A few weeks ago I wrote about the looming showdown over fuel economy standards. In that post, I argued that corporate average fuel economy standards (CAFE standards) are not an efficient way of saving fuel or pollution.
Now the EPA has released a proposal to freeze CAFE standards that largely bypasses the efficiency issue. It focuses, instead, on the claim that current fuel economy standards make driving less safe. It even gives the rule the cute name of Safer and Affordable Fuel-Efficient Vehicles Rule, or “SAFE Vehicle Rule,” for short.
So, do CAFE standards really make driving less safe? Does that justify the EPA proposal? The answers, in my view, are “Yes,” and “No.” CAFE standards are flawed, but the best approach would not be just to freeze them in place, but to replace them with a carbon tax, or at least with a higher tax on motor fuel. Here is why.
The rebound effect
The EPA’s first point is that CAFE standards encourage more driving, and more vehicles on the road mean more accidents. That happens because CAFE standards encourage fuel saving only at the dealership, not at the pump. Once a consumer buys a low-mileage vehicle, the cost of driving an extra mile goes down, thereby reducing the incentive for fuel-saving measures like moving closer to work, working at home, riding the bus to work, or consolidating errands. The tendency of more fuel-efficient vehicles to induce additional driving is known as the rebound effect.
The variable that is most critical to the size of the rebound effect is how much more people will drive when it costs them less to do so — what economists call the elasticity of demand. For example, if an improvement in fuel efficiency sufficient to cut cut the cost of driving by 10 percent would cause a 3 percent increase in driving, the elasticity would be -0.3. The increased miles driven would partly offset the improvement in miles per gallon, so that total fuel consumption would decrease by only about 7 percent.
Estimates of the numerical value of elasticity vary, but everyone agrees that averaged over all drivers, it is negative. (For more on estimates, see this earlier post.) That means that the number of miles driven goes up when CAFE standards are tightened.
Elasticity also matters when the cost of fuel rises, as it would with a carbon tax or fuel tax. However, using a tax to raise fuel prices at the pump has a different set of impacts on vehicle choice and driving behavior. In response to a tax, consumers would respond partly by buying moderately more efficient vehicles and partly by driving them less, rather than by buying super-efficient vehicles and then driving them more. We don’t know with certainty how large a tax would be needed to save the same amount of fuel as the 54 MPG CAFE standards proposed by the Obama administration , but economist Noah Kaufman makes a rough estimate of $50 per ton, or about 50 cents per gallon of gasoline.
The EPA’s second safety-related objection to CAFE standards is that by raising the price of new vehicles, they encourage people to hold on to their old vehicles longer. If so, that means it would take longer for innovations like automatic braking and electronic stability control to work their way into the national vehicle fleet. As evidence, the EPA points to a supposed increase in both the average age of vehicles on the road and the average cost of new cars.
That data is open to dispute, however. The global information firm IHS Markit reports that the average age of vehicles on the road has, in fact, risen by a full two years since 2002, but the trend in price is another matter. A report from WGNTV.com, based on data from the Bureau of Economic Analysis and AxelGeeks, a vehicle data site, show that the inflation-adjusted price of new cars actually fell by some 13 percent over the same period. Why, then, are original owners hanging on to their cars longer and why are used cars being kept in service longer before they are junked? IHS Markit points to improvements in vehicle quality, not price, as the main reason.
The EPA argues that strict CAFE standards further hurt safety by encouraging manufacturers to make lighter vehicles, even though, it claims, heavier vehicles are safer. It is true that in a head-to-head between a Ford Expedition Max (5,700 pounds) and a Ford Fiesta (2,500 pounds), you definitely want to be driving the Max. But the Max makes driving safer only for its own occupants, while reducing the safety of those in the Fiesta. If the administration really cared about improving safety, it seems that the best way to do so would be to reduce the variation in vehicle size rather than by the average heavier.
Higher fuel prices induced by a carbon tax ought to do just that, since they would discourage the purchase of gas-hungry SUVs. A study from Resources for the Future found that between 2003 and 2007, gasoline prices accounted for about half of changes in market share between SUVs and smaller cars. However, that study also found that over time, CAFE standards have blunted the effect of fuel prices, so that SUVs have remained popular no matter what.
Of course, some people would always want an SUV to tow the family boat to the lake or a pickup to haul lumber to the construction site. Even so, a carbon tax would help. For one thing, it would increase the incentive for manufacturers to make such large vehicles lighter to save on fuel, for example, by replacing steel components with aluminum. In addition, for families that have both a Max and a Fiesta in their driveways, higher fuel prices would increase the incentive to leave the Max parked when there is no need to tow a boat or haul a whole soccer team to a game.
But, wouldn’t a carbon tax also encourage people to buy more of the smallest vehicles? Wouldn’t that offset any benefits from a reduction in the chance of being T-boned by a monster SUV? Not necessarily, since, CAFE standards already encourage the purchase of the smallest vehicles, despite low gas prices. Wards Auto, another leading source of industry information, asks why car companies keep making small cars at all, when all the glamor is with larger vehicles. Number one on their list of explanations: Selling small cars, even at a slim profit margin, or none, lets carmakers comply with the CAFE system and sell more Maxes.
A false choice
On balance, then, the EPA’s SAFE Vehicle Rule presents a false choice. We can have safe highways and clean air. The best way to get there would be to eliminate CAFE standards and replace them with a carbon tax. Doing so would make for fewer ultra-heavy vehicles while eliminating the incentive to manufacture ultra-light vehicles and sell them at a loss. All vehicles, especially the largest ones, would be driven fewer miles, for a net gain in highway safety and a reduction in pollution.
It comes down to yet another repeal-and-replace scenario. We just need to make sure we don’t repeal the existing fuel economy standards before the replacement, whether a carbon tax or a narrower fuel tax, is firmly in place.