Embracing CAFE Society
President Obama may have a political Midas touch, but his decision to tighten fuel efficiency rules for cars was assailed from two directions.
Some critics charged that the rules would force car prices higher at the worst possible time — dealing a possible lethal blow to the American auto industry and hurting struggling consumers at the same time. Others berated the president for preferring regulation over a simpler tax increase. The Corporate Average Fuel economy standards — or CAFE — are costly, inefficient and politically craven.
Both criticisms rest on mistaken assumptions about pricing. Firstly there is scant evidence that tightening fuel standards were a major force in pumping up the price of cars in the 1970s and 1980s. Between 1978 and 1985 U.S. automakers managed a 50 percent increase in fuel efficiency without breaking a sweat.
The notion that CAFE standards significantly push up prices assumes technological stasis. Auto research continually spins off fuel efficient technology. The automakers and buyers then face a trade-off between deploying this to cut down gas usage, or to enhance the power and size of the vehicle.
Since the United States stopped tightening the standards in the mid 1980s, carmakers have chosen he latter. Obama’s rules are expected to add just $1,300 to the price of a car by 2016 and it is fair to assume that the price increase would phase in gradually along with the standards.
It would take just three years for fuel savings to put car buyers back in the black, according to the American Council for an Energy Efficient Economy.
The second error is to assume that the car buying public can be swayed by a modest increase in fuel taxes.
Recent history suggests it would take huge and politically implausible tax increases to make much of a difference. Americans started to abandon the SUV only when gasoline prices soared to $4 a gallon in July 2007 — close to double the price at the end of 2006.
To have a significant impact Congress and the White House would need to increase the Federal tax on gasoline at least fivefold (at present, it is a mere 18.4 cents). Not even the wildly popular Obama could get away with that. It might be easier to confiscate all the guns in Texas.
Nor will the cap and trade proposals being mulled by U.S. lawmakers do the trick. If implemented these may add between 10 and 20 cents to the price of fuel, according to the American Council for an Energy Efficient Economy — insufficient to change the behaviour of even the most impecunious American.
The standards certainly have their flaws. They do nothing to discourage the guilty pleasure of using the car for trips within walking distance. By placing trucks in a separate, privileged category, the CAFE standards may have steered Americans towards heavier vehicles. But this is an argument for adjusting the rules rather than abandoning them.
Even so, they have produced results that a price signals alone would not have achieved — forcing auto companies to incorporate fuel saving technologies that might otherwise be used to boost the power of a car or increase its size.
Indeed, even the European Union — with gas taxes that most Americans would consider ludicrously punitive — is embracing fuel efficiency standards. Europeans are right to believe that taxes alone are not always sufficient.