Category: energy

Just a few final comments on CAFE, before moving on to other topics. Kevin Drum argues, in a rebuttal to Matthew Yglesias, that the CAFE standards do what they were designed to do.

His evidence is a National Academy of Sciences study that tracks an increase in the average fuel economy of cars in the wake of CAFE. I cannot point out the weakness in this argument any better than a commenter on his site did (here and here)—it appears to ignore the CAFE-induced shift to light trucks with lower fuel economy requirements.

Drum’s article also points out that the NAS study also suggested the use of a tradable credit system, as I suggested in my earlier post. Good to know that this is concept is now accepted by a broad range of the policy community.

I still prefer the gas tax, but I am not as resolute as I was a few posts ago. If we are going to stick with CAFE, I'd recommend that it have the following elements:

1. One standard, covering every passenger vehicle
2. Tradable credits, to enhance efficiency
3. Stiff penalties for failing to meet the standards
4. A very agressive schedule of increases, legislated today for future years

Ted Gayer, a former colleague of mine at CEA, an Associate Professor of Public Policy at Georgetown, and a Visiting Scholar at AEI, takes a turn guest-blogging on CAFE:

Since I’ve done some research on light trucks, Andrew has graciously allowed me to throw in my two cents on the new CAFE standards. I’ll take the invitation as an indication that he has forgiven me for any headaches I caused him while working under him at the CEA.

As Andrew pointed out, one of the odd things about the new CAFE standards is that they create six categories of light trucks (based on wheelbase multiplied by track width), with the standards becoming more lax for the larger categories. So now there’s an incentive to build larger light trucks. (To DOT’s credit, by reducing the discrepancy between the CAFE standard for cars and the standard for small light trucks, they did reduce the incentive to make the latter rather than the former.)

Why would DOT want to provide an incentive to build larger light trucks? One reason is because of John Graham, who is the Administrator of the Office of Information and Regulatory Affairs (the OMB office that oversees regulatory matters). John has long argued that increasing CAFE standards leads to down-weighting, and that down-weighting leads to more traffic fatalities (see his 1989 paper with Robert Crandall in the Journal of Law and Economics [link via JSTOR]). The Crandall and Graham paper finds evidence of down-weighting, and they link these findings to work by Leonard Evans [link via ScienceDirect] which suggests lighter cars lead to more fatalities.

All of this is eminently plausible, yet I have a few quibbles with using this work as a justification for the structure of the new CAFE standards. First, the original Evans work (from the early 1980s) was focused on cars of different weights, and did not consider light trucks (there were so few data points back then for light trucks). While it may be true that two light cars crashing results in more fatalities than two heavy cars crashing, this is not directly generalizable to the case of two light trucks (which are heavier and larger) crashing. But my bigger quibble is that the Evans research examines the total fatalities that occur, given that a crash has taken place. In a world of only cars, this type of analysis makes sense, because there is no a priori reason to think that heavy cars are more crash prone than light cars. But given the higher center of gravity of many light trucks, and the different and conflicting sightlines they present, there is some concern that light trucks are indeed more crash prone than cars.

I looked at this issue in my 2004 Journal of Risk and Uncertainty article. First, I confirm the findings of Crandall and Graham as applied to light trucks. That is, given that a crash has occurred, we can expect more fatalities if the crash involves two cars than if it involves two SUVS. (Interestingly, I find that a crash of two pickups is worse than a crash of two cars.) Another way of saying this is that the safety advantage of being in an SUV rather than a car dominates the additional risk that the SUV rather than a car poses to the other driver in the crash.

But then I estimate the additional crash risk posed by light trucks relative to cars. This isn’t an easy task, since one must consider the likelihood that more reckless drivers select into light trucks relative to cars. I address this by using snow depth variation by states. It turns out that states with higher annual snow depth tend to have more annual light truck driving than car driving. I then use this variation to look at relative crash frequencies in summer months (when snow depth doesn’t play a part). I find that, indeed, the additional crash risk of light trucks cancels out the safety advantage they pose when in a crash.

So what’s it all mean? By creating an incentive to build larger light trucks, the new CAFE standards will likely not achieve their goal of protecting drivers’ safety. Aside from this, I should point out that I agree with Andrew: the pertinent regulatory issue is not the total fatalities resulting from the mix of vehicle types. A consumer can decide for herself how much to spend for a safer vehicle. What she can’t decide is how threatening a vehicle other people should buy.

