So You Want to Encourage High MPG Vehicles?

Posted: October 29, 2010 in Miscellaneous

I spent a good part of my life at the University of Iowa going after my degree in Economics.  In that time frame, I spent a lot of time learning and applying that skillset to analyzing efficiencies even providing on the side research for Professor Donald McKlosky (now Diedre – that is a whole other story).  In my studies I’ve seen how a Gov’t can be more efficient (and rational) than the free market and vice versa.  Gov’t intervention in its intent and/or its execution is good at times, bad at others.  Unfortunately, I see the latter in how our Gov’t is trying to force OEMs (through Corporate Average Fuel Economy – CAFE) to produce cars (fuel efficient ones) people don’t want to buy.

Our Gov’t has a very good intention of trying to persuade us to purchase vehicles we need rather than want by encouraging the sale of fuel efficient, economical vehicles.  Unfortunately, Congress created CAFE, which is essentially a knee jerk reaction after the OPEC oil embargo of the 1970’s to create a harmonic mean fuel economy (harmonic mean captures the fuel economy of driving each car in the fleet for the same number of miles) for light vehicles / trucks sold under the current model year that weight < 8,500 lbs.  CAFE is a supply side economics attempt to alter demand towards more fuel efficient vehicles.  However, its premise is faulty (you cannot effectively alter demand with supply when people can substitute for their wants), it is poorly written, contains many loopholes, and does very little to punish those who do not meet its demands.

We spend millions of taxpayer dollars pursuing CAFE ratings and their adjustments, studying faulty data, arguing / negotiating penalties with no teeth, and interpreting results depending on the current political climate.  CAFE is a politician’s bill written to not upset their voters (i.e. so they can run again for office) yet meet voter concern over our national security of dependence on foreign oil or the environment.  It is effectively a mess, for instance:

  • A loophole allowed some large SUVs or pick ups to be exempt from CAFE EPA as a personal vehicle b/c it was automatically assumed it would be used for commercial purposes (regardless of who actually bought it).
  • The Detroit 3 sold 100’s of thousands of Flex Fuel cars since the 90’s but availability of E85 was a laughing stock.  CAFE apportioned better mpg to these cars (up to 100mpg!!!) under their rating system – when ironically if the car actually ran it gets 30% worse gas mileage b/c ethanol has less energy density than gasoline and 50% less than diesel (i.e. a 20mpg SUV on E85 in reality got 15mpg!!!).  On top of that – Ethanol comes only efficiently from food stock in the US meaning the price of our food would go up and the Gov’t would subsidize the farmers to sell to ethanol producers.  They later had to cap the total increase to 1.2mpg overall as this was out of control.
  • CAFE was also complicated with applying different ratings to domestically produced cars (i.e. ones created at a UAW plant) versus import produced cars (even if built in the US but by non UAW workers).
  • Automakers could earn CAFE credits and apply them forward and backwards for up to 3 years.  They can also sell / trade them to other automakers.
  • CAFE mpg ratings for cars was frozen from 1990 to 2010
  • Automakers that can’t meet CAFE simply pay penalties (which have not increased since 1983) which no longer offset the profitability of selling the gas guzzlers nor has it kept up with inflation.
  • CAFE ratings have since been interdependent upon NHTSA ratings

The most efficient way of curbing demand / consumption of a product is to make it cost more.  This means artificially raising the prices to curb use (such as with cigarettes).  This means a national gas tax – very unpopular with some people but it is the most effective way to curb consumption as it directly affects the consumer’s pocketbook.  Though it sounds like a political trap – in the end it would be better for our county and our pocketbooks.  Here’s why:

  • Adding a national gas tax would curb excess consumption of gas – as it raises the opportunity cost of driving the gas guzzler as your main mode of transportation.  It also reduces how much one drives.
  • Larger vehicles cause more wear and tear on the roads so it apportions more money from those who drive heavier vehicles than those who drive smaller, lighter cars.
  • As people trade in gas guzzlers they will want more efficient vehicles – OEMs will follow suit (look at the gas crisis of 2007 and the $4 a gallon gas prices as proof).  Several Geo Metros sold for close to $10k during this period of irrational behavior.
  • As people pay more gas tax that is associated with their use of our roads, the Gov’t would be able to reduce its debt or reduce the taxes it charges us (not likely to happen with ours!)
  • Reduction in wasted gas on fuel inefficient vehicles leads to less consumption of gas and oil reducing our dependence on foreign oil.
  • Reduction in wasted gas leads to less creation of greenhouse gasses
  • Demands for fuel efficiency from the entire population (rather than from environmentalists) will provide a much greater motivation for OEMs to make all future cars and trucks regardless of light vehicles or heavy vehicles more fuel efficient rather than pushing hybrids for a small audience and meeting CAFE.
  • Higher gas prices will make people more aware of the driving they do and their driving habits (causing people to slow down or drive more efficiently or drive less).
  • Europe has been using this to push better fuel mileage – such as the huge following of diesel powered cars getting fuel mileage as good or better than our Hybrids (reason why hybrids there do not sell as they cost more than diesel and do not return your investment).

A great quote by Bob Lutz (former foot-in-mouth Auto Exec with GM) asserted that the CAFE standard was a failure and said it was like trying to fight obesity by requiring tailors to make only small-sized clothes.

harmonic mean captures the fuel economy of driving each car in the fleet for the same number of miles
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