Why fuel-economy standards make sense

By Felix Salmon
September 12, 2012
Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards.

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Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards. But before we get to the meat of his argument, it’s worth correcting his numbers. Here’s his conclusion:

In Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 86 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.

This is an apples-to-oranges comparison on not one but two different levels. I’m not sure about the gas taxes, I think they’re correct. But the mileage figures are misleading. Yes, UK Fiestas are more fuel-efficient than US Fiestas. But not by nearly as much as Porter suggests.

For one thing, the mileage tests are different. The test you use makes a huge difference, to the point at which the 2025 fuel-economy standard of 54.5 mpg actually corresponds in the real world to cars bearing window stickers advertising 36 mpg. The US Fiesta is already there, or extremely close. On top of that, UK gallons, also known as Imperial gallons, are significantly larger than US gallons. (Which is why a pint of beer in the UK is larger than a pint of beer in the US.) As a result, 85.6 miles per Imperial gallon is 71.3 mpg in American. And only one expensive “ECOnetic” Fiesta model gets that mileage in the UK; the other ones go as low as 42.8 miles per Imperial gallon, which is 35.6 mpg in the US.

I’s hard to say for sure which cars are more efficient, because the tests are different. To be sure, any UK fleet will be more efficient than any US fleet, for three main reasons: the UK has smaller cars, with more manual transmissions, a higher proportion of which are diesel. These are consumer choices driven by high gasoline taxes, and that really makes Porter’s point for him: raise taxes, and people will automatically start driving more efficient cars. But let’s not kid ourselves that Ford could simply import UK Fiestas into the US and overnight start shipping cars getting 86 mpg.

Porter’s central point is absolutely right: there are two ways to reduce the amount of fuel that people use. The first is to make cars more efficient; the second is to reduce the number of miles that people drive. Higher gasoline taxes work on both fronts, while higher fuel-economy standards only work on the first. Indeed, at the margin they increase the number of miles people drive: since more efficient cars cost less to drive per mile, people drive further when they get more efficient cars.

Porter is also right that in countries with higher gas taxes, fuel economy tends to be much higher. But he’s not necessarily right that the higher gas taxes alone are responsible. Porter implies that the US only has fuel-economy standards just because “a tax on gasoline doesn’t stand a chance” of being passed. But the fact is that even countries with very high gas taxes have fuel-economy standards as well. And, guess what, they’re significantly tougher than ours, and they always have been.

economy.tiff

The fact is that the US has pretty much the lowest fuel-economy standards in the developed world, and it still will in 2025, even after the new standards are fully phased in. If US carmakers want to be internationally competitive, they’re going to need to develop more fuel-efficient cars anyway, no matter what happens in the US.

As a result, I really don’t buy Porter’s scaremongering about the cost of the higher standards:

According to the government’s analysis, the additional production and maintenance costs made necessary by the mileage rules will rise gradually to about $31.7 billion in 2025 — which will add about $1,900 to the average price of cars and light trucks. There are other costs, too. Some Americans will not be able to afford a new car. Profits of some automakers and dealers are likely to decline. Greater congestion will impose an added burden on health.

The idea here is that the average price of cars will go up over the next 13 years; it’s far from clear why that would decrease profits at automakers rather than increasing them. What’s more, it’s equally far from clear that the average price of cars would go up significantly less if the new standards were not put into place. The question isn’t how much cars in 2025 cost compared to cars in 2012; it’s how much cars in 2025 will cost under various possible future regimes.

And when Porter starts talking vaguely about the health burden of greater congestion, you know he’s grasping at straws. Auto emissions pollution was a problem in the 70s and 80s; it’s not a problem now, with today’s much cleaner cars.

The fact is that fuel-economy standards are a pretty good way of ensuring that carmakers can plan for a more fuel-efficient future, without worrying about competitors undercutting them with gas-guzzlers. If the US government ever comes to its senses and increases the gas tax, or if it — wonder of wonders — actually implements a broader carbon tax, then at that point you would have three different forces conspiring to make America’s fleet more efficient. You’d have the tax, you’d have the fuel-economy standards, and you’d have the general global increase in fuel efficiency.

Without new taxes, we’re down to two; and without new fuel-efficiency standards either, we’d be down to just one. And that’s dangerous, because the US market is big enough that at that point there’s always a risk that we could replay the era of SUVs and Hummers, with manufacturers of small, efficient cars running a risk that they might get crushed if oil prices fall.

