California Gets a "Green" Light

As you may have read, the Obama administration is moving toward giving California approval to cut greenhouse gas emissions by mandating better fuel economy.

The California regulations should mean 40 percent more miles per gallon for new cars starting in 2016. The good thing is that the innovations that can make this happen are not in the realm of science fiction. We already know what to do, and it doesn’t involve drastic changes like a switch to alternate fuels.

According to Nic Lutsey, an expert on auto technology and the environment at the University of California, Davis, all of the requisite technologies are either already available or stand a very strong chance of becoming available in time to meet the target dates. These include improvements in engines, transmissions, aerodynamics, tires and air conditioning.

Some economists would doubtless prefer to improve efficiency through price signals (i.e. higher fuel taxes) than this kind of mandate. Regulations that set targets like this have some drawbacks. For example, they generally lack incentives for producers to exceed the targets if they can. On the other hand, the last time we seriously tried to raise fuel economy standards (from the mid-1970′s to the mid-1980′s) it got the job done.

I suspect that we go with these kinds of mandates as opposed to using prices because the costs are better hidden from the voters’ gaze. We all understand higher taxes come out of our pockets, but it’s easy to delude ourselves into thinking that the costs of the higher standards fall entirely on the producers.

The automakers will, of course, bear part of the burden, but ultimately we will not be able to escape paying our share. Based on estimates of the engineering costs for the improvements, these technologies will probably raise the price of the typical car by something on the order of $1,000. (The automakers have higher estimates, but then again, they lost a bit of credibility by heavily overstating the potential cost of catalytic converters.)

One thousand dollars is, of course, a lot of money, both for consumers and for the automakers, who plausibly fear a loss of customers.

But thankfully, there would be a financial upside to the new m.p.g. initiative as well. It will save motorists several hundred dollars per year at the pump, meaning the improvements should pay for themselves in four to seven years (even taking into account the fact that future savings are not worth as much to the driver as the money he forks over to buy the car).

And the payback period might even be faster; this calculation assumes that the average California motorist pays $1.74 for gas, which may prove to be conservative. So the added upfront expenditure need not cut into new car sales, provided that we can be sure people understand the savings they are getting “down the road.”

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  1. Nosybear says:

    The requirements are already met…. in Europe.

    Last time I was in Germany my rental was a diesel-powered Audi A3 with a sticker on the dash that said (in English), Limited to 230 Km/H. For the Metrically challenged, that’s fast. I determined the sticker to be true then, at the end of my stay, I filled up the tank. Efficiency: 42 MPG.

    Put another way, last year there were 102 models of car sold in Europe that got over 40 MPG. In the US there were two. An SUV brings the maker $5,000 in profits, a fuel-efficient small car $200. Follow the money – it’s not about technology. There’s plenty of technology to increase fuel efficiency. The US market wanted big gas guzzlers up until about last June. So that’s what we got.

    Oh, with the re-introduction of the VW TDI Jetta, we’re back up to three available cars with over 40 MPG. None of them are built in the US.

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  2. UnderstatementJones says:

    Also, keep in mind that demand for fuel is extremely inelastic in the short term. If you raise fuel taxes, you make people with inefficient cars hurt a lot in the short term, then you force them to buy a new, more efficient car. Which will still be more expensive, by the way.

    If you regulate the automakers, consumers take the hit later, when they’re buying a new car. Many of them will be able to offset the cost of the fuel economy price bump by choosing a cheaper car or fewer options.

    Also, American carmakers have not demonstrated particularly good ability to respond to market pressures. Though they might theoretically be flexible, they’re not. So sometimes it makes sense to make their decisions by fiat.

    So even if regulation is not the most economically efficient pathway, you can see how there are good arguments that it is the best econo-political path. And the interaction of politics with economics is not always as stupid as people assume – in this case, it’s not just about hiding costs from the consumer, but avoiding price shocks for the disadvantaged and moving a non-performing industry.

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  3. Gabriel Wolf says:

    This has already been done essentially; and it worked. Remember just five years ago when the Toyota Prius first came out, and there were hundred and hundreds of people waiting to get their hands on one? Well the prius isn’t a cheap car, and it doesn’t include many luxury items- people sprang for it because of the MPG. Just wait untill these come out and see, it will create increased car sales.

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  4. assumo says:

    @8,
    Who ever said that a car is a “required good” ? Sounds like the powers that made you think that are regulating you more than the government is. . . If the technology is there, why not implement it? Price controls may help CA meet emissions goals, but the net benefit to the consumer is increases greatly if a car goes farther on a gallon and give off less of the most foul pollutants. That is, of course, as long as we’re only treating symptoms here. If we want to get to the root of our problems, cities need to change the way they build and grow, transit needs to be built out to its full extent, and commuters need to a) get jobs that are close to them and b) use new beefed-up transit as much as possible. My crystal ball tells me that wishing alone isn’t going to make this happen. Oh, but I wish, I really do . . .

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  5. jblog says:

    Ideally, if we were going to do this, it would be done on a national level.

    Although in reality California is big enough and important enough that whatever they decide will become a de facto national standard.

    The reality is, we’re going to head in this direction — the U.S. automakers have made it clear they will not get there fast enough on their own.

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  6. Tim says:

    Once again, a government mandate is set in direct opposition to market forces and we are just expecting things to work out. They wont: it’s a train wreck in the making. What this will do in effect is cause every automaker to develop a California-only model, which is going to increase both cost and complexity at the worst possible time. If the automakers do comply, they run the risk of these models stacking up, unsold, on dealers lots (a very expensive proposition from a number of perspectives) and if they don’t comply, they are simply out of business in CA. I think we may see certain automakers simply pull out of California entirely.

    Perhaps the heart of the CA government is in the right place (so to speak) but once again, the bizarre, narcissistic character of the state shines right through. They are making a poorly reasoned decision without regard to the consequences for the economy as a whole or the rest of the country. They could probably establish the same reduction in carbon footprint by replacing every 4-way stop in CA with traffic circles and synchronizing traffic signals, but they wouldn’t be sticking it to the military-industrial complex that way.

    Perhaps most disturbing is this early sign of political cowardice on Obama’s part. The right thing to do would have been to wait for the EPA to raise its standards so that- at the very least- the complexity issue will have been reduced for the automakers (though this does nothing to address the demand issue). Or perhaps he’s trying to signal that the new CA standard will be the new national EPA standard? I suppose it’s possible-

    In any event, this posting is completely blind to the demand side of the problem, which- as evidenced by the automotive product disasters of the early 80′s- Californians are about to relive.

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  7. Arlen says:

    That’s alright, the Gooch, Detroit is hard at work spending taxpayer money to sue the taxpayers in the hopes of defeating this measure in court.

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  8. Compos Mentis says:

    Here comes the Socialism. You wouldn’t want to buy a car your stuff could actually fit in. America is not Europe. Stop trying to make it Europe. But that won’t stop the Socialists in California from running the Auto Makers out of business in their state, or just give the citizen a list of acceptable cars they are permitted to drive.

    It may be a free country, but it’s not a free state in California.

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