Wednesday, May 20, 2009

COP:The inefficiency of fuel-efficiency rules

Financial Times

President Obama’s move to toughen Corporate Average Fuel Economy standards is bipartisanship of sorts. CAFE standards were signed into law by Gerald Ford in 1975. George W. Bush, in a rare fit of environmentalism, raised them in 2007. Foreign policy realists and environmentalists alike support stricter standards. None of this alters the fact that CAFE is a deeply flawed policy. Fuel efficiency is a worthy goal. It helps fight global climate change and it promotes energy independence. From an economic point of view, who can be against more efficiency? But CAFE is about the worst possible way to pursue it.

CAFE standards are inefficient because they block normal market mechanisms. To impose the same average standard on each manufacturer’s fleet of cars sold forces car companies to produce similar ranges of vehicles rather than specialise. Such command-style regulation can only hamper the effort to make the US car industry retrieve its long-lost commercial acumen.

Even when CAFE does differentiate by type of car it does so inefficiently. Until recently, one standard applied to passenger cars and a laxer one to light trucks, which includes, for instance, sports utility vehicles. The predictable result is that more people are buying light trucks, which now make up half of US car sales, compared with about 10 per cent 30 years ago. Rather than reducing fuel consumption, therefore, CAFE has encouraged the use of larger cars. Recent changes make this problem even worse.

Beyond these perverse incentives, CAFE pre-empts rational consumer choice about how to consume less fuel. Neither the climate nor energy dependence depend on whether people buy more efficient cars, drive less or cut back on other energy- intensive activities. Artificially encouraging only one narrows the opportunities for improvement.

Fuel efficiency did rise after CAFE was introduced: from under 20 miles per gallon in 1978, 2009 model cars average 28.2mpg. But most of the increase coincided with high oil prices: fuel efficiency peaked for model year 1987 at 26.2mpg and stayed below that until 2007, when oil again reached record highs.

CAFE amounts to a hidden, biased and inefficient tax.
Mr Obama’s reported plan to raise standards for cars to 39mpg would be warranted if there were no alternative. But there is: introducing a price on fossil fuel, through a carbon tax or a cap-and-trade programme extended to vehicle fuel. Rather than wasting political capital on raising CAFE, Mr Obama should stop the emasculation of the cap-and-trade proposal currently before Congress.

Copyright The Financial Times Limited 2009

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