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CAFE and the law of unintended consequences

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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