Leave Those Car Buyers Alone

This article appeared in the National Review (Online) on December 19, 2007.

Last week, environmentalists and the auto industry struck a deal to require new cars sold 13 years hence to average 35 miles per gallon; a 40-percent increase over the existing 27.5 mpg mandate. Hands were held, tears were shed, and "Kum-ba-ya" broke out all over Washington. As the president prepares to sign the energy bill passed yesterday by the House, Congress's 32-year-old fight over automotive fuel-economy standards is probably over ... for now.

That's too bad, because while there are a number of parties claiming victory from this political peace treaty, consumers will almost certainly be the biggest losers.

Of the 1,153 passenger vehicle models on the road today, only two presently meet the proposed 35 mpg standard. According to a quick review of EPA data undertaken by Marlo Lewis at the Competitive Enterprise Institute, those cars are the Toyota Prius and the Honda Civic hybrid. Nine other vehicles, Lewis reports, get 35 mpg in city or highway driving conditions, but not both — and all of those vehicles are either subcompacts or compacts. Hence, the auto fleet is going to have to change — and change a lot — for new cars to average 35 mpg by 2020.

The industry has three routes it can go. First, it can lighten cars and thus improve mileage. Second, it can reengineer cars by reducing engine power and incorporating advanced technology to improve fuel efficiency. Third, it can simply stop making low-mileage cars and trucks or, alternatively, increase their prices so much that a substantial number of consumers opt for the fuel-efficient alternatives. Of course, mixing and matching is not only possible, but probable.

None of those options, however, represent a Christmas gift to car buyers. Reducing vehicle weight is the cheapest way to improve fuel efficiency, but that would increase highway deaths, just as it has done in the past according to a 2002 study by the National Academy of Sciences. Reengineering cars will reduce automotive performance in ways that car-buyers probably won't like while increasing automotive prices by as much as $3,500 a car according to the same NAS study. Cross-subsidies might be the most direct way to meet the standard, but that represents a rather steep tax on people with large families, big dogs, and those who for whatever reason need to haul around a lot of stuff — not to mention those who simply have a preference for zippy sports cars or riding high off the road.

So how does that square with claim that consumers win with more fuel-efficient cars? Well, if all other things were equal, they would. But all other things are not equal, and fuel-efficiency improvements involve trade-offs that consumers are demonstrably not wild about making. If they were, we wouldn't need a CAFÉ law in the first place. The fleet would average 35 mpg now.

So why are we so determined to overrule consumer preferences? Three rationales are commonly offered.

First, we're sometimes told that consumers want super fuel-efficient cars but automakers stubbornly refuse to make them. But automakers and venture capitalists who might otherwise enter the auto industry would hardly be more ignorant than the casual observers at the Sierra Club and Rep. Nancy Pelosi's office about how much money they're leaving on the table. Suffice it to say that this argument seems unlikely, which suggests that consumers are indeed getting exactly the kind of cars that they want.

Second, it's often alleged that consumers are irrationally attracted to gas guzzlers and are acting against their own self interests when they buy SUVs and minivans. But there is little evidence for that proposition. A recent survey of consumer behavior by Clemson economist Molly Espey found that consumers valued energy efficiency appropriately from an economic perspective. That is, they spent more money on engines that saved fuel when the initial cost of the engine was more than offset by the fuel savings over the lifetime of the vehicle, controlling for other attributes of the vehicle.

But that's not good enough for many critics. They don't like the fact that many consumers seem to like other attributes — such as vehicle size and acceleration — that mitigate against fuel economy.

Third, we sometimes hear that a host of market failures is responsible for fuel prices being too low, which in turn produces suboptimal interest in energy conservation. In our own study earlier this year, however, we find very little support for this proposition. But if there were good evidence for the existence of market failures, the proper remedy would be a higher fuels tax that would let consumers make their own decisions about the tradeoffs between those higher prices and consumption. Higher fuel-efficiency standards, on the other hand, will reduce the marginal cost of driving and thus exacerbate problems like traffic.

For many, however, there is no such thing as too much energy conservation, and society always gains the less we consume. But if that were true, why not just ban cars from the road altogether? Few seriously entertain that idea, because we know intuitively that some amount of fuel consumption is worthwhile no matter how we feel about oil scarcity, energy independence, or the environment. How much is the "right" amount for society to consume? The aggregated preferences of consumers facing accurate fuel prices will deliver the right answer. Interfering with those aggregated preferences is guaranteed, however, to deliver the wrong one.