With the confirmation of Scott Pruitt as President Trump’s new EPA Administrator, automakers have been quick to pursue a relaxation of the new Corporate Average Fuel Economy (CAFE) standards. CAFE standards regulate that each manufacturer’s fleet of new vehicles has an average fuel economy above a certain level. These standards originated in 1975 as a response to the Arab oil embargo of 1973 with the intention to reduce U.S. dependence on foreign oil. However, today the objective of CAFE has increasingly become about combating climate change. Through the years the standards have periodically risen but the most recent tightening in 2012 is considerably higher, requiring fleets to average 54.5 miles a gallon, or roughly 40 mpg in real-world conditions by 2025.
Spotting an opportunity provided by a new head of the EPA, the Association of Global Automakers and the Alliance of Automobile Manufacturers sent letters asking Mr. Pruitt to withdraw the agency’s Jan. 13th determination that future emissions standards remain intact. CAFE standards may be well intended, but have consequences the U.S. consumer must bear. For one, the standards distort the marketplace by giving incentives for auto production to cut costs where it can to maintain profits, while also having to invest in costly technology in order to meet high standards. For instance, Ford has decided to move production of its small cars to Mexico for the savings offered by lower labor costs.
In addition, the new stringent standards were written and agreed upon in a time when gasoline prices were considerably higher than they are today, and will be for the foreseeable future. With a higher cost for consumers at the pump, it translated to increased demand for more fuel efficient vehicles. As the letters sent to Mr. Pruitt point out, the standard pushes an agenda that the market is not driving. First, with lower gasoline prices consumers are choosing less fuel-efficient and higher-emitting pickup trucks and sport utilities. Second, to meet standards automakers will need to sell many more electric plug-in cars and hybrids, which currently only represent a sliver of U.S. sales.
What’s more, the CAFE standards are inefficient imposing higher costs to achieve the goals it aims to do. Generally, when consumers spend less on fuel, either because of dropping fuel prices or increased fuel efficiency, it causes what economists call a “rebound” effect. That means people simply choose to drive more when it’s cheaper to do so, diminishing the value added by the standards. Because there have been some changes in the program it is not yet clear whether CAFE has become more or less cost effective; but with the old standards, economists estimated that per gallon of gasoline saved, the cost was 3 to 6 times as much as a gasoline tax.
If we must impose penalties on consumers who want to drive less efficient vehicles, why not have a policy that is efficient and limits market distortion? For instance, a fuel tax imposing higher costs to the consumer for having a non-fuel-efficient vehicle or an extra tax on the purchase of a vehicle based on the mpg it achieves.
Coulter Young is a research associate with the National Center for Policy Analysis.