Corporate Average Fuel Economy (CAFE) standards have increased vehicle fuel efficiency, but new research shows that this gain has raised the price of an average new car by $6,200. Many argue that these standards are ineffective at achieving their stated goals, yet the standards could grow even stricter in the future. The Heritage Foundation’s Salim Furth explains why Americans would be better off if CAFE standards were frozen at current levels—or repealed altogether.
Jared Meyer: What are the current CAFE standards and how are they calculated? Are they set to increase in the coming years?
Salim Furth: The fuel economy regulations require that each automaker calculate the average gas mileage of its fleet every year. The calculation is very complicated, and cars with larger “footprints” (determined by how far the wheels are spread out) do not count as much against the standard. If automakers fall below the standard, they pay a fine. If they exceed the standard, they get credits for future years.
The standards are increasing every year now. Congress passed a law in 2007 that directed the administration to tighten the standards to 2016 levels of 35 mpg, which the Obama administration implemented enthusiastically. But the administration has also gone far beyond that, using executive action to bring the required average up to an absurd 49.6 mpg by 2025.
I do not know how automakers can get close to that kind of gas mileage by 2025. It is clear that consumers—not automakers—are paying for these higher standards.
JM: What was the initial justification for imposing the CAFE standards in the late 1970s?
SF: Oil was a weapon in the Cold War and Middle East conflicts of the 1970s, and CAFE standards were supposed to make the U.S. less dependent on foreign oil.
JM: If that is no longer the goal, why is CAFE still around?
SF: The stated motivation behind the increased standards is to reduce carbon dioxide emissions. However, CAFE was not an efficient way to promote energy independence and it is not an efficient way to reduce carbon emissions, either.
The Obama administration estimated that the 2016 CAFE standards would reduce global temperatures in 2100 by less than 0.02 degrees. I cannot find athermometer on Amazon that would even detect a change so small. We ran that estimate through a standard climate change cost model and found that the CAFE standards fail a back-of-the-envelope cost/benefit test by over 10 to 1—even when using overly generous benefit projections.
CAFE standards are not an effective climate change policy; they are a meaningless gesture .
JM: Economists conservatively estimated that the 2016 CAFE standards changes would cost consumers an average of $3,800 per vehicle. You have a new paper that shows the average cost difference between current costs and previous trends was $6,200. How did you arrive at your figure?
SF: Three teams of economists and engineers predicted that the new standards that Congress and President Obama created would cost consumers dearly, even when the lower gasoline spending over the life of the car is taken into account. My colleague David Kreutzer and I took the lowest cost estimate among the three papers, adjusted for inflation and for the number of cars sold per year, and arrived at $3,800 per car.
To evaluate whether the scholars’ predictions were correct, we compared the recent rising trend in auto prices with the pre-2009 falling trend. We chose dates that gave us conservative results, so we may be understating the effect. But we found that U.S. prices, adjusted for quality, are $6,200 above the previous trend.
It looks like the scholars were right: they predicted a massive increase in consumer costs per car and the data turned out to be consistent with that prediction.
JM: Do you have any data on how CAFE standards affect low-income households? I also wonder if they are part of the reason why car ownership among 16- to 24-year-olds is at its lowest level in half a century.
SF: One study we cited predicts that Obama’s 2025 standards will price more than 3 million households out of the new car market. This is definitely happening: as cars get more expensive, people who would have bought new cars are buying newish used cars, and the dominos fall all the way down to the traditional buyers of really cheap cars: 16-to-24 year olds. There are obviously other factors involved, but for the poorest buyers, price matters the most.
University of California San Diego economist Mark Jacobsen estimates that the 2016 standards will cost the poorest quarter of households over 1 percent of its income as the higher prices cascade down to the used car market. The top quarter, which spends less of its income on cars in general, will spend about 0.4 percent more of its income on cars thanks to the 2016 standards. And those estimates do not include downstream effects, such as job loss, due to the inefficiencies that CAFE introduces into any American business that relies on automobiles.
JM: What are the options for reform? Do we need Congress to act, or can the next president change CAFE on his or her own?
SF: Both. Congress ought to repeal CAFE standards altogether. They were a bad idea in the 1970s and they are now an extremely costly bad idea. Only Congress can completely scrap the CAFE standards.
But this president, or any future administration, can cancel President Obama’s executive action and reduce CAFE standards to the lowest level allowable under law. Executive repeal would save buyers in the year 2025 at least $5,900 per car and action now would result in significant savings as soon as 2017.
JM: Why is a program that places substantial costs on a household staple receiving so little public pushback? With low gas prices, the push for higher fuel efficiency makes little sense—especially when the geopolitical and environmental benefits are minimal. Even with these costly policy changes, Americans continue to demand SUVs and trucks instead of the smaller cars that meet CAFE standards.
SF: If the government tried to raise the gas tax 10 cents per gallon, there would be a hue and cry from consumers. But when policymakers effectively added a $3,800-per-car tax through regulation, nobody noticed. This is why regulation can get out of control. Its costs are hard to measure and hidden inside the price tags and distortions that consumers come to accept. Americans who are living on a budget should let their congressmen and presidential candidates know they are not willing to pay a $3,800 tax on every car for such a meaningless gesture.
This piece originally appeared at Forbes
This piece originally appeared in Forbes