A different kind of Santa is on the way. Just in time for Christmas, Congress will deliver its interpretation of President Bush’s special request: A spanking-new fuel economy regulation that will require U.S. auto producers to achieve a 40 percent improvement in fuel efficiency by 2020, when fleets must average 35 miles per gallon.
For passenger cars, the current standard is 27.5 mpg; for light trucks, 22.2 mpg. The new regulations may not be exactly what Bush had in mind, but they meet the spirit, if not the letter, of his 2007 State of the Union message, which called for much higher fleet fuel efficiency. The new fuel economy regulations add to the arsenal of government actions Bush is offering to help Americans break their unfortunate “oil addiction,” as he has termed the problem.
But while the CAFE standards may look like Christmas cheer to Bush and perhaps a few others, only a bona fide Grinch would celebrate their heavy economic burden.
How can this be?
On its face, fuel economy by government mandate sounds like a good thing. Almost half of the 20 million barrels of petroleum consumed each day in America goes down the throats of our auto/truck fleet. Some 20 percent of total U.S. carbon dioxide emissions come from auto/truck tailpipes.
Holding everything else constant, with government-mandated economy cars, the calculated benefits from predicted fuel cost savings, assuming prices stay roughly at their present level, will more than offset the added cost of bringing fuel efficiency to the fore.
But there is a two-part hitch standing in the way, and policymakers have tangled with it before. Everything will not be held constant, and the price of gasoline has a way of falling as well as rising.
With cars in most showrooms showing greater savings in fuel, consumers will buy more cars or put more miles on the cars they buy. Fuel consumption goes up, not down, at least for part of the fleet. The resulting rebound takes some of the edge off economy gains that might otherwise come with tighter CAFE standards.
Then, as experience has taught us, the price of oil and gasoline can fall just as dramatically as it has risen. Fuel economy mandates will be based on today’s higher-priced oil, but consumers will be motivated to find the low-cost transportation package, which includes comfort, safety, and size, as well as fuel efficiency. When fuel prices fall, the sale of larger cars, SUVs, and light trucks will soar like eagles while smaller cars gather dust in dealer lots. From the experience of the 1970s, we know the outcome. With mandates to be met, manufacturers will manage sales as best they can by cutting prices on smaller cars, raising prices on big ones, rationing to dealers, and hoping for the best.
Some analysts believe manufacturers will profit from higher CAFE standards. An October 2007 Citi report titled CAFE and the U.S. Auto Industry says meeting a 40 percent fuel economy improvement mandate would actually add to the net profits of Ford, GM, Honda, and Nissan, while just marginally reducing profits for Chrysler. They also point out, interestingly enough, that the value of the marginal improvements in fuel efficiency as reckoned by consumers would be less than the cost consumers pay. In other words, the proposed rules impose a deadweight loss on all consumers taken together.
The notion that consumers would bear the burden of costly regulations is nothing new. But the idea that most U.S. auto producers operating in a globally competitive world would enjoy higher profits from a mandated increase in fuel efficiency staggers the imagination. How can it be that government-inspired improvements would be more profitable to producers than consumer-inspired product changes? And if profits can come from CAFE, why would they not be competed away?
Even though the CAFE Christmas gift delivered by Congress would be burdensome to consumers and producers, it is still possible that restrictions on carbon producing fuels may be desirable. If consumption of petroleum products imposes environmental costs not registered in consumer markets, then incentives for conservation may need to be devised. But if that is the case, then the incentives should be registered in all crude oil product markets, not just the 50 percent where autos and trucks operate, and on all major producers of carbon dioxide, not just the 20 percent produced by autos and trucks.
Only a Grinch would want to steal Christmas from the nation’s auto buyers.
Dr. Bruce Yandle ( [email protected]) is an economics professor emeritus at Clemson University and has written extensively on energy and environment issues.