Tag: CAFE

Obama’s new CAFE Standards as a tax break

Lisa Schweitzer

Eagle-eyed reader Don C referred me to this nice Op-Ed from the statesman.com Ready for an Obama Tax Break: TxDOT might not be by Ben Wear. The key point:

Hang on first for some math.

Let’s say a Pflugerville physics schoolteacher drives 15,000 miles a year and, by coincidence, has a car that averages right at that 28 mpg existing standard. She would need 536 gallons to do that.

She pays both a state gasoline tax of 20 cents a gallon (which hasn’t increased since 1991) and a federal gasoline tax of 18.4 cents a gallon (locked in since 1993). So her annual tax hit (paid invisibly at the pump) is $107 to the state and almost $99 to the feds. So, about $206 a year.

With a 56 mpg car, her total tax would be $103. Oh, and at $3.40 a gallon (and subtracting the gas taxes), she would save another $800 by buying half as much gasoline.

But here’s the problem, from a statewide perspective. TxDOT, which gets about three-quarters of that state gas tax revenue and about the same percentage of what Texans pay in federal gas taxes (because a quarter of it, unfairly in the eyes of Texas officials, is then distributed to other states), would lose a couple of billion dollars a year. Ouch.

I had to look up Pflugerville.

Finance folks in transport have seen this train coming for some time. The GAO issued a report in 2009 discussing the issue of improved fleet fuel economy on Federal coffers. Most of us have argued we should go with a mileage fee, or usage subscriptions for autos. Both of which could be handled by leases to private companies.

A primer on CAFE standards and “Better Than Nothing” Policies

Lisa Schweitzer5 Comments

My brilliant colleague, Richard Green, an economist, is acting like an economist about CAFE standards over on his blog. I have a retort, though an addled one. Peter Gordon, another brilliant and genteel colleague of mine, has also weighed in. Economists agree: a carbon tax is the way to go.

CAFE stands for Corporate Average Fuel Economy standards. It’s one of those regulations that people tend not to understand terribly well because the rules are complicated. Here’s a nice overview by NHTSA.

President Obama, like just about everybody else for the past 20 years, wants to raise CAFE standards. For passenger vehicles, Obama wants to go from 25 mph to 39 mph by 2016 (that gives us 5 years to get there).

The rules pertain to a harmonic mean fuel economy of the fleet of cars that a manufacturer produces in a given model year. During the SUV craze (which doesn’t seem to be over if west-side Los Angeles is any indicator), US manufacturers could cash in on gas guzzling SUVs because they were not really considered passenger cars (defined by a weight of 8,500 pounds). The original limit was intended to keep farm and industrial equipment exempt from regulation, such as medium-duty trucks used by farmers and contractors. The wrangling over getting a set of light-duty truck fuel standards (for urban SUVs, used almost exclusively as commuting vehicles) took us a decade, and the damage was done. SUVs not subject to the standards have already penetrated the US fleet, where they will stay on average for 7 to 12 years. We have to make sure those glitches are gone if any revamped regulation–at all–is to be effective in raising fuel economy.

The penalties for CAFE noncompliance have also not risen concomitant with inflation. BMW and Mercedes famously have paid CAFE fines just about every year from 1983 to just recently (2008, largely because of the recession affecting their US sales). Right now, I believe manufacturers have to pay $55 for each vehicle they sell per each 1 mpg below their fleet target. Those types of penalties can be relatively small, and for luxury importers like BMW and Mercedes, they can easily pass those costs along to their buyers.

Automakers can get thus around the law–that’s a problem. And in addition, some economists have argued that by forcing fuel economy, cars became less safe than otherwise:

Lave, Charles and Lester Lave, “Fuel Economy and Auto Safety Regulation: Is the Cure Worse than the Disease?” Pages 257-290 in Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer, edited by Jose Gomez-Ibanez, William B. Tye, and Cliffor Winston, Brookings Institution Press, Washington D.C., 1999.

(aka one of my favorite transportation books of all time).

The argument: cars had to get lighter and thus they got less crash-safe.

As a result, CAFE has few friends other than environmentalists, and many environmentalists I think have stopped advocating around car technology in favor of advocating for Smart Growth or the New Urbanism. After all, raising fuel economy just makes cars less expensive to use, and that flies in the face of the ideas behind these two urban models.

So here are my problems, in a set of bullet points:

1) Yes, absolutely, a carbon tax or simple higher petrol taxes would accomplish the same thing as revamped CAFE standards, and at lower cost. However, I don’t see how a tax would avoid the same safety issues that Lave and Lave (1999) talked about. The basic engineering principles mean you go lighter if you want to use less fuel; we don’t have any strap-on technologies analogous to the carburetor in 1980s or fuel injection that we can turn to. The alternative would be more hybrids, which are also lighter.**

2) Tax aversion pretty much seems to be controlling the world of US policy right now. I’m told that any and all taxes, even ones that would be good for us like most Pigouvian taxes, are off the table, forever and ever, amen.

3) So that means we are left with fuel economy regulation or…nothing?

4) Nothing may have fairly steep consequences. By far—BY FAR–the most effective thing we could for climate change emissions reduction in transportation is improving the fuel economy of the passenger fleet on the road for the next 20 years. Not even in analyses written by the most religious New Urbanist/Smart Growthy people can fudge the fact that most substantial, most immediate gains to be had in climate policy come from changing fuel economy as VMT changes marginally in response to built environment changes, and those built environment changes are happening slowly–even more slowly now that the recession has become permanent.

5) So, yes, it’s costlier and more convoluted to regulate cars via CAFE, but if it’s the only game in town, the additional costs associated with raising the fuel economy of the fleet becomes the price tag of tax aversion—not the fault of the second-best policy. It’s a legitimate democratic choice for voters to prefer to avoid taxation in favor of a costlier strategy. We can’t blame the costlier strategy for being costlier if the optimum isn’t the optimum according to voter preferences. I didn’t make up these rules: but Americans would rather pay more overall for fuel economy changes than pay taxes, well, that is what it is.

This “better than nothing” is the argument made to me for years about congestion pricing. Voters hate it; we aren’t going to do it. So we’re going to build lots of trains to alleviate congestion, and those trains will, in turn, be underused because we’re not pricing autos properly. But building and running half-empty trains is a “better than nothing” policy.

I’m not sure what the answer is. But it’s a debate worth having.

**See comments for Gabriel Rossman’s referral to the Continuous Variable Transmission technology, which would allow for fuel economy improvements without going lighter. (I still wonder, though, because the models where the CVT has been employed aren’t taking us up the economy notches that a harmonic average of 39 would need to go–the Cube, the Maxima, etc. Remember that this is a harmonic average. You have a number of ways of achieving it, and one of the most expedient is chopping off your lower tail of the distribution of models you are producing.)