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Thursday, June 14, 2007

Are CAFE standards the right path?

A post by my favorite oil-and-gas-price analyst Robert Rapier got me thinking about CAFE standards amidst the challenges of oil dependency, carbon emissions, and energy security. He's a skeptic of CAFE not because he opposes fuel efficiency, but because it shifts responsibility:
The problem I see is that this attempts to address the issue in the same way that windfall profits' proposals attempt to address the issue of high gas prices. There are plenty of high fuel efficiency cars on the market now. The problem is, people aren't demanding them. They want their SUVs and big trucks. What people are really after here is a free lunch. They think increasing CAFE standards will make everyone else drive a fuel-efficient vehicle...Increasing CAFE standards is not going to increase the public's desire to drive fuel efficient cars, nor is it going to result in a 35 mpg Ford Expedition. (emphasis original)
Solving oil dependency, global warming, et al, requires that we act to use fuel more efficiently. While a fuel mandate does work (fuel efficiency doubled from 1978 to 1985), it worked in the context of supply shortages and high prices. In other words, though the standard worked, it got its political strength from a high price environment (and a time when fewer people drove SUVs).

The last time CAFE standards were increased dramatically, average vehicle weight shrank by 1000 pounds (almost 25%) in five years as cars dumped steel, used lighter components, and shrank in size. This time around, the heavy cars still use lighter components, they're just big. In other words, cars will likely get smaller. The car companies know this, so they've started a big ad campaign against CAFE standards (and a plug for hydrogen technology which will a) never happen and b) is pointless because it uses fossil fuels).

The problem is, we're in a lose-lose. CAFE standards themselves will help, but they are a halfway solution because increases in fuel economy decrease fuel demand and lower prices (which then has the opposite effect). Without CAFE standards, however, we're not likely to make a significant dent in carbon emissions.

Other solutions?
  1. Gas tax increase - price up, demand down. People can see right on the car sticker (XX mpg) how much this car will cost them and the additional revenue can be used to give income tax rebates to low-income folks. Disadvantages - doesn't deal with carbon emissions from other sources; Americans are surprisingly willing to adjust to higher prices.
  2. Carbon tax - price up, demand down. This would catch all the carbon emissions (on-road and off-road) and provide revenue for income tax rebates to the poor, but it still runs the risk of allowing people to buy their way into higher emissions. Americans have a lot of money - they'll probably give up the third TV, second home, and eating out before the give up driving solo to work.
  3. Moving carbon cap with auctioned carbon credits - price up, demand down, supply constrained. Lowers carbon emissions by fiat, but allows the market to allocate carbon to the highest bidder. Provides revenue to offset impact on the poor, invest in new technology, and provide alternative transportation. And best of all, it guarantees that carbon emissions will actually decrease.
The amazing thing is how easy a carbon cap would be. There are essentially three major sources of carbon in the economy: oil, natural gas, and coal. Everyone who retrieves it domestically or imports it has to buy the credits (you could even charge slightly more for imports to promote energy independence). The consumer simply sees the final price - with carbon factored in.

That's a great idea.

Note: I didn't address carbon "cap and trade" in my solutions. Here's why.


Anonymous said...

A carbon cap is the equivalent of a quota system, in terms of economics definitions. If you've got activities with very inelastic demand (auto driving, power generation, farming, etc), that'll drive the price of carbon units sky-high nearly instantly. I'm confident that my family's farming business would end very quickly, as diesel fuel is -needed- for it to function, and our profit margins are slim to begin with.

The carbon cap would achieve its primary goal, but the secondary outcomes would be felt everywhere that there's an inelastic demand for that carbon-based energy.

I tried posting on Kloumr's blog, but it ate my post. Say hi to her for me when she gets back; I was interested to hear that she is (was?) near my hometown!


Otto said...

Interesting post. I happen to work for the Auto Alliance, and we're supporting an amendment to the current bill (informally called Pryor-Bond-Levin). You can read about it on our site at

You raise some interesting points about the problem with CAFE standards, but we think if the requirements are made a little more reasonable, auto makers will be able to build more light trucks and SUVs that likewise leave a lighter environmental "footprint."