The EPA and National Highway Administration have released a required report on progress in achieving the mandated 54.5 miles per gallon average by 2025. The report concluded that the goal was in jeopardy because of low gasoline prices and an express preference for larger rather than smaller vehicles.
CAFE is a relic from the distance past—the 1972 Arab oil embargo-- and fear that oil imports would give Persian Gulf producers too much economic power over our economy. The energy security fear persisted even though little was done to increase domestic production of oil. Technology and access to private lands in recent years relegated the energy security argument to the scrap heap of flawed policies.
Environmental advocates creatively replaced the energy security rationale with the threat of climate change and the need to reduce emissions of CO2, a by-product of gasoline and diesel combustion. The Obama administration embraced this rationale with unconstrained enthusiasm. In its 8 years, it has raised the CAFE standard from 27.5 miles per gallon to the current 2025 mandate of 54.5 miles per gallon for light duty vehicles.
Compliance with CAFE standards involves inducing buyers to purchase smaller, high mileage vehicles. Except when the price of fuel has risen steeply, this is accomplished by cross subsidization. Purchasers of larger vehicles pay a higher price so that manufacturers can sell their smaller vehicles at a loss.
In the past, the biggest inducement to purchase high mileage vehicles came from increasing oil prices, which rose from $ 40 a barrel in 2002 to over $130 in 2008. High oil prices always please environmentalists who have an anti-oil agenda. Now, however, with prices lower, Americans are moving back to SUVs.
CAFE has proven to be a blunt instrument, with EPA deciding that fuel economy has to be the motoring public’s highest priority. To the extent that it has worked, its usefulness has come at a high price. The market is much more effective in revealing consumer preferences- comfort, safety, accommodating personal needs, and fuel economy.
Oil prices have always been cyclical and always will. Anyone who thinks that they can forecast the price of oil over the next 9 years is on a fool’s errand.
The current preference for large vehicles such as SUVs will persist as long as oil prices remain low. If they spike again as they did in the not too distant past, consumers will again switch to small- to mid-size vehicles which get higher mileage. EPA’s attempt to mandate a doubling of light duty fleet average mileage is likely to fail unless fuel prices go above $4 a gallon.
Over the years, manufacturers have developed advances in engine and transmission technology, improved aerodynamics, developed tires with lower rolling resistance, and are materials that reduce weight. None of this has been free. The average incremental cost of the Obama standards has been estimated to range from $3,000 to $6,000 per vehicle, which excludes the cost of subsidies for hybrids and electric vehicles. Mandates that increase prices discriminate against low-end buyers and represent an indirect carbon tax, narrowly applied. And, those who face the higher costs that should but do not explicitly spell out the subsidy for smaller vehicles, forego purchases that have a higher value to them.
The Obama administration’s pursuit of an extreme climate agenda ignores several important facts. First, the contribution of U.S. autos to atmospheric levels of CO2 is trivial. It is emerging countries that are responsible for the growth in CO2 emissions. Second, the contribution of CO2 to global warming at best is trivial. Third, EPA’s solution to reaching the mandate of 54.5—more technology—is naïve or disingenuous. Technology advances are not products that you can simply take off the shelf as if you were at Home Depot. And, as manufacturers have to make incremental increases in miles per gallon, their cost of making incremental gains also increases.
CAFE had little justification in 1975; it has none today.
William O'Keefe is the President of Solutions Consulting. You can follow him on Twitter here.
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