The CAFE is closed

Fuel economy in context 13

The decision of the Obama Administration to embrace stronger fuel economy standards by 2016 is drawing praise from environmentalists but fire from auto analysts who say it will add to Detroit’s woes.  The decision to accelerate fuel economy comes on top of a variety of policy proposals to address climate change, the auto industry and transportation including the cap and market bill that was the subject of House hearings yesterday, the deliberations of the Auto Task Force over GM’s fate, replenishing the Highway Trust Fund and a proposal to offer clash for clunkers also in legislation working its way through Congress.  Here are my thoughts how higher fuel economy standards fit into the bigger picture.

First, fuel economy standards are among the least precise tools for addressing climate change.  The reason?  Fuel economy is the mathematical equivalent of lower gas prices insofar as its allow consumers to drive more for less.  While it is therefore good for motorists’ pocket books, its impact on emissions is ambiguous.  If you believe that people drive a certain amount each day and never vary that amount—then higher fuel economy translates directly to lower emissions.  However, if you believe that people drive more when gas costs less in other words that gas usage is price elastic—then higher fuel economy leaves more money in your pocket but does little to reduce emissions.  Last year’s falloff in driving when oil prices spiked (as well as numerous studies) suggests that gas use is price elastic. As a result, the primary impact of higher fuel economy is likely to be what economists call an improvement in consumer welfare but not a large reduction in gas emissions. 

Second, higher fuel economy—by lowering the cost of driving a mile—also runs counter to the idea of making carbon more expensive—the idea behind carbon tax proposals and the cap and market legislation debated yesterday.

Third, fuel economy standards like gas prices are likely to impact the quantity of gasoline consumed.  In fact that is the goal.  To the degree they lead to less gas consumption, they lead to fewer gas taxes collected.  Since the Highway Trust Fund which finances not only roads but a large share of mass transit in America relies on gas taxes, higher fuel economy standards may reduce money available for transportation.  Later this year, Congress will try to fix the finances of the Highway Trust Fund.  But we should be mindful that improving fuel economy cuts in the opposite direction of two other policy ideas: making carbon more expensive and replenishing infrastructure funds.

Finally, there is the cost to the auto industry of making cars more fuel efficient.  The Auto Task Force has adopted fuel economy as an unofficial goal and suggested Chrysler and GM need to improve fuel economy as a condition of survival.  However, there is no link between fuel efficiency and profitability and, if anything, the correlation is negative.  Large cars remain a requirement for families and Americans simply like them.  Indeed, a Chevy Suburban with five in it is far more fuel efficient than a Prius with one person in it.  Cash constrained Americans—the lower three fifths of our beleaguered consumers—also prefer to pay less up front even if they have to pay more for fuel later on.  This is a question of their internal discount rate and cost of capital—which in the case of the poor is very high.  Even the New York Times, discussing the looming GM bankruptcy yesterday, got its logic mixed up when it described the fact that 11 of 20 of GM’s best selling cards are gas guzzlers as a problem.  The company’s problem is not its money making cars but its money losers.

As I have written before the crisis of the auto industry is due to one thing and one only, the virtual halving of sales volume due to the financial crisis that makes it impossible for anyone, Toyota, Honda, GM or Chrysler, to make money in the United States.  Fuel economy is a largely separate issue.

All this is a long way of saying that the higher fuel economy standards are no magic bullet to the problem of emissions and the real requirement of all the policy suggestions currently floating around is that they work together in alignment.

Here are proposals that are aligned.

The cash for clunkers idea now before Congress that Jack Hidary and others have advocated makes sense because it replaces old, smoky cars with new clean ones and also will generate demand for cars at a time when sales are down.

Pricing carbon through cap and market makes sense because it will attach the costs of emissions directly to their source, carbon. 

Good old gas taxes which are a form of carbon tax make sense as well, since they connect the tax to the carbon.  In contrast, the Vehicle Mileage Tax that some have proposed, even apart from its Orwellian implications for our freedom, would remove any incentive to buy an electric car or plug-in hybrid or, indeed, own a fuel efficient vehicle.

Incentives for electric cars and plug-in hybrids make sense because they move us off gasoline entirely.  Indeed, higher gas mileage is only likely to lead to major reductions in emissions if it hastens a switch to electric vehicles.