I do think there was another reason for the structure of the new CAFE standards. U.S. automakers make larger light trucks than their foreign competitors, so a uniform light truck CAFE standard hurts domestic automakers. I think this gets at Andrew’s concern that CAFE standards are not transparent: here’s an example where they can be used for protectionist purposes. So I throw my hat to the politically implausible goal of scrapping CAFE and replacing with a higher gas tax.

Thanks to Ted for guest blogging. When in doubt, consult an expert!

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The Environmental Economics blog has a few of posts about CAFE, including a link to this study done by Resources for the Future that purports to estimate an "optimal" gasoline tax of about $1 per gallon. It is based on factors such as air pollution, greenhouse gas emissions, congestion, and accidents. The author is up-front about the uncertainties involved with making such a calculation.

This calculation does not include the "externality" of the impact that our importation of oil from authoritarian regimes has on the welfare of people living in those countries and or the terrorism those regimes may sponsor, the topic that originally sparked this thread. Overall, though, a thoughtful read and an excellent blog. Also of interest is Matthew Kahn's new blog, focusing on Environmental and Urban Economics.

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A comment over at Brad DeLong's blog, in his discussion of this earlier post, suggested that my criticism of CAFE standards is off the mark:

Samwick is simply wrong.

CAFE standards, historically, are extremely effective at increasing efficiency.

The amount of tax you'd need to begin approaching the efficiency under CAFE would be pretty steep. While it could be done in principle, as commenter Rob points out above, it's very unlikely the necessary gas taxes would ever be passed.

I suspect we are not writing about the same exact concepts (e.g., efficiency versus usage), but it did prompt me to recall some academic work on the subject. The best paper I have ever seen presented on this topic is by Penny Goldberg, now at Yale. As far as I can tell, it is still state of the art in the economics literature. The full citation is:

Goldberg, Pinelopi Koujianou. "The Effects of the Corporate Average Fuel Efficiency Standards in the US" The Journal of Industrial Economics, Vol. 46, No. 1. (Mar., 1998), pp. 1-33.

And for those of you with access to JSTOR, you can get it here. She's got a pretty slick model of both automobile demand (including the new and used markets) and the non-competitive elements of the automobile supply side. Using data from 1984-1990 to estimate the model, she does some simulations that compare the effects of CAFE (as it existed in 1989) with a gasoline tax. First, she simulates what would happen if the CAFE standards were eliminated:

The results from these calculations ... indicate that CAFE standards lead to approximately 19 million gallons fuel consumption savings per year. This figure can only be interpreted as a one year ahead effect ... a rough idea about the total impact of the 1989 standard can be obtained by calculating the annual savings in the "steady state," after the current vehicle stock has been completely turned over and replaced by vehicles subject to the 1989 regulation. Assuming that there were no further changes in the standard after 1989, and that the total number of cars on the road remained constant ..., the 1989 CAFE standard alone would lead to approximately 400 million gallons of annual fuel savings.

Even thought this figure is much larger than the 19 million gallons estimated for the first year, it still represents only a small fraction of the approximately 130 billion gallons of gasoline consumed in the US every year.

Okay, so 0.4/130 = 0.3%. Not a very big dent in usage at all. But this doesn't mean that a gas tax is much better, as she shows in her next simulation:

[W]e can compute the gas tax increase necessary to achieve the same fuel savings as with the CAFE regulation. According to our results, this increase would have to be 780% or 80 cents per gallon, implying almost a doubling of gasoline prices.

The gas tax at the time was 10 cents per gallon. So this suggests that neither policy, as they have been implemented to date, have generated much of an impact on total gasoline utilization. So we'll give the commenter 1-for-2: CAFE standards have not been particularly effective, but the gas tax required to mimic their effects on utilization would have to be pretty steep.

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Paul Mulshine of the Star Ledger "outs" me in his column today for driving an SUV myself, in the sense of a vehicle subject to the lower standards of fuel economy for light trucks under the CAFE regulations. Like many of my liberal friends in rural New England, I drive a Subaru Outback. I had no idea at the time I purchased it that it qualifies as a light truck, which is the focus of Paul's rather amusing article on the new regulations. If it's any consolation, I walk to work most days.

