Free Enterprise: CAFE may be the way to wean Americans from fossil fu...
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Free Enterprise: CAFE may be the way to wean Americans from fossil fuel addiction
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MICHAEL REKSULAK | Saturday, July 21, 2007 at 12:30 am
The Senate recently passed an energy bill emphasizing conservation and higher energy efficiency. What followed this week probably was not exactly what environmentalists had envisioned as a consequence. In a "fly-in," some 100 dealers from more than a dozen states burnt airline fuel, and also shoe leather, in the House of Representatives. They aim to reverse one of the most unexpected results of the Senate legislation: the first significant update to fuel efficiency regulation in decades. The corporate average fuel economy plan, known by the acronym CAFE, had grown out of the 1975 Energy Policy and Conversation Act. It mandated that manufacturers of new passenger cars meet a standard, weighted by sales averages, of 18 miles per gallon by 1978. It gradually was increased to reach 27.5 mpg by 1985. Light-duty trucks had to achieve lower benchmarks. Since then, any attempts to further tighten those standards were successfully opposed by an influential alliance of car manufacturers and labor unions. That is, until last month, when the Senate by a veto-proof margin increased the fleet-wide standard to 35 mpg by 2020. Listening to opposing sides on this topic sometimes is like cruising between Scylla and Charybdis (presumably with low emission): Either promises catastrophe. Proponents of the CAFE increases see it as the only way to wean the country from its destructive addiction to fossil fuels. Opponents claim it to be a sure way to annihilate already ailing domestic automobile makers, which
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Free Enterprise: CAFE may be the way to wean Americans from fossil fu...
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are dependent on higher profit-margins from gas guzzling pickups and SUVs, and an advantage to foreign competitors. These extreme scenarios are not supported by economic analysis. An influential 2002 study by the National Research Council scrutinized CAFE with respect to its effectiveness and impact. The conclusions describe possible benefits of such mandates. One argument is that so-called market failures, e.g. when one cannot internalize all the benefits from an invention, are identifiable in the context of developing more fuel-efficient technologies. The Research Council identified possible technologies that could well pay for themselves. Requiring higher efficiency while also subsidizing such research, which the Senate bill does, may be enough incentive to overcome such market imperfection and spur technological advances. In addition, one could increase the economic efficiency of CAFE by permitting industry-wide rather than fleet-wide targets. Producers could then trade allowances, which would - for the first time - provide market-based cost information for emission advances. Before CAFE fans run the previous paragraph through a copier, they need to be aware that economics also quantifies ways in which CAFE falls short of its promises. Two important ones include a "rebound effect" prediction that higher gas mileage will increase miles driven, thereby reducing the anticipated savings by up to 20 percent. Also, higher congestion related to these changed driving patterns can add substantial inefficiencies to the economy. Of course, everybody looks right past the 800-pound gorilla of a solution, which would accomplish the policy goal, reducing gasoline dependence, while avoiding cumbersome regulation and not favoring foreign over domestic car brands. That is a significant, say 50 cents per gallon, hike in the gasoline tax. Few are candid about this because of its apparent political infeasibility, because it makes the cost transparent. One may even label that policy prescription to gasoline addiction the third "lane" of politics. Economists, being car-drivers too, also seem to want to steer clear of this fast-lane to ignominy. Michael Reksulak teaches economics and public finance at Georgia Southern University's College of Business Administration. E-mail him at mreksula@georgiasouthern.edu.
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