Fuel-efficiency standards are a way of preventing car companies from being forced to hedge their bets by working on gas guzzlers as well as efficient runabouts. As a result, those companies can take the money they’d otherwise spend on developing six-ton monsters, and invest it instead in the efficient cars of the future. Everybody wins, and the cost — contra Porter — is negligible. He’s absolutely right that higher gas taxes are a very good idea. But that’s no reason at all not to implement higher fuel-economy standards as well.

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Comments
7 comments so far

Higher taxes and big gummit mandates are both needed to make U.S. car mfgs do the right thing: defy U.S. consumers.

For some reason, Americans have built into our entitled sense of exceptionalism the idea that 7-liter V8s developing 600 horsepower are a birthright, to be wedged optionally or as standard equipment into every two-bit pickup truck, SUV and red “sports car” those Detroit knuckleheads produce. Hot-rodder madness is in our DNA, somehow, and it needs to be excised.

We have the technology to get 50mpg average out of everything we build–using recently developed 200-hp four-bangers. But we need to take about 600 pounds of useless junk out of every passenger car to get there.

Normal U.S.-market sedans these days weigh two tons. That’s about 600 pounds more than they weighed in the early 1970s, and there’s no good reason for it.

Mandate and tax, for sure. Americans are like a mule when it comes to these things.

Posted by Eericsonjr | Report as abusive

“But that’s no reason at all not to implement higher fuel-economy standards as well.”

No worse then telling a farmer in Iowa how much wheat he is allowed to grow on his own land for his own consumption. The commerce clause has been expanded to the point that the goverment can claim that a hydroelectric dam is an emmiter because of the water they let through, that some light bulbs that cost .25 cents per should be banned so that people will buy ones that cost 2$ per which flicker for 30 seconds when you flip the switch.

Taxes are a neccessary evil if you want national defence and secure borders, and cradle to grave healthcare.

Mandates are not.

Posted by y2kurtus | Report as abusive

The New York Times ran the more correct counter-argument that fuel economy standards do not make sense and that the correct policy response to promoting fuel economy should be a gasoline surcharge(http://www.nytimes.com/2012/09  /12/business/fuel-efficiency-standards- have-costs-of-their-own.html?_r=2&ref=bu siness&pagewanted=all). Higher fuel standards make new cars more expensive, do not alter driving habits and keep older cars on the road longer. A tax on gasoline would shift driving habits, by encouraging alternative transportation, less driving or the purchase of a more fuel efficient vehicle. Simply raising fuel efficiency standards may have more people driving on the road longer and be counter-productive. I also can’t help thinking that the bean counters who calculate the CPI will decide car prices are flat and attribute it to “hedonism” and say we benefited from lower smog etc erasing the higher prices from gov’t data.

Posted by Sechel | Report as abusive

The New York Times ran the more correct counter-argument that fuel economy standards do not make sense and that the correct policy response to promoting fuel economy should be a gasoline surcharge(http://www.nytimes.com/2012/09  /12/business/fuel-efficiency-standards- have-costs-of-their-own.html?_r=2&ref=bu siness&pagewanted=all). Higher fuel standards make new cars more expensive, do not alter driving habits and keep older cars on the road longer. A tax on gasoline would shift driving habits, by encouraging alternative transportation, less driving or the purchase of a more fuel efficient vehicle. Simply raising fuel efficiency standards may have more people driving on the road longer and be counter-productive. I also can’t help thinking that the bean counters who calculate the CPI will decide car prices are flat and attribute it to “hedonism” and say we benefited from lower smog etc erasing the higher prices from gov’t data.

Posted by Sechel | Report as abusive

I live in the UK and most people I knew had wondered why SUVs were so popular in America.

Then I did a 3 week roadtrip around California / Arizona / Nevade earlier this year.

The roads are terrible. We were driving a 2013 Lincoln MKS which for the most part was extremely comfortable yet we spent most of the journey bouncing up and down. Even the interstates are covered in pot holes. They are easily the worst roads any of us have ever driven on. If I actually lived there and had to drive on them frequently I don’t think there would be any choice other than to get something like a Range Rover.

Posted by ABT | Report as abusive

I live in the UK and most people I knew had wondered why SUVs were so popular in America.

Then I did a 3 week roadtrip around California / Arizona / Nevade earlier this year.

The roads are terrible. We were driving a 2013 Lincoln MKS which for the most part was extremely comfortable yet we spent most of the journey bouncing up and down. Even the interstates are covered in pot holes. They are easily the worst roads any of us have ever driven on. If I actually lived there and had to drive on them frequently I don’t think there would be any choice other than to get something like a Range Rover.

Posted by ABT | Report as abusive

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Posted by methew | Report as abusive
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