 2500 gallons or $5000 over the car lifetime. To get savings up to the purchase price of a $20,000 new car, gas would have to be priced at $8 per gallon. This pricing is a political non-starter a most people are totally dependent on cars for transportation and have to drive to work or to shop. Politicians that supported $4 gas would be voted out of office.
    Analysis that FAILS to include TOTAL transportation costs and FAILS to consider the costs of replacing current vehicles with new vehicles does NOT reflect the REALITY of the car market. Of course pricing at some level can drive fuel efficiency. Why don’t you tell people that that price is well over $5 per gallon. They will then reply that you are NUTS to think that using pricing instead of standards to drive efficiency is a good idea.
    This is bad modeling. Plus, the idea that we need either CAFE or gas tax does not optimize policy options. Why ONLY consider high gas prices and no standards or low gas prices and standards? How about CAFE standards plus moderate gas pricing?

  28. JDH

    Bakho, first you say the graph is “misleading,” and now you say it is “stupid.” I still suggest that you have missed its point. So I repeat that point now for the third time: the graph shows that BMW consistently violates the standards, and Toyota consistently does better.

  29. DickF

    CAFE standards are not simply reporting the efficiency of a product and allowing the consumer to make a decision like other energy standards on appliances. CAFE standards are mandates on manufacturers to produce at an arbitrary standard whether the consumer wants it or not. You guys are mixing apples and oranges.
    I think reporting energy efficiency of autos is wise, good marketing, and great for the free market. I think government mandate of what is to be produced and what consumers will buy reeks of Fascism. Mussolini would be proud.

  30. bakho

    So the graph is both stupid AND misleading?
    Guess what DickF. You can’t buy a toilet that doesn’t meet efficiency standards unless you go to the black market. You can’t buy a water heater that does not meet standards. You can’t buy a child safety seat that does not meet standards. You can’t buy tires for your gas guzzler that don’t meet standards. Can you think of a reason for this?
    There are system efficiencies that sometimes cannot be achieved because of structural barriers. Transportation has so many structural barriers and so many subsidies that very little of the sector is anything close to resembling a free market. There is no free market in auto sales. Not even close.

  31. JDH

    Bakho, carrying on a conversation with you is certainly an interesting experience. Let me try once again, if I may, in the form of a question for you. Just to try to make things as clear as possible, I’ll offer the question in the form of a multiple choice.

    The claim that BMW consistently violates the CAFE standards and Toyota consistently does better is (circle the correct answer)

    (a)misleading

    (b)stupid

    (c)bogus

    (d)true

  32. Hal

    The problem with CAFE standards as I understand them is that they do not penalize specific cars as being low mileage. Rather, they rate the manufacturers on the overall mileage of their whole fleet of cars being sold. If a manufacturer has some high mileage and some low mileage cars, and consumers buy the low mileage ones, the manufacturer gets penalized. This sends only a very indirect signal to consumers.
    How about if we combine the idea of a gas tax, where lower mileage cars have to pay more, with the “seller pays” concept which is necessary to make it politically acceptable? Instead of rating manufacturers on the basis of their whole fleet, simply put a tax on cars based on their mpg, said tax to be paid by the manufacturers. Low mileage cars would be taxed heavily, making high mileage cars relatively cheap.
    In this way consumers would immediately see the effects of buying a low mileage car up front. As noted above, people are much better at judging initial costs than operating costs. The tax rate could be changed from year to year based on current conditions, without the multi year lead time seemingly necessary for changes in CAFE standards.

  33. bakho

    Breakout of motor fuel is here:
    http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5_32.pdf
    Petroleum data is here:
    http://www.eia.doe.gov/emeu/aer/petro.html
    CAFE data is here:
    http://www.nhtsa.dot.gov/cars/rules/CAFE/NewPassengerCarFleet.htm
    Notice that almost all the efficiency gains occur between implementation of CAFE and 1983. Note that there is no increase in fleet fuel efficiency in the 2000s in spite of high gas prices. Note the lack of efficiency improvement in the absence of CAFE standards.
    CAFE standards work. Past evidence shows that they work. I don’t think that can be argued. I think you ought to be fair about economic analysis especially when you are making policy recommendations. More importantly, CAFE is an important policy tool that should not be rejected for non-economic and ideological reasons which seems to be the case here.
    Recommendations that fuel pricing should be used to improve fleet efficiency need to be accompanied by numbers that say what price level is necessary to drive car buyers to more efficient vehicles. If $3 gas will drive fuel efficient cars then the policy MIGHT (but probably not in the current political climate) stand a chance. IF $5 or $8 or $10 gas is needed (very likely to be in the $8 range) to get people to switch to fuel efficient vehicles, is that a policy that would get serious consideration? What dislocations would be caused by forcing gas prices high enough to make a difference? and can the same results be achieved by using CAFE without the dislocations (the reasoning behind efficiency standards for appliances).