All these goals require a healthy auto industry.  If the Auto Task Force can keep GM out of bankruptcy, this would be a good thing, as a drawn out GM bankruptcy could hobble America’s clean energy future.

In short, when dealing with issues this complex, it is vital that we get them right and that different policy proposals work together.  While higher fuel economy standards are not a bad thing, they need to be viewed as part of an overall plan to create a clean, healthy and robust American transportation sector.

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  1. apsmith Posted 11:47 am
    19 May 2009

    I think there's a subtle effect here that you're missing - why are fuel-efficient cars money-losers for American manufacturers? Because of CAFE standards. Since the fleet average has to reach a certain level, manufacturers have to under-price the efficient cars to sell enough of them to keep the average up. That means they look like money-losers in all their financial analyses. And the manufacturers get stingy on innovation and marketing for that class, since it looks like they're not making money off them. Until they collapse.A better system, other than simple fuel taxes which would also do the trick, would be the sort of feebates Amory Lovins (who I'm not generally a fan of) has proposed. This way the manufacturers can directly see higher prices and actual profits on their more fuel efficient cars, while the government shuffles the money from gas guzzler purchases (imposed fees on purchase) to efficient car purchases (rebates). Otherwise manufactures simply have a continuing disincentive on fuel economy, simply because the CAFE standard exists.

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  2. Christopher S. Johnson's avatar

    Christopher S. Johnson Posted 12:40 pm
    19 May 2009

    This is all interesting. But Obama doesn't have the power to unilaterally raise a gas tax. And Congress is in the middle of finding it's soul.This is what he could do -- now.  Lets hope other good ideas written above come about as well.

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  3. sialia Posted 1:00 pm
    19 May 2009

    Better information can also help. Easy steps like improving fuel efficiency from 10 to 20 mpg actually provides more savings than improving from 25 to 50 mpg for the same distance of driving. Think gallons per mile. See: http://www.sciencedaily.com/releases/2008/06/080619142118.htm 

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  4. Christopher S. Johnson's avatar

    Christopher S. Johnson Posted 1:06 pm
    19 May 2009

    For that INDIVIDUAL and their pocketbook, RELATIVE to what they had before, yes. But for ALL of us and CO2 pollution, the 50 mpg is still a necessary move for the owner of the 25 mpg vehicle.

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  5. Noah Pollock Posted 4:49 pm
    19 May 2009

    Lots of food for thought. It is worth mentioning that fuel consumed is a function of both fuel efficiency and total vehicle miles traveled (vmt). While fuel efficiency has been increasing in the past fifty years, vmt has been increasing faster. (The same, incidentally, applies to the economy - while our emissions/gdp have been decreasing, our total emissions rise because the economy keeps growing).

    In terms of VMT, land use decisions and policies play a huge role. But this is typically left to local governments.

    For those interested in this topic, at the Institute for Global Sustainability's courses in ecological economics (http://learn.uvm.edu/igs ) students in classes happening on campus and online explore these types of trends in greater detail.

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  6. apsmith Posted 7:18 pm
    19 May 2009

    Though I hasten to add, if you're going to have CAFE-like rules, make them as tight as possible. So kudos to Obama for doing this, and I don't think the arguments in this article make it one bit less right to tighten them up.What manufacturers should do, given CAFE, is realize that it constrains them to pair up vehicles, in a sense. They can only sell a (profitable) Hummer if they also sell (at a loss) a Volt, because of how the average fuel economy works between the two. So given that constraint, the profit shouldn't all be allocated to the Hummer in manufacturing accounting, but should be evenly divided between the two cars, because you can't sell the Hummer without the efficient car to meet the average requirements.Let's just hope Detroit gets managers and finance folk smart enough to figure this stuff out.

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  7. Royal Enfield's avatar

    Royal Enfield Posted 9:35 pm
    19 May 2009

    Obama is a political ninja of a caliber seen only once every couple of generations and his achievement today cannot be understated. More efficient cars are an important part of addressing greenhouse gasses from the transportation sector.  However; unless we also address land use policies any technological improvements we make in our vehicles will be offset by the amount of miles that these vehicles will travel. Since World War II, we have become increasingly dependent on the automobile and, as a result, land is being consumed for development at a rate almost three times faster than population growth, causing carbon emissions to rise while reducing the amount of forested land available for carbon absorption. In order to address this issue, we must change our approach to land use and encourage smart growth principals incorporating higher density mixed-use development, an interconnected street network, and a variety of transportation options including mass transit, biking and walking. Where such development tools are used, people tend to drive 20% to 40% less.  Such local level policies employed in tandem with federal actions will prove to be effective.

