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By Robert Rapier on May 21, 2009 with no responses

Thoughts on New Fuel Efficiency Standards

After I wrote The Problem with CAFE a couple of years ago, a lot of people concluded that I am against higher CAFE standards. That’s not exactly the case. In a nutshell, my problem with CAFE is that I feel like it addresses the problem from the wrong side of the equation. In light of the new announcements on stricter CAFE standards, this might be a good time to review the issue. First, the new policy:

Stricter mpg rules may be boon for automakers

By issuing rules aimed at sharply boosting vehicle gasoline mileage and slashing greenhouse gas emissions, experts say the Obama plan is just what carmakers need given the prospect of higher gas prices and worries about global warming.

Automakers, in fact, reversed decades of opposition to stricter mileage standards by supporting the administration’s new rules — likely spurred in part by the industry’s heavy reliance on bailout money from U.S. taxpayers. Auto executives, for their part, said they like the plan’s unified approach to rulemaking.

The plan’s 30 percent boost in fuel economy would translate into a 35.5 mile per gallon average for cars and light trucks in 2016, four years earlier than the existing law called for. New passenger cars sold here would need to average 39 mpg, up from the current 27.5 mpg. Light trucks, which include pickups and sport-utility vehicles, would need to average 30 mpg, up from 23.

So what could possibly be wrong with that? The problem I have with it is that it mandates that automakers build vehicles that people are not demanding. There are very fuel efficient cars available right now. In fact, that’s about all you see in Europe, and you can certainly get them in the U.S. Why is the demand high in Europe? High fuel prices. People demand fuel efficient cars when fuel prices are high, as we saw last summer when SUV sales plummeted and hybrids were flying off of the car lots. Europe doesn’t have to mandate that they are built; the demand is there. This was the thrust of my argument in 2007, and CNN has picked up on that theme as well:

Gas prices: The key to fuel economy

The Obama administration estimates these rules will add about $600 to the cost of a car. That’s on top of an estimated $700 added by changes to fuel economy rules that have already been enacted. All this may keep consumers from buying a new car, some say.

Also with fuel prices still low, consumers may want larger vehicles, but these will never be as efficient as small cars. Without soaring gas prices pushing drivers to conserve, it will be difficult for makers of larger vehicles to meet the administration’s efficiency goals.

“You could achieve the standards today with ultralight, really small cars,” said Jeremy Anwl, chief executive of the automotive Web site Edmunds.com, “but how many people are really going to buy those?”

“They’re continuing to focus on the wrong program,” said Todd Turner, an analyst with Car Concepts Automotive Research.

Bingo. The problem with this is that the end result may very well result in better fuel efficiency, but it will be an inefficient process. By making cars that aren’t in demand, you may increase the price of the larger cars (e.g. SUVs) that are in demand. This may shift demand to smaller cars. But this could be accomplished by my proposal to exchange higher fuel taxes for reduced income taxes.

I think that’s reality. But in the alternate reality where technology is magically mandated to fix problems, we get thinkers like this:

Obama’s fuel home run

America finally has a smart leader, not a good old boy from Texas and his sidekick who were in the hip pockets of the Saudis and oil interests at home and abroad. Yesterday’s announcement of dramatically enhanced fuel efficiency standards on vehicles recognizes that environmental, economic, trade and foreign policies converge and can be addressed all at once.

I think these sorts of stories are incredibly naive. I suspect everyone is for higher fuel efficiency. What these sorts of proposals suggest is that it is a painless fix. Detroit will bear the costs, while consumers can continue to drive their Lincoln Navigator, only now it will get 30 miles per gallon instead of 14. Somehow, this magic wave of the wand is going to do this, and Obama is a genius for recognizing it.

Heck, if it is that easy, I don’t understand why he didn’t mandate that all vehicles achieve 100 mpg. For that matter, I still can’t understand why we don’t mandate a cure for cancer.