  34. Joseph

    James, regarding Jacobsen’s graph you say “His simulations suggest that one consequence of tightening CAFE standards is an increase in the number of imported cars and a decrease in the fuel efficiency of those cars.”
    But he doesn’t conclude that the efficiency of the overall fleet decreases, only that there is some shift in inefficiency from the U.S. producers column to the import column. So I guess this only matters if you are more concerned about protecting U.S. manufacturers than reducing oil imports or protecting the environment You could just as well argue that this helps U.S. producers meet higher fleet standards by reducing their percentage of gas guzzlers. And I also assume that such a shift would only be temporary and a one-time effect until U.S. manufacturers could respond to the increased standards with new models.
    The fact that BMW ignores the standards is of little consequence because their total contribution to the fleet is relatively small. The way to fix this would be to raise the penalties sufficiently to discourage their customers.

  35. JDH

    Joseph, yes indeed, as I noted in the original post, the net consequence of a 1 mpg tightening, according to Jacobsen, is a 2.5% increase in the efficiency averaged across all new cars sold. But I disagree with your statement that the fact that the U.S. would import more cars, and the imported cars would be less efficient than they currently are, only makes a difference for the U.S. manufacturers. It also means that you get less total benefit in terms of the amount by which total average fuel efficiency goes up. That is one reason why Jacobsen concludes that CAFE is a far costlier way to get to a given target for average fuel efficiency.

    I also disagree with your assessment that this is strictly a short-run issue for the U.S. car manufacturers. Jacobsen’s model is one in which each producer has a particular brand niche, based on differences in the kinds of cars that different customers want. In that view, the advantage of domestic producers, such as it is, is based on those buyers who want those kind of cars.

  36. Jack

    CAFE standards are currently a smaller burden for GM than they are for Toyota or BMW. BMW’s extra burden is manifest and Toyota must have one or there is no burden on the US makers. To then argue that it mustn’t be changed because the Detroit makers would do worse than the Atlanta makers may make political sense but is unusual economics.
    Why not just change the standards as suggested by environmental policy goals and give the Detroit crew a subsidy to compensate? As bakho suggests, the policy space implicit in the above analysis is restrictive in a way that obscures what is in fact being suggested, namely not to change anything to avoid removing an implicit subsidy.
    Surely the efficient thing to do would be to make the CAFE restrictions tradeable so Toyota could sell permits to BMW.

