Trump’s Proposed CAFE Standard

On August 2, the Department of Transportation and Environmental Protection Agency made a joint proposal to reform the corporate average fuel economy (CAFE) standards. Originally adopted in 1978, when new cars were required to average all of 18 miles per gallon, the standards were increased by the Obama administration to a target of 54.5 mpg by 2025. (This 54.5 is actually an idealized number; as a practical matter, the real target for 2025 is about 47 mpg.)

The new rule proposes to maintain the existing fuel economy standard, which rises to 37 mpg by 2020, and then freeze it at that level after that. By 2025, new automobiles meeting the Obama standard would be about 25 percent more fuel-efficient than under the Trump standard – though if fuel prices rise, consumers could end up buying more fuel-efficient cars than the standard anyway.

Another change, as pointed out in a Wall Street Journal article earlier this week by DOT secretary Elaine Chao and acting EPA administrator Andrew Wheeler, is that the administration wants “to create one national standard.” This means that California won’t be able to impose its own, stronger standards.

As the Competitive Enterprise Institute’s Marlo Lewis observes, when Congress created the CAFE program in 1975, it specially forbade states from adopting their own stronger rules because this would greatly increase the costs of compliance to manufacturers. Despite that, the Obama administration decided to exempt California from the one-national-standard rule. The Trump administration is going back to the actual law.

Obama’s adoption of the stricter standards was supported by many carmakers, including Ford, GM, and Chrysler (the latter two of which were under the government’s thumb due to corporate bailouts). However, Volkswagen strongly objected, saying that the standards were unfair to cars while overly generous to light trucks (pick ups, SUVs, and full-sized vans). This may be one reason why Ford has announced it is getting almost completely out of the car business, planning to make only light trucks plus the Mustang and a new China-made small car called the Focus Active.

The Obama standards assumed that two thirds of vehicles sold would be cars, and only a third light trucks. In fact, it has been about half and half. For that reason alone, the EPA in 2016 (when Obama was still president) concluded that standards would have to be changed no matter who was in the White House. Changing them now gives Democrats one more tool to use to bash Trump, but another president would have had to make some changes anyway.

Chao and Wheeler argue that rolling back the standards will reduce the cost of new cars by several thousand dollars and reduce total costs to consumers by $500 billion over the next 50 years. However, Americans currently spend about $1.1 trillion a year buying, operating, and insuring cars, so $500 billion over 50 years is less than a 1 percent savings on their driving bills.

However, that 1 percent isn’t equitably distributed. To meet the Obama standard, automakers would have to build electric vehicles, sell them at a loss, and then sell their other vehicles for higher prices to make up the difference. Since electric vehicles are mostly purchased by high-end buyers, this imposes a regressive tax on lower-end auto buyers.

Another important issue is that the CAFE program has suffered mission creep. When Congress created the program in 1975, the nation was suffering from politically induced energy shortages. But the standards weren’t needed to save energy; people responded to higher gas prices by buying more fuel-efficient cars without the government standards.

Today, we have an abundance of energy: after adjusting for inflation, gas prices today are much lower than they were in 1975 and much less volatile. So there’s no need to keep the standards to save energy.

Instead, environmentalists defend strict CAFE standards in order to reduce greenhouse gases. But there’s little reason to believe that the standards will have much of an effect on climate change, especially with the emphasis on electric vehicles. This is because most electricity in this country is still generated by burning fossil fuels. Due to losses in generation and transmission, it takes the combustion of three British thermal units (BTUs) of coal, gas, or other fuel to deliver one BTU of electricity to someone’s auto battery. Thus, the savings in greenhouse gas emissions will be far smaller than suggested by the differences in miles per gallon of the Obama and Trump standards.

Even if you believe that we can increase the amount of electricity generated using means that don’t produce greenhouse gas, CAFE standards aren’t the best way to reduce carbon dioxide emissions. The McKinsey Report on greenhouse gases concluded that there are many ways of reducing emissions that are far more cost effective than trying to force cars to become more fuel efficient, most of them having to do with making existing and new buildings more energy efficient.

Only Congress can repeal the law requiring the standards. In the meantime, rolling back the standards is worthwhile because it lets consumers choose how they are going to save money, save energy, and save the environment.