CAFE and the law of unintended consequences

Adam Stein | February 14, 2006

The Times ran an article recently about the way in which the CAFE standards are virtually set up to undercut the environmental benefits of hybrid cars.

CAFE stands for Corporate Average Fuel Economy, and, as the name implies, the standard sets benchmarks for the average fuel economy that car manufacturers must achieve across their entire fleets.

The problem is that manufacturers have no incentive to exceed the CAFE standards, so every hybrid car they sell gives them the opportunity to peddle another gas guzzler to less environmentally-conscious consumers.

When you buy a TerraPass, you’re paying money to displace carbon pollution elsewhere. The hybrid owner is essentially paying money to allow someone else to pollute. Seen in this light, a hybrid car is like the anti-TerraPass.

Don’t misunderstand — I’m not suggesting that buying a TerraPass is preferable to buying a hybrid car. I am suggesting that carbon trading mechanisms only work when they are set up to provide proper incentives to all the participants.

For example, what if manufacturers were financially penalized — or rewarded — for every car they sell, depending on how far the car falls short of — or exceeds — the CAFE standard? The result would be a net payment transfer to hybrid owners, with greater rewards accruing to the most efficient cars.

Consumers who want to guzzle gas could pay for the privilege, and those who want to conserve would be rewarded for their virtue. Car manufacturers could decide for themselves how they want to compete. If Toyota is great at making hybrids and Chevy better at selling pick-ups, the market will find the right overall equilibrium, rather than requiring each company to meet a rigid standard.

This scenario has another major benefit. As the Times article notes, convincing a consumer to switch from an efficient non-hybrid to a hybrid (say, from a Corolla to a Prius) carries nowhere near the same environmental benefit as moving someone from a car with terrible mileage to a car with merely bad mileage (say, from a Hummer to a Lincoln Navigator). A flexible, market-based mechanism would provide the proper incentives.

Of course, this is a fantasy land scenario, a political non-starter. And, anyway, the Times article probably overstates its case. In the long term, putting more hybrids on the road is a good thing, because the innovations in technology will trickle down.

CAFE may be deeply flawed, but for now it’s the best we’ve got. If only we could nudge the standard upward.

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Comments

4 comment(s) on this post. Leave your own!

1. By Tawna Farmer on February 15, 2006 11:06 AM

I would like your articles to give readers the option of a printer friendly format, and the opportunity to email the articles to interested friends. This second option is bound to increase your membership as your members "spread the word."

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2. By Adam on February 15, 2006 2:39 PM

Good idea. We're launching a site upate in a few weeks, and we'll try to get both these features in there. Thanks for the suggestions.

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3. By David Wilkie on February 15, 2006 6:07 PM

Here's my proposal, one I would like to see some brave president implement. After all the US automotive companies go bankrupt, it might be easier...

Auto manufactuers selling cars in the US have 5 years to raise the weighted average gas mileage of all the cars they sell in the US by 2x.

In parallel, tax levy increases on gasoline are such that the cost of gasoline is raised over the same five years, in real terms, by 2x.

As a result, while the cost per gallon for gas would be twice that of today, the total annual cost for gasoline for the consumer would be the same and the US would consume half as much gasoline.

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4. By Kati Gillespie on February 16, 2006 3:20 PM

As much as I absolutely love the idea of the U.S. using half as much gasoline, one ought to realize that raising the gas tax will not stop people with a lot of money and very little social conscience from buying and driving Stupid Useless Vehicles (SUVs). However, it will have a decidedly negative impact on the hard-working middle class, lower middle class, and the working poor, viz., anyone who is making less than $20,000 a year.
Personally, I think it makes very little financial sense to penalize everyone, particularly those who can least afford it, just for the one segment of society that's decided to have an attack of stupidity. Instead, I would propose an additional tax on all SUVS that get less than 50 mpg. equal to the cost of 10 Terrapasses for that particular vehicle, which would cover the carbon-offsetting costs of that vehicle for 10 years. For example, if you were to buy a Ford Explorer, and the Terrapass for that vehicle costs $80 a year, then you would be taxed $8,000 as an "Environmental Impact Tax". It would be doubled for anyone who bought a Hummer, governor or not.
Of course, no buyer of a hybrid or efficient non-hybrid, such as the Toyota Corolla, Nissan Sentra, or Honda Civic, would have to pay this tax; it's just for SUVs. If the buyer decided to unload the SUV or Hummer before the 10 years were up and replace it with a hybrid vehicle, then a portion of it would be refunded to them on a pro rata basis, viz., if the buyer had owned their Ford Explorer for 5 years before trading it in for a Honda Civic Hybrid, then they would get a refund of $4,000.
Such a tax would not only cause people to think twice about SUVs, but would also encourage manufacturers to make hybrid SUVS to fill in the market gap of people who want an SUV and don't want to pay thousands of dollars in tax.

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