  37. Buzzcut

    What should I do with my car? On your list of uncertainties when you take up residence in the cliffs of New York City, that question looms. For sure, you wont be driving to work. By 1981, I had already been a Manhattan dweller for 14 years when a friend, new to the city, put the car question to me. She had a VW Rabbit diesel, the much-sought-after mpg hero of those days. Remember, we were in our eighth year of off-and-on gas lines and spiking prices. Diesel Rabbits were the future, if you were an optimist.
    I knew what everyone knew in 1981, that oil was running out and prices could only go up. Hang on to the diesel, I advised in the future, everyone will drive thrifty cars.
    Hey, how was I to know that crude prices were peaking and we would move into two decades of cheap gas?
    Now were in another one of those gloom times. You can tell that everyone expects high gas prices forever when a pusillanimous Congress finally decides its safe to raise the Corporate Average Fuel Economy standards for pickups, vans, and SUVs, as it did this past spring.
    Making a federal case out of bad gas mileage is an insulting idea. Every car owner in the country knew two-and-a-half years ago that gas bills were getting painful. So they did what they always do they sucked it up and cut back spending where they could to cover the gas pains. Exactly zero-point-zero Americans expected relief from Congress.
    All the same, riding to the rescue as fast as it can, the government has written a new CAFE rule that will kick in with a 0.3-mpg improvement in the average mileage of light trucks for the 2008 model year. Isnt democracy wonderful?
    This is a daffy gesture because customers are way ahead of CAFE when they care about it at all, which they mostly havent done for the two decades that gas was cheap. In those times they bought guzzlers for a perfectly rational reason; they got more mobile for their money. And when gas is dear, as it is now, they trade for a mix of cars and trucks far more frugal than CAFE demands.
    With gasoline prices near $3 a gallon, sales of big pickups have slowed to a crawl, just as big SUVs slumped earlier this year, says trade journal Automotive News. In January, the just-introduced 2007 Chevrolet Tahoe sold at an average of $42,191 after only seven days on the dealer lot. By July, the transaction price had dropped to $37,667 after an average of 62 days in stock. Year-over-year sales of high-end SUVs through July are down 20.6 percent for the entire industry.
    No surprise here. CAFE went into effect for the 1978 model year, allowing it to serve as a benchmark for its own silliness during Energy Crisis II. We can see this in the difference between the minimum mandated mileage and what the customers actually bought. In 1978, customers bought cars averaging 1.9 mpg over CAFE. That dropped to 1.3 mpg in 1979, then rose to 4.3 and 3.9 mpg for 1980 and 1981, the worst years of Energy Crisis II.
    Energy Crisis II gave us a helluva scare. General Motors reacted with a drastic plan for the Cadillac Eldorado, Oldsmobile Toronado, Buick Riviera: They would be downsized three-cylinder coupes. Gas prices in todays dollars peaked at $2.75 a gallon in March 1981 and then eased over the next five years to about $1.50 by 1986, a level that continued until a further softening in 1998 to about $1.20 for several glorious months. The trend has been up ever since, reaching $3.15 in September last year.
    New-car designs over those years tracked the price of gas. Fuel economy, still important in 1983, inspired Chryslers revolutionary minivan. But GM was watching prices drop and revised its plan for the Eldo-Toro-Riv coupe: It would be widened in time for its 1986 intro to accept V engines. By 1990, gas was just an incidental expense when Ford kicked off the SUV era with its hugely successful Explorer.
    Motorists are the first to know when gas prices turn upward, and they respond. The average passenger-car mpg increment over CAFE was just 1 mpg in 2000, but it climbed along with gas prices to 2.5 mpg in 2005.
    Its easy to be a moralist and say Americans should use less gas. But its quite another thing for the government to pass a law to that effect. Laws have consequences, often unintended. In the 80s, passenger-car mileage standards resulted in downsizing and the elimination of Americas traditional big family wagon. So car buyers made an end run around the law by switching to SUVs. Unquestionably, CAFE put SUVs in Americas driveways.
    Now we have a new light-truck CAFE, a bewilderingly complex stack of iffy suppositions meant to fix problems with the old rule and stroke a few political constituencies at the same time. Gone are the old weight classes; too easy, Congress thinks, for Escalades and Navigators to pork up a few pounds and graduate to a higher weight class with a lower mpg requirement.
    Instead, the new rule bases mileage on the vehicles footprint, the product of track width and wheelbase. Big-foot vehicles are allowed to have lower mileage according to some official government graph with footprint on one axis and mpg on the other. The National Highway Traffic Safety Administration, which made the rule, has been congratulating itself because this rule supposedly prevents automakers from downsizing their way to better mileage. Huh? Well, downsizing might hurt safety. Instead, the government is trying to force automakers to add technology.
    The technology to meet the new rule will cost $250 per vehicle, NHTSA says, and take four years of gas saving to pay back. Even if you believe these numbers would the government lie to you? they show the shaky logic behind CAFE. Its not that truckmakers resist the idea of spending $250 extra to make a truck youll buy $250 is trivial compared with the multi-thousand-dollar incentives already in place. No, their only fear is putting $250 extra into a truck you wont buy. So the point of this rule, really, is to take away the chance that youll go to a dealership and choose a guzzler just because you could buy it for $250 less.
    Gas mileage will get better because youll insist on it. What this CAFE rule will really force is big footprints. Notice BMWs and Chrysler 300s, their tracks pushed wide and their front wheels shoved forward to the headlights? If that look wasnt coming to SUVs before, it sure is now

  38. Hal

    Two reasons have been advanced for wanting to see higher mileage: A, we’re running out of oil soon; and B, global warming.
    In case of A, if Peak Oil is really a short-term issue and this is well enough established to be making policy on that basis, markets would know about it and send the price of oil much higher in anticipation of near-term shortages, as JDH discussed in detail back in the beginning of the blog. Since we’re not seeing that, it means that PO is still just a theory and not well enough founded to be imposing these kinds of changes. In short, this is a problem which will fix itself because once shortages are clearly enough seen to justify regulation, that will cause prices to skyrocket and make regulation unnecessary.
    For B, global warming, most studies (with the exception of the Stern report, which has been widely criticized) find that discounted harm from CO2 emissions should be priced substantially less than $100/ton of Carbon. But let’s use that higher figure as a benchmark since it is widely quoted. This works out to a tax of less than 30 cents a gallon, quite a bit less than even Americans are paying already in gas taxes, let alone Europeans. In short Westerners are already more than paying for a “carbon tax” in their gas prices. Sure, we could increase them another 30 cents but let’s be realistic and understand that will make almost no change in driving behavior. With all the gyrations in price we’ve seen over the past couple of years, 30 cents is down in the noise.
    So, if even conservative estimates of CO2 damage costs lead to tax levels that are so low as to make minimal change in driver behavior, what does that mean? It means that the damage from CO2 is so slight that few changes today are justified. It simply doesn’t make economic sense to impose stringent costs on the world today to deal with a threat that is so far out into the inherently nebulous future. The same reasoning applies to CAFE standards – it doesn’t make sense to increase them drastically to deal with global warming. The costs are real and now, while the rewards are hypothetical, far-off, and may well turn out to be imaginary.

