Raising MPG Standards: The Second-best Solution to a Gas Tax Increase

(Comstock)

It got surprisingly little press coverage given the degree to which it will affect our lives (thanks, pesky world economic meltdown), but in case you missed it, the Obama administration recently worked out a compromise with the major automakers that will dramatically raise the corporate average fuel economy (CAFE) standards.

The new regulations mandate that the mix of new cars sold in the year 2025 must achieve about 54.5 miles per gallon (though if you read the fine print you’ll see that credits for various other green innovations mean that actual fuel economy will be more like 40 MPG.) For reference, the auto fleet currently on the road gets about 27 MPG. It’s a well-done agreement that will help avoid well-done citizens as global warming accelerates.

Before proceeding, let me note that I am strongly in favor of this policy. The problem of excessive fossil fuel use in transportation is multidimensional: if the issue of global warming doesn’t move you, the thought of Hugo Chavez and Mahmoud Ahmadinejad using our own hard-earned dollars to tweak our geopolitical noses should.

However, it is worth noting that raising CAFE standards is what political scientists and economists call a “second-best” solution; we could be doing considerably better if we thought all of this through more clearly.

This is not because CAFE doesn’t work; it does. In 1975, a few years before CAFE was implemented, average MPG for new cars and light-duty trucks was 13.1. In 2010 it was 22.5. Can this be attributed to CAFE? To a large degree, yes, as this graph makes clear:

CAFE standards were aggressively increased from 1978 to 1984, and, as the chart above shows, fuel economy responded. However, from 1985 until 2007 CAFE standards were no longer raised meaningfully—and MPG flatlined. The table makes it pretty clear that the CAFE standards created a floor under MPG for a 25-year period, when low gas prices (remember those?) rendered consumers otherwise indifferent to fuel economy.

So what’s the problem with raising CAFE today?

There is a long history of debate on whether “command and control” regulations (like raising CAFE standards) are a good way to bring about change. The other option is the use of price signals—which in this case would be increased fuel taxes—to influence consumer behavior.

Regulations do have some attractive features. For example, we can directly target what, when, and how much improvement we are getting. If we want fuel economy of 55 MPG, we can decree and achieve it with greater certainty than if we try to monkey around with prices.

However, in theory at least, economists generally prefer to do things with price signals as opposed to regulatory standards. Why?

Price signals inflict pain on consumers, but let them figure out what form they want to take it in. They in turn force producers to respond to their (altered) demand, but allow producers leeway in how that demand is met. This allows consumers and producers to change behavior in the most efficient possible manner.

Instead of CAFE, why not just raise the gas tax and let drivers figure out whether they want smaller cars, lighter cars, less powerful cars, more expensive cars, shorter-range cars, or, crucially, cars that are just as heavy, powerful, and cheap—but which get driven less?

This raises the true problem with CAFE. It misses out on a potentially key part of the solution to reducing fuel use: driving less. In fact, ironically, increased CAFE standards will have a perverse and unwelcome effect; better fuel economy will increase the fixed cost of driving (i.e. vehicle prices) but will actually reduce the marginal cost (i.e. fuel expenditures). To a degree, less thirsty cars will actually cause people to increase the number of miles they drive (as I’ve written about here).

With increased gas taxes, on the other hand, less driving will be part of the consumer’s toolkit. Some who absolutely need vehicles with poor fuel economy will have the option of avoiding the tax by driving less instead. As long as their fuel use goes down, why not give them that choice? Greater economic efficiency would result. In fact, the Congressional Budget Office ran the numbers in 2004 and found that cutting fuel use through taxes was considerably cheaper in the long run than raising CAFE.

Reducing driving through a higher gas tax would have other important benefits that improving fuel economy does not, like congestion relief and accident reduction. I personally am more sympathetic to automobility than most of my colleagues in my field, and I have faith that technological ingenuity will deal a powerful and probably decisive blow to our emissions problems. But raising the price of driving above current levels is pretty much a no-brainer; it has support that stretches across ideological lines in the transportation field, even among those like me (and even among carmakers such as GM) who do not see exchanging cars for biodegradable pogo sticks as the only possible solution to our transportation problems.

Another advantage of a gas tax increase is that it would start working today. Since the car fleet takes so long to turn over (according to the US Department of Transportation, automobiles these days stay on the road an average of about 12 or 13 years), it will be a very long time before the new CAFE standards actually translate into meaningful changes in emissions. But increasing the gas tax would have immediate effects.

(Some might object that fuel taxes are regressive and would hurt the poor, and to an extent they would be right. However, the rich drive considerably more than the poor, taking some of the stink off. And paying for many of the new fuel-economy technologies CAFE will result in will be regressive too.)

Thus CAFE might be a second-best policy: good, but not as good as we could have. Then why are we using CAFE while gas taxes stay laughably low by developed-world standards? Obviously, and understandably, because voters hate taxes. If anything, the political winds are blowing towards a lower gas tax, not a higher one.

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  1. Justin Credible says:

    Yes, lets tax and regulate until our overlords get us to act the way they want us to act….hey were not forcing you to do anything, we are just limiting your options…one wonders when they will just rename it the Peoples Republic of America.

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  2. Allen says:

    Like most people who like government controls you lean toward the stick instead of the carrot. You can change behavior by penalizing people who do what you don’t like. Another way is to reward behavior you do like. We subsidize farms for growing desired products, oil companies and airlines so why not subsidize consumers for making your desired choice?

