Fuel Economy Standards Are a Costly Mistake

By Salim Furth, Ph.D. and David W. Kreutzer, Ph.D. of Heritage. Excerpts:

"Corporate Average Fuel Economy (CAFE) standards are adding thousands of dollars to the prices of new cars. When the Obama Administration began implementing Congress’s stricter CAFE standards in 2009, scholars predicted that the standards would cost consumers at least $3,800 per vehicle. Vehicle prices, which had been falling, began rising in 2009 and have not stopped. The average vehicle now costs $6,200 more than if prices had followed their previous trend. Prices will continue to rise, by at least $3,400 per car through 2025, unless this costly policy mistake is undone."

"It is likely that the regulations are adding at least $3,800 (perhaps much more) to the average price of new vehicles"

"The regulations require that each manufacturer’s fleet of new cars have average fuel economy above a certain level, with extensive instructions for computing the average and exemptions for certain types of vehicles. Manufacturers have found work-arounds to thwart the intent of the regulations. For example, the standards raised the price of large cars, such as station wagons, relative to light trucks. As a result, automakers created a new type of light truck—the sport utility vehicle (SUV)—which was covered by the lower standard and had low gas mileage but met consumers’ needs."

"The regulatory push will not stop with MY 2016 vehicles. In 2012, the Administration finalized extremely rigid regulations for vehicles in MY 2017 and beyond.[4] These new regulations will require an average fleet efficiency of 49.6 mpg in MY 2025."

"After the policy change in 2009, several economists and engineers modeled the likely effect of the tightening standards. All of them found that the CAFE standards are much more costly than their alternative, a direct gasoline tax that would reduce fuel use by the same amount.

Kate Whitefoot, Meredith Fowlie, and Steven Skerlos modeled the ways that car design could respond to the standards in effect for MY 2014. They found that the tightening of the regulations since 2009 would cost consumers an additional $59 billion per year.[6] Projected to MY 2016 and adjusted for inflation, the annual estimated cost to consumers is $82.5 billion.[7]
 
Thomas Klier and Joshua Linn compared automakers’ reaction to higher fuel standards in the short run (when they can change only prices) and the medium run (when they can change both prices and vehicle design).[8] They find that companies and consumers are worse off on account of the regulations in both scenarios, but the medium-run scenario is worse for consumers. They estimate that a 1 mpg tightening of the standard would cost consumers $7.81 billion annually.[9] Projecting the estimate to match a 9 mpg regulatory change and adjusting for inflation, the cost estimate grows to $61.2 billion per year. 

Mark Jacobsen also modeled the CAFE standards increase, distinguishing between different automakers and including the used car market in his model.[10] He found that domestic automakers and consumers would bear almost all the costs of the regulations. Consumers’ losses add up over time as the costs of the new regulations work their way through the used car market. After 10 years’ adjustment, the burden of the regulations will fall most heavily on households with incomes below $25,000.[11] Jacobsen’s estimate of the total consumer cost of a 1 mpg increase in CAFE standards after 5 years is $20.87 billion per year,[12] almost triple the comparable estimate of Klier and Linn. For the 9 mpg regulatory change through MY 2016, adjustments bring the annual consumer cost to $186.1 billion."


"All three papers take into account the value of fuel efficiency to consumers, which also tends to make consumer surplus loss per vehicle smaller than the average price change."

"Despite the original intent of the CAFE standards (to reduce dependence on foreign oil), it is clear that the Environmental Protection Agency’s current goal for the standards is to decrease carbon-dioxide emissions. The Obama Administration has optimistically claimed that the change in the standards through 2016 will decrease global temperatures by 0.007 degrees to 0.018 degrees Celsius in 2100.[25]
 
Predictions of the economic cost or benefit of higher global temperatures vary widely.[26] In a widely read survey article, Richard Tol, a lead author of Intergovernmental Panel on Climate Change assessment reports, reviewed estimates of a 2.5 degree Celsius increase in average world temperature on world gross domestic product (GDP).[27] The estimates ranged from an increase of 2.3 percent to a reduction of 4.8 percent. The average of the reported studies was a loss of 0.91 percent of world GDP.

Using the central estimate, the CAFE standards’ trivial moderation of warming would lead to a benefit equal to 0.0065 percent of world GDP in 2100. Any benefit in the same order of magnitude as this undiscounted, distant gain to GDP would be more than offset by the massive losses the strict CAFE standards are already imposing on U.S. consumers each year. 

The $61.2 billion cost to U.S. consumers estimated by Klier and Linn represents 0.054 percent of 2015 global income.[28] The new CAFE standards thus fail a cost-benefit test by a large margin,[29] even using climate models that are favored by global warming hawks and ignoring the job losses, lower incomes, and lost lives that CAFE standards also cause."