  39. Don

    Fact: Fuel economy of vehicles (domestic and imported) rose substantially throughout the late ’70′s and early ’80′s.
    Hypothesis 1: CAFE requirements forced fuel efficiency standards on intransigent automakers.
    Hypothesis 2: Consumers and automakers saw the gasoline market instability of the mid ’70′s as a sign of things to come, and started to increase the importance of fuel efficiency in the set of tradeoffs that is vehicle design.
    Any thoughts on clever ways to distinguish empirically which of these is correct?

  40. Bruce Hall

    We have to presume that Hal’s points are a reasonable explanation for President Bush’s support of increasing CAFE. But it is more likely that severing the ties to politically antagonistic oil sources is lurking under the public statements of clean air, global warming, and the decline of oil reserves.
    For example, if clean air and global warming were really being pushing for CAFE, then the government would not be pushing ethanol as an alternative. Ethanol has not been shown to reduce CO2 overall (you have to include the CO2 expended to produce the crops and, in many instances, the clearing of forested lands to open up more cropland and the source of significant increases in CO2 and aerosols in Asia… plus burning ethanol produces “smog”). Secondly, ethanol is only 75% as energy dense as gasoline which means a drop in miles per gallon if it is used in a mix of 85% ethanol/15% gasoline (E85). Naturally, that would not be factored into the CAFE standards, but see the conflict?
    Increasing CAFE is a great political ploy to demonstrate “commitment to the environment”, but probably not a great economic or environmental tool. The cost of increasing fuel efficiency is not just the development of technology, but the delivery of vehicles that have trade-offs in other areas such as safety. Insurance companies are quick to point out that the most fuel efficient vehicles are also the least safe.
    The simplest way to change purchase decisions and affect CAFE is to increase the cost of gasoline. That will force all lower income people to not drive, middle income people to purchase the smallest possible vehicle with which they can get by, and upper income people (over $100k per year) such as Arnold S. to continue driving Hummers. Since the upper income group constitute only 1% of the total population, the CAFE…global warming… clean air…energy independence goals can be met. Too bad about those people with 3 or more kids. Any more than 2 kids will have to stay home or be strapped to the roof.
    Choice is bad. Rules are good.
    Maybe we should rethink those 1960s buses that used overhead electric power lines. We might have to burn some more coal to generate the electricity, but it would reduce gasoline consumption. Nah, I can’t see congressmen turning in their limos for a bus ride.

  41. bakho

    Buzzcut, Don’t assume that gas mileage of purchased vehicles increases primarily because people who drive gas hogs switch to more efficient vehicles. Some do. However, people hang onto their cars longer. Since the pinch hits hardest on those who drive gas guzzlers, those drivers hang onto their cars longer. This drops the sales of gas guzzlers. So a part of the rise in mpg for purchased cars is the drop off in sales of low mileage vehicles. Note that Ford and GM are both cutting production by about 30%. Toyota is ramping up production. People compensate for fuel price increases by altering the entire transportation budget, including vehicle trade in rates..
    Detroit always gets hit with a slump in car sales when price of fuel goes up.

  42. Anonymous

    Don, simple to see which hypothesis is correct. Look at markets without CAFE.
    About gas going from $1 to $3 a gallon. Price increase wasn’t that large because it is not the price of a good that is important in a purchasing decision but the expected price. And the expected price of gas wasn’t $1 but a lot higher in 1999.

