Transportation Secretary Mary Peters announced an acceleration in the CAFE standards this afternoon. I think a gasoline tax is superior to the CAFE standards as a policy mechanism to reduce CO2 emissions. From the Vox Baby classic, "Don't Linger in this CAFE:"
The first issue, as I've alluded to earlier, is that the problem we care about is total usage of gasoline. Total use is the amount of miles driven divided by fuel economy. CAFE standards, at best, address fuel economy, but they provide no incentive to economize on the number of miles driven. This is why a gas tax is better--it allows people to decide how they want to conserve on fuel usage, fewer miles or fewer gallons per mile.
The second issue is that the CAFE standards operate at the level of a fleet of vehicles produced by one manufacturer. I have never heard of a rationale for regulating a company's whole product line. The more economy cars a company makes, the more fuel-inefficient cars it can make without penalty. Why provide an incentive for Toyota to make larger cars just because it happens to make good small cars? If the objective is to regulate the average fuel economy of all cars on the road, then there ought to be a tradable permit system established. We would get a better variety of cars on the market, though not at any one particular dealer. Pure welfare gain.
The third issue is that the CAFE standards operate in a hidden fashion, and as a result there have been plenty of abuses. CAFE standards are negotiated behind the scenes with a few entities (the manufacturers). They lobby for complexity and then exploit loopholes, like the different standards for cars and light trucks or, as I fear, all these new flavors of SUV. Lack of transparency is the enabler of bad policy. Is there anything more transparent than a gas tax at the pump?Keep it simple. Scrap CAFE, set a higher gas tax, and return the aggregate revenues from that gas tax through lower income taxes in a progressive fashion.
We can do better. All it takes is leadership.
Don't regulate the product to change demand
Great Points Andrew. I also believe the gas tax is the way to go. An eclectic mix of what I consider to be interesting & related points:
Bob Lutz (GM product Czar) uses the following metaphor to illuminate CAFE: Does it make sense to regulate shirt manufacturers -- to say put a quota on oversize shirts -- in order to deal with the obesity problem?
Perhaps abolishing the Fast Food industry through regulation would be more appropriate as a comparison? The tax version would be to tax the bigger shirts/clothing and the less healthy food. This makes more sense to me.
Because the oil industry has a cap on supply because of refining capacity, some of the tax on gas would come from oil industry profit instead of raising price (since the cap does this already).
Though I don't usually prefer government over private industry, using the gas tax to fund energy R&D might be better than leaving the profits to "big oil." I often believe that long term, high risk R&D works better when funded by government (since private industry is often short sighted and risk averse). I don't know how the heavy regulation wrt to oil exploration fits into this equation, but I bet it does.
Weaning the nation off of our oil addiction has two strong benefits: (1) reduction in our strategic dependence upon an unstable/hostile region (SW Asia); and (2) a potentially improved environment.
I say potentially because it depends upon how we replace oil for energy. Though I think global warming is overblown (and not yet well understood), pollution from oil is serious [just visit China's big cities -- or many of ours (LA anyone?)]. BTW, I hate it when people refer to CO2 as pollution. After all, it comes out of our mouths and is what plants need to survive (did you know plants breath?).
Although it may be the case that benefit (1) is most important, there is another benefit to (2) -- sort of an inverse corollary. If we do move strongly into green/alternative/new energy R&D it may lead to important economic growth. We are used to being the leaders in nearly every field. Ignoring/underfunding this area could carry significant opportunity cost.
CAFE
25 years ago I concluded CAFE was ridiculous because it has no effects on the marginal auto buyer. I suggested CAFE be replaced with a "mileage tax" on all vehicles, trucks included.
The tax would be computed as follows: Assume a vehicle has an average life of 150,000 miles and gets 25 miles to the gallon. It will use 6,000 gallons of gas over its life. No tax. Suppose the vehicle gets 20 miles to the gallon. It uses 7,500 gallons over its life, the tax is: $7,500 - $6,000 = $1,500. A car which gets 30 miles to the gallon gets a $1,000 tax credit, computed as follows: $5,000 - $6,000 = -$1,000. Simple enough.
If after say three years Uncle Sam concludes he has not achieved a large enough reduction in gas consumption, just multiply the tax and rebate amounts by say 50%, wait three more years and look at the results again. No fancy lobbying, no econometric studies, none of that garbage.
Expedient Politics
I think that the problem is that people will support fining corporations (because they don't understand it comes back to them), but they won't support direct increases to their cost.
So, we get these crazy inefficiencies instead.
Andrew, Counterargument re: CAFE
Andrew,
Re: "a gas tax is better [than CAFE standards] --it allows people to decide how they want to conserve on fuel usage, fewer miles or fewer gallons per mile."
I understand the logic of this argument and I agree with it in part, but here's something that seems to be an oversight: The presumption in that argument may be that everyone will choose to conserve one way or another, but that is counterfactual; if there are a lot of highly fuel inefficient vehicles on the market (and, in turn, on the road), it's possible that a lot of people will own those cars and NOT scale back their miles in response to a gas tax (that is, to a gas tax of desirable and politically feasible amount). In that case, the gas tax does not serve to limit gas consumption as much as CAFE plus a gas tax would, even if the gas tax is somewhat lower in the second (combination) scenario.
It may be that theoretically a gas tax could be set so high that, on an aggregate level, consumption would be limited to the same level as CAFE standards combined with a lower gas tax, and that such a high gas tax could also ensure that those who don't conserve compensate everyone else sufficiently for the externalities related to their high level of consumption, but (1) while there may be a level of gas tax that would accomplish this objective in aggregate, it seems that it would hurt some people (the more price-sensitive consumers) more in order to achieve this aggregate result (by being a high enough tax to influence the less price-sensitive), (2) it may be that it is not politically feasible to set the gas tax high enough to achieve that objective, and (3) it may not be desirable to set the gas tax that high (e.g., impact on prices and on the economy).
Lastly, from a behavioral perspective, if manufacturers are, in effect, limited in the degree to which they promote fuel inefficient vehicles, the result can be a different set of consumer priorities in choosing a car. If there are fewer Hummer ads showing how darn cool they are, maybe more would-be Hummer buyers would start to consider other attributes, whether fuel economy or other attribute that can be found in more fuel efficient vehicles.
I'd be interested in your thoughts re: my points above.
There are good CAFEs and bad CAFEs
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