A couple of news stories got me thinking anew about the federal government's fuel-economy standards, known as CAFГ‰. This week, DaimlerChrysler paid a record fine of $30.3 million for failing to meet the mileage standards in 2006. And oil prices briefly topped $100 a barrel.
As you probably know, the energy bill passed by Congress and signed by President Bush last month included first increase in the CAFГ‰ standards since the 1970s. It requires automakers to increase the average efficiency of their new-vehicle fleets to 35 miles a gallon from 27.5 by 2020. Like many, I applauded.
Now I'm not so sure. As one of my libertarian friends points out, there are philosophical reasons to oppose CAFГ‰ standards. They insert the federal government into what, ideally, should be unimpeded transaction between willing parties, i.e., the car companies and the rest of us. He's got a point.
But my own concern about the new CAFГ‰ standards are more pragmatic. For one thing, as The Wall Street Journal reported today,
Automakers got some important concessions, such as credits for building vehicles designed to burn ethanol and a new classification system that will make it easier for them to continue to sell larger vehicles.
These are, in effect, loopholes. Today's CAFГ‰ standards already give credits to the carmakers for making vehicles that are able to burn ethanol, even though most of those cars never use a drop of ethanol. Fewer than 1% of gas stations in the U.S. sell the biofuel.
The Journal goes on to say that the energy bill "marks the end of an age in which the industry was able to make vehicles heavier and more powerful without making significant gains in fuel efficiency." I'm not so certain.
Consider the fine levied on DaimlerChrysler. Its $30 million penalty topped the previous record, a $28 million fine assessed against BMW in 2002. BMW, Porsche and Volkswagen paid fines for exceeding the standard again last year. The government has collected $735 million in fines since 1985 from automakers whose fleets failed to meet the standards. They can, in effect, buy their way out of obeying the law, based on a well-understood formula.
There are at least two other reasons why CAFГ‰ standards are, at best, a crude and heavy-handed tool for improving fuel efficiency and curbing greenhouse gas emissions. The first problem is obvious-they only affect new cars. Since cars remain on the road for an average of bout 12 years, it takes a long time for CAFГ‰ standards work their way into the system and have an impact.
The other problem is that CAFГ‰ standards don't encourage people to drive less. As it happens, Americans are driving more. They amount of miles we drive has risen 9% between 2000 and 2005, according to the Bureau of Transportation Statistics, the same people who reported a few years ago that more than 3 million Americans travel 50 miles or more one way to get to work.
So what's the alternative to CAFГ‰ standards? Honestly, I'm not certain. I'd say (and most economists would agree) that the best and simplest solution would be to raise gasoline prices-either directly with a gas tax or, more likely, indirectly through a carbon tax. The trouble is, gas prices have been climbing along with the price of oil and there doesn't seem to much evidence-maybe I've missed it?-that we are driving less. What's more, if gas prices go much higher, they will impose a hardship on poor or working-class people tied to those 50-mile commutes.
A complementary idea is "feebates." Buyers of inefficient cars would be charged extra by the government, with all the revenue then turned into rebates for buyers of more efficient cars. You can buy a Hummer, but you will pay extra and subsidize the buyer of say, a Honda Civic. See this explanation from a think tank called the Sightline Institute. Like CAFГ‰, this is government intrusion but it's likely to be more effective.
The challenge here is to come up with a policy that is effective but with a light touch, if possible. I'm not enough of a policy wonk to prescribe the best approach but I'm fairly sure that CAFГ‰, by itself, won't do the job.