  43. Buzzcut

    >>Buzzcut, Don’t assume that gas mileage of purchased vehicles increases primarily because people who drive gas hogs switch to more efficient vehicles.
    Bakho, the fact is that, when you look at fleet average mileages vs. the CAFE standard, you can see a rather tight correlation between the mileage of the new vehicles being bought and the price of gasoline. As gas prices increased throughout the new millenium, the average mileage of the new vehicles being bought also increased.
    You can get the same effect of CAFE standards by increasing the cost of gasoline through a tax or tarriff on imported oil. So why would you go with a complicated regulation rather than a straightforward tax? Not to mention that you could use that tax revenue to lower or eliminate other taxes like the income tax, which might make the gas tax more tenable.
    CAFE standards are of another time, when command and control were the government phillosophy of the day. Times are different, and CAFE doesn’t make sense. A gas tax makes sense.

  44. bakho

    Buzzcut: Oil pricing is controlled by a cartel. Command and control of oil prices is the philosophy of today. It is difficult to use tax to control fuel prices. You complain about efficiency standards being command and control, but the automobile is one of the most regulated products in all other areas (safety, emissions, etc). Automobiles impose huge external costs, which is the reason for the regulation. After all, we don’t have a tax on unsafe cars, we have safety standards like seat belts and air bags.
    Yes, you can point to relatively minor changes in mpg due to fluctuations in fuel prices. However, to get adoption of major technological changes, either a huge tax ($4 per gallon or higher) is needed or the an efficiency minimum standard must be implemented. This is because of economy of scale associated with new technology. Fuel efficiency has a perverse incentive. As more people buy fuel efficient vehicles, the demand for fuel drops and the price goes down.
    There is a large literature surrounding this problem as applied to appliances and electricity demand. By mandating efficiency, everyone pays more up front for the appliance, but the operating costs are kept low and everyone makes back their investment. Without standards, people who pay extra for more efficient appliances end up subsidizing the parasites who buy energy guzzlers.
    I agree that CAFE standards are klunky and poorly written. This is in part because of loopholes written to favor certain American companies. This does not mean that auto fuel efficiency standards cannot be written in a way that makes sense.

  45. Anonymous

    $4 per gallon is not a huge tax
    “As more people buy fuel efficient vehicles, the demand for fuel drops and the price goes down.”
    How can that be if the oil price is controlled by a cartel?
    A more serious answer. This maybe true for the US but it isn’t for smaller countries like the UK because the gas Britains use is insignificant with respect to the global market. It isn’t even true for a gastax of $4 because the gasprice is than mostly tax and distribution costs

  46. Buzzcut

    Bahko, I’m an automotive engineer, so keep in mind that I might know more about this than you do.
    Automobile efficiency has been increasing steadily at about 1% per year. Automakers have been using this efficiency to increase horsepower while at the same time maintaining mileage. They do this because horsepower sells. People like driving fast cars.
    They’ve also used the efficiency to allow them to build heavier cars. Heavier cars are safer because of Newton’s second law.
    Now, this tells us two things:
    1) the automakers could cut back on horsepower and increase mileage.
    2) Consumers won’t buy lower horsepower/ higher mileage cars at current gas prices.
    But if gas prices increase, the demand for fuel efficiency will be there, and the automakers will respond by using efficiency gains to increase mileage, not horsepower.
    Moving forward, there’s a lot of potential technology to keep the efficiency gains coming. Both variable valve timing and direct injection are not yet widespread. Turbocharing is also becoming more sophisticated.
    Now, you may say that believable increases in the gasoline tax aren’t going to give you the increase in mileage that you’re looking for. I grant you that. A $4 a gallon gas tax is not realistic. But neither is jacking up the CAFE standard to 40 mpg (or whatever you think it should be), nor is making SUVs and minivans hit the same CAFE standard as cars.
    I think a gradual increase in the gas tax, say 5 cents per gallon per year, would give consumers a nice incentive to shop for more fuel efficient cars, which in turn will force the automakers to use efficiency gains to increase mileage, not horsepower.
    And if you still don’t believe that I’m right and you’re wrong, I invite you to examine what went wrong with the Ford Freestle and Ford Five Hundred vehicles. These vehicles were flops in the market because Ford didn’t give them enough horsepower. They mistakenly thought that better than average mileage would sell better than the higher horsepower that competitors have. Ford even included a CVT transmission to further increase mileage, to no avail.
    Ford is making mid-model corrections to the vehicles, increasing horsepower to the average for the class, and deleting the CVT transmission. Mileage will suffer, but the vehicles will sell better (they’re also changing the name to Taurus, and slightly restyling the vehicles).

  47. Anonymous

    >>Oil pricing is controlled by a cartel
    All the more reason to tax oil or impose a tarrif (my preference). Then the government captures the excess profits, not the cartel.
    You should look at some of Mankiw’s writings on gas taxes and his Pigou Club. He is very persuasive that a tarrif on imported oil will transfer profits from the Saudis to the federal treasury.

