Obama’s Fuel‐Economy Standards
If you like driving a big car or SUV, the good news about Obama's new fuel-economy standards is that they won't dictate what kind of car you will be able to buy in the future. If you want to buy a 15-mpg SUV, Detroit (or Aichi or Wolfsburg) will be free to make and sell you one.
The bad news is that the standards may make your car more expensive. Corporate Average Fuel Economy (CAFE) standards are actually calculated as the mean of gallons per mile, not miles per gallon. So, as of 2016, for every 15-mpg model made by an auto maker, that company will have to make five models of cars that can go 50 mpg in order for its fleet to meet Obama's new target. Since bringing each new model to market can cost billions of dollars, if there are not enough people who want to buy those fuel-efficient cars to cover their design costs, the company will have to add a share of those costs to your SUV.
If you want to save energy, the good news is that Obama's standards are more stringent than those in the Energy Independence and Security Act of 2007 -- but not by much. While the 2007 law required new car fleets to average 35 mpg by 2020, Obama's standard requires fleets to average 35.5 mpg by 2016.
The bad news is that nothing in Obama's standard guarantees that they will actually save energy. The rule only requires that the mean fuel economy of all models, not all cars, made by a manufacturer meet the 35.5 mpg standard. Not much energy will be saved if gas guzzlers sell well and hybrids don't.
If gas prices go up, people will buy the fuel-efficient models that auto makers are forced to make -- but that would have happened anyway. If gas stays cheap, people will continue to buy fuel-inefficient cars (tempered only by having to pay extra to cover the start-up costs of models no one wants). If you believe that saving energy or reducing dependence on foreign oil is important, then you should prefer a stronger form incentive over this mandate.
The worst-cast scenario is that the new standards increase the cost of buying new cars but don't save any energy (except to the extent that a few people can't afford to own a car at all). The best-case scenario is that Obama's standards result in future auto fleets that are not much different from what a free market would have produced. Considering that Honda and Toyota are now in a price war over their Insight vs. the third-generation Prius, that may be closer to the actual outcome.
The good news is that auto makers readily acquiesced to this standard, partly because they feared something worse but partly because they didn't think it would cost much. The Obama administration estimates that the added cost of the new standard will be $1,300 per car, but that (if gasoline remains $3 per gallon) it will save drivers $500 per year. That means it could pay for itself in the long run -- but only if people actually do buy more fuel-efficient cars.
The debate over the standard reminds me of the debate after Congress gave the Environmental Protection Agency the authority to regulate air quality in 1970. One faction favored of technical solutions to pollution, such as catalytic converters. The other faction argued for behavioral tools aimed at getting people to drive less.
Today, we know the behavioral solutions were a complete failure. Although many cities imposed urban-growth boundaries, built light rail, and implemented various disincentives to driving, not one can say they have reduced per-capita driving by even 1 percent.
On the other hand, the technical solutions were highly successful. Though we drive nearly three times as many miles as in 1970, total automotive air pollution has declined more than 50 percent.
There was a third faction in 1970 whose voice was almost inaudible: economists who argued that incentives would clean the air better than mandates. The mandates that were put in place only acted on new cars, and it took more than a decade (and now takes almost two decades) to turn over the American auto fleet. Properly designed incentives could have acted on all cars and cleaned the air much faster (by, for example, giving people a choice between retrofitting their cars or paying a pollution fee that was dedicated to cleaning up pollution elsewhere).
The lesson libertarians take from this is that incentives are better than mandates. But the point I like to make is that, though incentives might work better than mandates, technical solutions work far better than behavioral ones.
Despite the past failure of behavioral tools, there is a strong movement in the administration and Congress today for more behavioral controls aimed at reducing driving to save energy and greenhouse gas emissions. These behavioral tools will be expensive, they will have costly unintended consequences, and in the end they will do little to protect the environment.
I remain unpersuaded that we need to reduce greenhouse gas emissions. But if there is a political need to do so, we should at least do it in ways that cost little and provide other benefits that will help cover those costs. McKinsey & Company estimates that the United States can meet the most stringent greenhouse gas targets by investing in programs that cost no more than $50 per ton of greenhouse gas abatements. More fuel-efficient cars meet this test, says McKinsey, and will also reduce the emissions of other pollutants such as nitrogen oxides.
Meanwhile, light rail, growth boundaries, and other behavioral tools, if they save energy and reduce greenhouse gases at all, will only do so at costs of tens of thousands of dollars per ton. Though I am far from thrilled about Obama's new policy, at least it reminds us that, for a relatively low cost, we can significantly reduce energy consumption and various pollution emissions without trying to socially engineer American lifestyles.