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  8. Dave from Canada Posted 12:49 pm
    20 May 2009

    Two fundamental mistakes:1. Confusing the impact of higher mileage with lower gas prices.  Yes, both have the impact of putting more dollars in consumers pockets.  But lower gas prices result in more driving, while higher mileage cars don't necessarily.  When gas prices are higher - as they soon will be, due to both carbon pricing and peak oil - there will be a strong disincentive to drive more.  While the marginal cost (cost per extra mile driven) might be the same with higher mileage cars as with lower gas prices, the psychology won't be the same.  Motorists are not exactly rational economic actors; when gas prices are high, most of them will drive less, whether their cars are efficient or not.2. Cash for clunkers.  How can anyone still seriously argue for this?  We have known for more than a decade that at least a third of the emissions of any car is embedded in its manufacture.  Cash for clunkers is great for automakers, but let's not kid ourselves that it's good for the environment.   

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  9. katakanadian Posted 1:51 pm
    20 May 2009

    It may be politically unworkable but I think we should look at gas rationing, or more precisely cheap gas rationing. Every citizen (0-110 years old) gets a ration card that entitles them to a fixed amount per year of gas at regular price. Then slap a massive gas tax on anything beyond that. This means that a family of four gets more cheap gas to deal with driving to day care and soccer games while the single executive who wants to live 2 hours away from work gets less cheap gas. Set the ration low enough so that everyone who owns a car is likely to pay the gas tax for at least part of the year which should be shocking enough to get a lot of people switching to bikes, electric vehicles, or living more locally. Those people who are already living the right lifestyles would have cheap gas ration credits unused which they could sell to higher consumers or they could choose to retire those cheap gas credits which would be almost like leaving oil in the ground.Better yet, just bring in a honkin' big carbon tax since coal is a much bigger problem than oil.

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  10. splashy's avatar

    splashy Posted 10:55 am
    23 May 2009

    It seems that it will take a while for the mileage to be raised in vehicles, while the gas prices go up pretty much continually. I remember 26 cents a gallon.Therefore, the tendency to drive more miles because your vehicle gets better mileage will be offset by the higher price per gallon, leading to about the same amount of miles driven, at the same total price spent.Gas prices rise fairly quickly when they do rise, better mileage in vehicles is a slow process (unless they atually start letting us buy the ones that have been sold in other countries for years now). It all evens out after a while, and I'm thinking that's what they are thinking.

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  11. sameer Posted 12:21 pm
    04 Jun 2009

    Hi all - One key issue surrounding the discussion of fuel economy is
    the initiative that drivers in the U.S. can take on their own to reduce
    their gasoline consumption. Obviously, higher fuel economy standards
    are a huge factor, but if we could only get drivers to take a few
    simple steps, like checking the air pressure in their tires every
    month, driving the speed limit, getting regularly scheduled tune ups,
    etc., the reduction in gas consumption would be enormous. Drivers would
    barely have to bat an eye to become more efficient with their gas use,
    and as U.S. Energy Secretary Steven Chu wrote, “Energy efficiency is
    not just low-hanging fruit; it is fruit that is lying on the ground”.

    To
    that end, I’m actually working as a communications intern on the Drive
    Smarter Challenge with the Alliance to Save Energy. It is a public
    awareness campaign that was launched to encourage drivers to reduce
    their gasoline consumption through following a number of easy to do
    tips. For instance, each 5 mph you drive over 60 mph is like paying an
    additional 24 cents per gallon for gas.

    Please visit the website at http://drivesmarterchallenge.org... and take the challenge, and ask your friends and family as well.
    Knowledge is power, and the more we can get the word out about this,
    the better.— Sameer Ranade, Washington, D.C.

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  12. drewtiss Posted 11:40 pm
    17 Jul 2009

    Some groups have the initiative to do their part. They modify pontiac parts such as fuel injectors of their rides to affect its fuel eco. Most of them owned a 1998 Pontiac Firefly models.

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  13. Marry Posted 4:40 am
    28 Oct 2009

    Excellent work every buddy can get lots of interesting information, keep on posting this type of brilliant articles.



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