  48. bakho

    People are all over the map with this gas tax idea. One poster says $4 per gallon is not a big tax and another suggests 5 cents per gallon per year.
    Gas prices vary by much more than 5 cents per gallon per week. You could add 5 cents per gallon per year and no one would notice for a decade or longer. I think the $4 per gallon figure is what it would take to get people to buy more efficient vehicles. But $4 per gallon tax is not going to happen anytime soon.
    Bill Clinton increased gas tax by 4 cents a gallon and the GOP and the public raised holy hell. Gas prices were generally going down and they stopped complaining once gas prices dropped under $1 per gallon. I agree that we should raise taxes on gasoline. It would be a lot smarter than mortgaging our toll road (I live in IN) to get revenue to build roads. However, majority opinion is against raising the cost of gasoline.
    Raising CAFE standards is the more direct incentive to the auto companies. Raising gas taxes is more indirect and may or may not result in gas prices high enough to drive demand for fuel efficient vehicles.
    Of course the Big Oil companies are against CAFE standards because refinery utilization dropped below 70% during the 1980s.

  49. Anonymous

    $4 per gallon is of the order of the fuelduty in the UK. A fueltax that increases 5 cent a year wouldn’t lead to an increase in fuelprices after inflation and as such will not lead to more efficient cars.
    Car companies don’t buy car. Consumers do. And raising gas taxes is the more direct incentive for them

  50. Valuethinker

    Hal
    I agree with you that a gasoline tax is the wrong instrument with which to attack global warming. The actual argument about CAFE/ gasoline taxes is one about national security, in a world where the US imports an increasing fraction of its gasoline and oil from politically unstable regions. (I’ll ignore Peak Oil for this post).
    Transport fuel consumption is actually a fairly inelastic source of carbon emission– there aren’t easy alternatives.
    However ‘lock in’ suggests you don’t want too many high polluting cars around. Because the economic cost of scrapping them early in their lives is high. Better that they were never built. The same applies (even more) to conventional coal fired power stations which last 50 years, not 14.
    Your estimate of the likely costs of abating global warming, and the likely costs of permitting it to continue, is quite likely to be wrong.
    We know a lot about the costs of a world 2 degrees centigrade warmer than it is now. They are not small. That temperature is ‘in the bank’ in terms of our current CO2 emissions and likely trajectory. We will live in that world although whether in 2050 or 2100 is not yet clear.
    We know very little about the costs of a world 5 degrees centigrade warmer. The damage is likely to be exponentially larger than the damage of a 2 degree C warmer world. The impact of, say, having to resettle a couple of billion people away from the equatorial regions of the planet could be very big. Ditto the cost of abandoning Florida to the hurricanes. Or of agriculture ceasing west of the Mississippi due to water shortages.
    Australia is now in the worst drought ever recorded, to the point where they are building desalination plants, looking at drinking recycled sewage water, and the South Australia wine and fruits industry might just cease to exist. These are small, and early, signs of what the world might be like, and each of them has a $billions price tag. This on a global temperature rise to date of 0.6 degrees C.
    The danger of global warming is that 5 degree plus world.
    By contrast, a $100/tonne carbon tax would be about 1.7% of world GDP. *and* of course that is not all deadweight loss– new industries and activities are created as a result of that tax, and the tax revenues can be used to lower other taxes (the ‘double dividend’).
    The same is true for a traded carbon permit scheme.

  51. Anonymous

    >>Australia is now in the worst drought ever recorded, to the point where they are building desalination plants, looking at drinking recycled sewage water, and the South Australia wine and fruits industry might just cease to exist. These are small, and early, signs of what the world might be like, and each of them has a $billions price tag. This on a global temperature rise to date of 0.6 degrees C.
    You have no idea that any of this is due to global warming, nor that, if it is global warming, it is due to human CO2 (as opposed to, say, increased solar output).
    And what’s so bad about desalination and “recycled wastewater”? Reverse osmosis technology is advancing rapidly. Australia could become an irrigated new Eden should the technology advance far enough.
    I’m not against carbon taxes and carbon trading per se (especially if, as you suggest, other taxes are lowered in return), but let’s be realistic. More is unknown than is known, and we need to respect the law of unintended consequences.
    I think that your contention that we know what a 2C warmer world will be like is laughable. Adaptation is the answer, and the timeframe is long enough that natural human migration will most likely preclude the need to move billions of people at the drop of a hat.
    But the socialists out there don’t want to hear that.

