This Friday is the deadline for public comments on the stricter vehicle efficiency standards from EPA and the Department of Transportation. The docket is likely to be overrun with statements for and against the regulation that would make cars and light trucks 30 percent more efficient in 5 years.
From an economic perspective, the social benefits of the rule outweigh the costs. The environmental, health, and energy security benefits—most especially from reducing the tailpipe emission of greenhouse gases—could more than double the estimated costs to manufacturers of installing more fuel efficiency technologies: social benefits could total over $800 billion, compared to around $400 billion in compliance costs.
But there will also be the straight up savings to consumers, who will spend a fraction of the current cost of filling their tanks. The benefit to Americans’ pocket books could reach as high as $2 trillion.
This line item alone swamps the price tag on the rule making it overwhelmingly justified—but some opponents of the rule may want the EPA to nullify these savings.
Their argument goes something like this: Consumers have the option to buy more fuel efficient cars right now, and they do not. Therefore, there must be something about having bigger, heavier, more powerful cars that benefits American consumers. Since this regulation could limit their ability to buy these larger, those citizens would have to do without something they value.
Opponents of stricter fuel standards admit that it is almost impossible to value that preference for bulkier cars, but they might try to convince the agencies that it is at least as much as the fuel savings we’d see at the pump. Since consumers could have those same fuel savings today by buying a Prius or an Insight, but forgo those cars for an Explorer, then the lost consumer benefit would need to be at least that amount.
But how consumers choose and value cars is more complicated than that. A car’s newness, size, and power are valued not just for their functionality, but for their relation to the others in the parking lot. Consumers value horsepower not just for speed but as a status symbol and for the ability to out-accelerate others at a traffic light. People don’t necessarily want a big car, they just want a bigger car.
The problem with prestige goods is they don’t actually increase welfare or status. If Smith buys a bigger car, Jones has to buy a bigger car as well to catch up; relative to average car size, neither has really moved ahead. By devoting resources to conspicuous features like size, less visible features like fuel efficiency and financial savings are sacrificed.
The proposed CAFE regulations correct a market failure and accomplish what the non-cooperative marketplace cannot: fuel efficiency increases, Americans get the value of fuel savings, and consumers do not have to risk their positional status, since over time the entire fleet’s average size and power will shift.
This is one of the chief reasons to regulate: to increase consumer welfare by doing what the market can’t on its own. It might take consumers some time to grow accustomed to the new vehicle options, but relatively quickly they will be just as happy with their new, more fuel-efficient models, and they will be thrilled by the trillions in savings at the pump.
Walking: A simple focus for the Smart Growth movement
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Gene Preston Posted 7:36 am
24 Nov 2009
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Ken Johnson Posted 11:03 am
24 Nov 2009
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Gene Preston Posted 7:53 am
25 Nov 2009
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Ken Johnson Posted 9:30 am
25 Nov 2009
The new regulations have an average compliance cost of $1050 per vehicle, and reduce lifetime emissions by 16 tonnes, so the regulatory incentive is 65.6 cents/gal.
At current national gasoline prices of about $2.65/gal, the existing marginal incentive for CO2 reduction via fuel economy is about $300/tonne.
data sources: here and here
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Gene Preston Posted 10:23 am
25 Nov 2009
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Ken Johnson Posted 11:19 am
24 Nov 2009
But suppose the fuel savings were internalized in the sticker price, e.g. as a low-interest loan, which might be payable through registration fees. If Joe gives any thought to projected lifecycle operating costs (which he doesn't) he would see no difference between cars A and B, because the lower fuel costs of B would be offset by the loan payments. But now the sticker price on B is lower than A by $1900. Joe now has a marginal incentive of over $200/ton-CO2 for reducing GHG emissions, not when he goes to fill up his shiny new car at the gas pump, but before he foolishly buys that cheap gas guzzler.
Innovative financing models for transportation vehicles could create GHG-reduction incentives more than double the regulatory incentives of new fuel efficiency regulations -- just based on fuel savings alone. Furthermore, car buyers who are more interested in reducing their carbon footprint than saving fuel costs would be able to do so under financing regulations -- but not under the new efficiency standard. Under the new standard, if you buy a vehicle having better-than-average emission performance, then the manufacturer will earn compliance credits from your purchase, allowing them (or someone else) to sell more high-emission cars that will neutralize the emission benefits of your car. This is a consequence of the "least-effort" regulatory paradigm underlying current policy, which prioritizes cost minimization over emissions minimization even when direct monetary benefits far exceed costs.
Another consequence of our lazy policy-of-procrastination is that pending federal cap-and-trade regulations will neutralize any emission benefits of vehicle regulations. Aggregate emissions in capped sectors (including transportation) are set by a predetermined cap irrespective of what vehicle reg's do. Any incremental reduction in transportation emissions will result in surplus emission allowances, which will simply allow more coal burning.
Since the regulatory incentive of fuel economy regulation far exceeds projected trading prices (e.g. $20/ton) under cap-and-trade, it would make sense to take transportation out of the cap-and-trade system. If the coal-burning industry needs more allowances, they can be given more allowances; it doesn't make sense to let them burn up all of the benefits of vehicle regulation whether or not they need the allowances.
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