Our friend the Minuteman has picked up the topic, focusing on the increase in the light truck requirements but the odd coupling of this change with lower standards for larger vehicles within the group. Okay, let's think this one through. With a separate standard for light trucks over the past years, we've seen more SUVs in the light truck category and fewer cars in the other category. Anyone want to bet that we won't simply see more quantity in the less fuel efficient categories over time?

I think the CAFE standards are lunacy as currently conceived, and I'll cite three issues. The first issue, as I've alluded to earlier, is that the problem we care about is total usage of gasoline. Total use is the amount of miles driven divided by fuel economy. CAFE standards, at best, address fuel economy, but they provide no incentive to economize on the number of miles driven. This is why a gas tax is better--it allows people to decide how they want to conserve on fuel usage, fewer miles or fewer gallons per mile.

The second issue is that the CAFE standards operate at the level of a fleet of vehicles produced by one manufacturer. I have never heard of a rationale for regulating a company's whole product line. The more economy cars a company makes, the more fuel-inefficient cars it can make without penalty. Why provide an incentive for Toyota to make larger cars just because it happens to make good small cars? If the objective is to regulate the average fuel economy of all cars on the road, then there ought to be a tradable permit system established. We would get a better variety of cars on the market, though not at any one particular dealer. Pure welfare gain.

The third issue is that the CAFE standards operate in a hidden fashion, and as a result there have been plenty of abuses. CAFE standards are negotiated behind the scenes with a few entities (the manufacturers). They lobby for complexity and then exploit loopholes, like the different standards for cars and light trucks or, as I fear, all these new flavors of SUV. Lack of transparency is the enabler of bad policy. Is there anything more transparent than a gas tax at the pump?

Keep it simple. Scrap CAFE, set a higher gas tax, and return the aggregate revenues from that gas tax through lower income taxes in a progressive fashion.

Linked at Outside the Beltway's Traffic Jam.

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Andrew Sullivan returned from his bloggatical this week and picked up the thread of SUVs and terrorism, referencing a generally good column by Fareed Zakaria in Newsweek.

Andrew is also soliciting suggestions for bumper stickers to express the frustration that many feel about conspicuous consumption of gasoline that helps support non-democratic regimes. I haven't seen anything that compares to Tom Friedman's:

There is actually a cottage industry of anti-SUV bumper stickers, some that are intended to be placed on SUVs by someone other than their owner. Start here, or just use Google.

My libertarian streak prevents me from getting into the business of micromanaging what car people drive or how much they choose to spend on gasoline or any other private good. (Though I do confess that this chart makes me wonder why people would want to drive a fuel inefficient SUV unless they absolutely filled it to capacity.) The aspect of SUVs that does annoy me is that I believe that they impose a safety risk on the rest of us for which the owners bear no cost. Consider this fascinating paper by Michelle White of UC, San Diego. Quoting from the abstract:

The main result is that when drivers replace cars with light trucks, 3,700 additional crashes per year involving fatalities of smaller vehicle occupants, pedestrians and bicyclists occur, while only 1,400 crashes involving fatalities of light truck occupants are avoided, i.e., the ratio of negative external effects to positive internal effects is [over] 2 to 1. The paper argues that none of the existing traffic laws or institutions forces drivers of heavy vehicles to take account of their negative external effects.

You can read a digest article summarizing the paper here. If you are going to drive an SUV, you should have to drive better than if you drive a lighter car. I would support a special driver's license for people driving SUVs. Some of the possible reforms discussed in the paper and listed in that summary also make sense: "lower speed limits and more stringent driving rules for heavier vehicles, requiring that all vehicle owners in all states buy liability insurance, raising the minimum required levels of liability insurance coverage, and replacing no-fault liability systems for motor vehicle accidents with fault-based systems."

On the broader issue of excessive gasoline consumption and what that does in the wider world, I reiterate my basic point that a simple gas tax is the best policy. The mullahs don't care whether they get their money from someone driving an SUV 15 miles or a hybrid 45 miles--it's the same gallon of gasoline. So tax that directly and let cost drive behavior.

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