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.”