Friday, June 22, 2007

New CAFE Standards

Congress wants to raise the average fuel economy of cars sold in America. Of all the ways to achieve this end, I suppose we should not be surprised that they picked the most regulatory alternative: have Congress simply require the auto manufacturers to make more efficient cars.

Congress makes its economy standards through the CAFE standards. I want to challenge the wisdom of Congress's action.

There are a few ways to make cars that run more efficiently on gasoline. One way is to install engines with less horsepower. Consumers generally dislike this solution because we like fast cars. Another alternative is to employ non-gasoline fuels in some hybrid technology. This plan is popular but it is not clear how soon the expensive hybrid hardware will become cheap enough to put in every car. Most hybrids are still marketed towards people who care more about the environment than about getting the best car for their money. Also, hybrids that perform as well as current non-hybrids are not substantially more efficient. Car manufacturers will likely employ a lot of hybrid technology to meet the new CAFE standards, but it is really unlikely that hybrid alone will get us there.

The third and most likely way that car makers will meet the CAFE standards is to make their cars lighter. Carbon materials weigh a lot less than metals and most plastics, so the same engine could move a carbon-fiber car easier (more efficiently). The problem is that lighter materials are substantially more expensive than current materials. Consumers should expect that cars will get more expensive, and that they will not have much choice in the matter.

I think we should think of price increases caused by CAFE standards as taxes. Any time the government acts to make us pay more, I think we should always use the lens of tax. And, when examined as a tax, higher CAFE standards don't make much sense.

Think about it: we want to pollute less and use less oil, so we tax car manufacturers in such a way that they raise the consumers' costs of buying a car. There is a much more direct way to accomplish this ends.

If we want to tax oil consumption, why not just levy a gas tax? People who drive more will pay more, and most of us will try to find a way to use less gas so as to pay less money. One way or another, we won't end up paying more for expensive materials in our cars that we really don't care about in the first place.

If lighter materials are the most efficient way to increase fuel efficiency, expect a gas tax to lead to higher demand for lighter cars. If they are not the most efficient way, why are we adopting regulations that lead to that result?

Let's not let Congress pass indirect taxes because they are afraid or unable to pass a direct one. Would you support a gas tax? If not, why would you support new CAFE standards?


Anonymous said...

Why should we impose a gas tax whereby people are forced to pay out of pocket while oil companies are still making record profits? I fail to see the good sense in that plan. I am all for using the tax system to incentivize behavior but not when it's directed towards the wrong group. Moreover, on the margin, we have not seen high gas prices affect the rate/amount of driving. Europeans still pay twice as much as we do for gas...they still drive, they just drive smaller, more economical cars. Americans should be doing the same by buying more efficient and less pollutive vehicles. Note: even if hybrids are not "substantially more efficient," they still run substantially cleaner.

However, when it comes to the environment and foreign dependence on oil, I do not think it can be left to Americans to fix or be taxed for these problems. This is something that should be highly regulatory because it is the only way we will see change. And change should begin with the oil companies and their highly paid lobbyists that are allowed to run willy-nilly on capitol hill.

Thomas Richie said...

I think you misunderstand me as advocating a gas tax. I don't. I merely advocate Congress doing what it is doing directly.

The whole point of my post is that the consumers are going to be forced to pay out of pocket regardless of whether Congress raises the CAFE standards or imposes a gas tax. At least, with a gas tax, people know that they are being taxed. The have the choice to buy a more efficient car, drive less, or just bear it.

I'm interested in seeing if high gas prices will affect the consumption of oil on the margin. My impression is that car companies are designing and marketing cars much more towards efficiency than in the pre-Katrina gas spike days.

But please understand me: I don't pretend to understand the underlying policies here, but I most strongly think that raising the CAFE standards is just a inefficient way to reach the same ends as a gas tax (think of CAFE as a materials tax) without Congress being held accountable for either the rise in prices or the inefficiency of the materials tax.

Anonymous said...

I understood your post and you make a good point that Congress should take a direct means to an end rather than a regulatory subterfuge. However by advocating this point, you are also allowing Congress a pass altogther by saying "I know what you're trying to do so you should just do it directly."

All I was saying is, while consumers should be more socially conscious, we would not have to pay out of pocket (on this measure at least) if we demanded that Congress and oil companies be held accountable.

I guess I just happen to believe at the outset of the debate that cars should be made to run more efficiently anyway. If we had listened to Jimmy Carter back in the 70's on this point, perhaps we wouldn't be so dependant on foreign oil today... which can only lead one to wonder whether we would be embroiled in a foreign civil war that we cannot win.

Nevertheless, I enjoy your insight and your blog.

Thomas Richie said...

Thanks for reading! And please continue to give me your thoughts.