  52. DickF

    bakho wrote:
    Guess what DickF. You can’t buy a toilet that doesn’t meet efficiency standards unless you go to the black market. You can’t buy a water heater that does not meet standards. You can’t buy a child safety seat that does not meet standards. You can’t buy tires for your gas guzzler that don’t meet standards. Can you think of a reason for this?
    Sure, safety, except for the toilet situation which was passed in large part by Al Gore to save water and the result has been that toilets have to be flushed three and four times.
    bakho, think deeper. Can you make a frog not bump its butt when it hops just by passing a law?

  53. Hal

    Valuethinker, that’s a good point that another justification for reducing oil consumption is national security. However, I am skeptical that even a substantial reduction like 10% in our oil consumption would significantly change the American national security posture. In particular, I’d like to see some attempt to quantify how much it would save in order to know how high to set the tax.
    As far as climate change, I don’t see how a $100/tC tax would have much impact on consumption seeing as how that corresponds to under 30 cents a gallon of gasoline, and most Western countries are already paying more than that in taxes. So as far as I’m concerned, we gasoline users are already doing our share to pay for global warming. You might say, oh, gas taxes go for roads, but that just points up the immense difficulty of accounting for all externalities, positive and negative. 30 cents is way down in the noise of such calculations.
    BTW somebody above mentioned Mankiw’s Pigou club. Take a look at his “manifesto”:
    http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html
    What bogus reasoning! Not one word of justification for his tax levels as correctly compensating for externalities. And many of his arguments aren’t even remotely Pigouvian in nature, like fixing the budget deficit. If I hadn’t always heard that Mankiw was a smart guy this essay would certainly have called it into question.

  54. Joseph Somsel

    As to “the toxic anti-tax atmosphere generated by the Republicans,” I can only reply that the opposition to taxes is older than the Republic and certainly older than the Republican Party, founded in the 1850′s to oppose slavery.
    Remember the Boston Tea Party? How about “no taxation without representation.”
    Valuethinker again shows why he should be called “Valued Thinker.” This time because I largely agree with him.
    One shortcoming of the study is that the effects of CAFE and the effects of tightened air pollution standards are coincident. The drive to reduce emissions necessitated fuel injection, for example, which increased efficiency. Catalytic converters demanded lower unburned hydrocarbons, ie unburnt gasoline.
    My fundamental problem is that it seems many posters are searching for a way to control me and my fellow citizens and to remove my decisionmaking power.
    My simpliest and most heartfelt response is “Buzz off.”
    signed,
    “Patio Man,” proud driver of an official “gas guzzler,” a 350 hp GTO.

  55. Buzzcut

    >>”Patio Man,” proud driver of an official “gas guzzler,” a 350 hp GTO.
    But only if it was the automatic.
    You don’t drive an automatic GTO, do you? Schah, those are for grannies!
    Just kidding, I’d love to have a GTO, but the 400hp version.

  56. Anonymous

    A fuel tax does not increase national security because you use less oil. It does it by accustomize the economy to a high peacetime gasprice so one can outbid the rest of the world on the international black market

  57. Valuethinker

    Hal
    Agree if greenhouse gases are the main target, then a gas tax doesn’t stand up.
    The reason being the marginal cost of abatement is far lower in other areas of the economy. Saving a tonne of carbon emission from rainforest deforestation could cost as little as $10,
    abating the emissions of an entire 1000MW coal fired power plant could cost as little as $100/tonne– certainly at that price, nuclear and wind power are both significant and competitive alternatives.
    By international treaty, aviation fuel is not taxed. Taxing aviation fuel at the equivalent of $100/tonne (adding about $200/ticket to the London-to-Sydney return flight) is going to abate more CO2 than the comparable impact on gasoline.
    I would argue the costs of driving are more diffuse in the economy. Basically they are the lost utility due to structuring an entire society around roads and driving, rather than bicycles, walking and public transport. And of course the costs of congestion, and the costs of accidents.
    But by and large, the price elasticity of demand for motor fuel is empirically quite inelastic (ie low). So again, if you want to restrict driving, gasoline taxes aren’t the way to do it.

  58. Joseph Somsel

    We certainly hear many compliants about the COST of driving, especially the “externalities” that are not paid by the driver.
    Please let us not forget the BENEFITS of driving, both to the driver but the “POSITIVE EXTERNALITIES” also.
    American society is one of the most automobile-oriented of economies and one of the most productive. We’re to suppose that this fact is an abberation? Perhaps a test of high tax theorists is to explain how their theory predicts effects 180 degrees opposition to economic reality.
    Focus on costs without consideration of benefits ill distort our decision-making as surely as a focus on benefits without consideration of cost would.
    As to the wisdom of the ordinary citizen making proper decisions, I will offer my own choice – I willingly passed on the 400 hp version of the GTO to buy the mere 350 hp engined version. Why? Better gas milage!
    I will admit to buying the automatic because my wife wanted to drive on ocassion and she has a bum left knee. I was afraid that regular use of congested California freeways would result in a bum left knee for me too.