    Going to regulations to force manufacturers to build what you think is good or penalizing buyers for not making what you think is a good choice is the mark of the person who thinks they have the right to dictate to others. Make the price of your favorite choice less than the behavior you don’t like allows people to spend more for their “objectionable” behavior but spend less to conform to your idea of what is “better”.

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    • Chun says:

      We do both. Government has instituted both carrots and sticks in this industry.

      We have a Gas Guzzler Tax for cars that get horrible mileage(which people have the option to avoid by not buying those cars). And we’ve incentivised the purchase of cars that get better mileage, thus reducing our dependence on foreign oil(whatever size that reduction actually ends up being).

      Cash for Guzzlers was the most recent Federal program. But the government(I include both State and Federal in this statement) has also introduced tax rebates for purchasing certain products. On a more local level, in the initial phases of the introduction of Hybrid vehicles, many of those cars were given a waiver that allowed them to use HOV lanes while only carrying a single person. As the percentage of people who have these types of vehicles has increased, those waivers are no longer being granted.

      And as a side note, I’d like to point out that Ford’s Model-T, the first mass produced US automobile, got around ~13–21 mpg. At almost a hundred years after its development, it’s a pity that fuel efficiency research by automobile manufacturers has only gotten us this far. CAFE standards may be the kick in the pants they need to actually get us real improvements in efficiency.

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  3. Caleb b says:

    “…Ford’s Model-T, the first mass produced US automobile, got around ~13–21 mpg….”

    I’ve pointed this out before, bur anytime the discussion of MPG comes up, some hack quotes this, so I feel compelled to repeat the facts.

    Briefly, the model-t carried very little weight, it’s top speed was very low, and it could not go up steep hills without stalling out (unless in reverse). Despite the lower speeds, crashes were very dangerous as it had no seatbelts and the glass would shatter, severely cutting occupants.

    The “we haven’t advanced in auto-fuel efficiency in 100 years” act is completely misguided. It’s an apples to oranges argument every time.

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  4. Thinking Cap says:

    The problem with your argument is that too many people won’t stop driving the way you think they will. The new middle class are the millionaires, and raising fuel prices won’t affect them at all. Those on a marginal income will be severely affected, and may no longer be able to afford to get to and from work. Also, the cost of food will spiral up sharply making it unaffordable to the same group. You’re not thinking it through!

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  5. Phil Jones says:

    If we would have increased the gas tax after the 70′s oil crisis we would now be driving electric or hybrid cars getting 100 mpg. Also the train systems would be a lot better. Finally, and best of all, no wars in the Middle East for us.

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  6. Barbie says:

    A gas tax will discriminate against lower and working class citizens, especially in rural areas where transportation is needed to continue working and supporting their families. However, with meager wages, individuals will not be able to afford the extremely high prices and regulations which will reserve driving as a privilege for the rich and work in favor of keeping the poor poor by making them immobile (not able to commute for work or educational purposes).

    Also, the poor in inner cities would depend on public transit, which will also be impacted by higher prices and raise bus fare which will make mobility extremely difficult.

    Driving less is definitely better, but using money to dictate that just enforces that the poor will be driving less.

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    • Eric Masaba says:

      @Barbie,

      This is called social inequity in transportation. The same applies for congestion charges which have disproportionately adverse impacts on the poorest in society, further exacerbating the detrimental effects of poverty.

      A private mass transit alternative is available and indeed possible.

      See:

      Eric Masaba (@TexxiOps)

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  7. Eric Masaba says:

    How about Jevons’ Paradox, which states that in some situations, higher fuel efficiency for engines results in more overall fuel use?

    This is called “Boomerang”. More MPG means more travel (since it becomes cheaper) and more overall fuel use.

    http://en.wikipedia.org/wiki/Jevons_paradox
    http://johngeraci.com/blog/2011/11/why-smart-cities-wont-stop-global-warming-and-may-even-accelerate-it/

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  8. G. Horvath says:

    I think your analysis missed an important dimension of the new federal CAFE dictate. Unless there is a revolutionary development in engine efficiency or the government somehow finds a way to repeal one of the laws of thermodynamics, any major increase in fuel efficiency will be made by building cars that are smaller and lighter. Much smaller and very much lighter. The amount of steel will be reduced and more plastics and composite materials will form the bodies of the new fleet.

    Smaller, lighter and very much less protection for the occupants.

    And we’ll need a lot of very small vehicles to push the average high enough to meet the federal requirement. My diesel-powered car gets 48 mpg on the highway. It’ll take several ‘Smart Car’ equivalent vehicles to raise the overall average to 57 mpg. That’s a lot of tiny little cars out on the road. I don’t know about you but I’d be very uneasy to take my family on a drive in such a tiny vehicle.

    This decrease in size and mass will be to the detriment of those forced to ride inside. Traffic collisions will become more hazardous to the drivers and passengers.

    Certainly more fleet MPG will lower gas tax revenues under existing taxation schemes. I expect that those savings will be more than offset by higher insurance and medical costs as collision damage increases and more folks go to the hospital or the morgue.

    I’d be interested in seeing a report that correlates automotive casualties to vehicle size and composition. It’s something that gets no media attention.

    There’s more at risk with this federal dictate than just a loss of tax revenue. People are going to die.

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