A Defense of CAFE

A DEFENSE OF CAFE….Over at the Prospect, Matt Yglesias writes about CAFE, the federal standard that mandates minimum levels of fuel economy for cars and light trucks. He doesn’t like it. It’s true, he says, that part of CAFE’s problem is that it largely exempts SUVs from its rules, but there’s a broader reason to dislike it too:

Applying tighter rules to cars than to light trucks means that, in effect, CAFE standards are subsidizing the purchase of highly inefficient SUVs, which is the reverse of what we’re trying to accomplish. The root of the problem, however, isn’t in the ill-designed rules but in the fact that CAFE is trying to tackle the wrong problem.

If you want to reduce gasoline consumption, what you want to do is tax gasoline consumption, not inefficient engines.

This is a very peculiar argument. There are, after all, two ways to decrease gasoline consumption: (1) drive less and (2) drive more efficient cars. Gasoline taxes do indeed provide incentives to do these things, but that doesn’t mean you shouldn’t add other policy prescriptions into the mix too. In fact, adopting several modest policies is almost always better than putting all your eggs into one gigantic policy basket. So why not do both?

For policy wonks, here’s the nickel defense: CAFE was passed in 1975 and mandated an increase in average fuel economy for cars from 18 mpg in 1978 to 27.5 mpg in 1985. The National Academy of Sciences investigated CAFE standards back in 2002 and came to several conclusions. As the chart on the right shows, one of them is that CAFE worked:

The CAFE program has clearly contributed to increased fuel economy of the nation’s light-duty vehicle fleet during the past 22 years….If fuel economy had not improved, gasoline consumption (and crude oil imports) would be about 2.8 million barrels per day greater than it is, or about 14 percent of today’s consumption.

….Between 1975 and 1984, [automotive] technology improvements were concentrated on fuel economy: It improved 62 percent without any loss of performance….Thereafter, technology improvements were concentrated principally on performance and other vehicle attributes. Fuel economy remained essentially unchanged….

So CAFE does what it was designed to do. What’s more, CAFE is almost certainly more effective than gas taxes at reducing gasoline consumption. During the period from 1979-1982, for example, gasoline prices doubled and CAFE standards were rising. The result was a 15% drop in oil consumption worldwide and a drop of about 20% in the United States.

Compare that to 1999-2005: gasoline prices have more than doubled, but gasoline consumption has continued to rise. In fact, it’s been rising faster than it did during the 80s and 90s. These two periods aren’t strictly comparable (the first one included an oil shock that had a significant psychological impact, while the more recent rise has been slower and steadier), but it’s still clear that gasoline demand is pretty inelastic: higher prices by themselves appear to have only a modest impact on gasoline consumption. To make a serious dent in gasoline consumption we’d probably have to increase gas taxes on the order of $2-3 per gallon. That’s a mighty blunt instrument.

Instead, a more modest tax increase should be paired with other policy instruments. The NAS report, for example, includes several technical recommendations for improving CAFE, and one very interesting one is the use of tradable fuel economy credits. The federal government would mandate higher CAFE standards, but manufacturers would be able to buy credits either from the government or from other manufacturers who exceeded the minimum standard. This would guarantee an increase in average fuel economy but would allow market-like mechanisms to do a lot of the work that detailed regulations would otherwise do ? and do it more efficiently.

Bottom line: don’t throw out CAFE just yet. Obviously the Bush administration has no interest in any policy designed to seriously reduce our dependence on foreign oil, but that doesn’t mean it will never happen. When the time is right, a modified and tightened CAFE regimen is a policy option we should remain open to.

POSTSCRIPT: Or there’s always my idea for making the cost of gasoline more obvious to car buyers. It’s cheap, too!