  59. Buzzcut

    Joseph,
    I had the exact same reaction as you to Valuethinker’s post. The benefits of the automobile culture are simply huge, and to not even mention the benefits when talking about the costs just shows a certain bias.
    Public transportation is a huge time waster in any city that doesn’t have massive density. It works well in Manhattan, but few other places. Quite simply, we are too rich, and thus our time is too valuable, to waste it taking public transportation.
    Even in Manhattan, density is decreasing, not increasing. Few people want to live like ants in 50 story high buildings, which is what it takes to achieve the kind of density needed for efficient public transportation.
    Just from an evolutionary/ creative destruction point of view, every city in America had a public transportation system that was bankrupted by the automobile. Now, you can spin all kinds of conspiracy theories as to why that happened, but the fact is that the efficiency of the automobile is what did them in.
    In fact, Henry Ford instituted one of the most effective anti-poverty programs in the history of mankind during the Model T’s production run. As it became cheaper and cheaper, more people could benefit from being more productive by owning an automobile.

  60. KJ

    I am new to this site.
    First off, as the owner of a Volvo SUV that seats 7, I am tired of the criticisms directed at SUVs in general.
    We are a family of 5 and our car frequently has to ferry up to 7 passengers (its maximum load). Obviously we had this in mind when we bought the vehicle – the minivans on the market looked larger and were a lot less welcoming.
    There is another reason why we bought the SUV – living in Canada, we were once trapped in the snow in a Ford Freestar for hours on end. Never had that problem with our Volvo.
    The SUV in our case makes a great deal of sense -for the alternative would be to strap a couple of people to the roof of the car or (more likely) to go about more often in 2 cars.
    Second, on the issue of energy security. This has been the subject of much wooly thinking. I often see it equated with becoming less reliant on oil. So lets suppose the US is able to reduce its oil imports by whopping 30%. The price of oil would surely fall – if it fell far enough it would in all likelihood destabilize the more moderate regimes in the middle east. [If the regimes fell, and the supply of oil dried up, it would be a disaster if the world economy went into a tumble as a result]
    Lets think about this a little more – falling oil prices will make oil more attractive? So unless there are import controls or some form of rationing and taxation, imports of oil rise again until a new equilibrium is reached. The process is of course a continuous one and not discontinuous as in the example I have laid out.
    With import controls and more taxes on oil, we will be less competitive than other countries. Will imports rise? Or would we need to impose controls there as well. Where would we stop?
    Finally there is no point being slightly less dependent on oil – that is neither here nor there. If supply drys up, we are all in deep trouble whether we are more or less.
    If anyone has come across a well reasoned analysis on the topic of energy security, please let me know.

  61. Mike

    I believe environmentalism is the new home of communism: It is the mechanism in which centralized command economy proponents wish to put their hands on the levers of the economy.
    All of this CAFE arguing is predicated upon the ‘facts’ of global warming. It also assumes I want to put my familily in a Prius. There are so many other answers. The simplest answer, which has been virtually outlawed by CARB is the diesel. Diesel cars would immediately cut the US oil consumption by half and be much more environmentally sound.
    BUT, moving to nice big diesel cars like Europe has done for decades, doesn’t ‘feel’ very environmental does it? That’s why you tofu eaters don’t like it, because at the end of the day you want to feel good about this stuff, regardless of a true workable solution.
    Perhaps someday, some future generation over taken by poverty and cold will throw off these arbitrary controls and begin to move FORWARD again. Where do you think we get the money to waste on these fantasy hybrid cars? PRODUCTION. Liberalism / Environmentalism is a wart on the back of capitalism. Were it not for the excess produced by capitalism, we would not have the disposable income and government subsidy wasteful spending to blow on fantasy pet projects of the elitist left, who by the way, completely ignores all their own imparatives: Al Gore, John Edwards, John Travolta, etc. living in MANSIONS and flying JETS. If the Earth is so important to them, why don’t they give a darn? It’s a scam to buy carbon credits from Al Gore himself.
    Don’t be blind. Hybrids are a waste. Ethanol is a joke. Do some due diligence, for God’s sake, before we are all wearing sweaters and are over ran by mongul hoards who could care less about the environment.

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