realitybase - Journal

The question came up at lunch two weeks ago and again today in Paul Krugman's blog. Has the increase in average fuel economy of automobiles and light trucks been driven by higher fuel prices or the federal CAFE (Corporate Average Fuel Economy) standards? Here's the answer and the evidence.

In 2002 the National Research Council in Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards published these conclusions (at 15):

Figure 2.2 suggests that the CAFE standards were not generally a constraint for imported vehicles, at least until 1995, if then. Domestic manufacturers, on the other hand, made substantial fuel economy gains in line with what was required by the CAFE standards. The fuel economy numbers for new domestic passenger cars and light trucks over the past 25 years closely follow the standards. For foreign manufacturers, the standards appear to have served more as a floor toward which their fuel economy descended in the 1990s.

When in 1980-81 inflation-adjusted motor fuel prices were in the same high range they are now, new vehicles purchased were on average more fuel efficient--even getting ahead of the CAFE standards by about a year. (Sorry I can't reproduce Figure 2.2 here; please follow the link.) [Image of Figure 2-2 inserted 2 Feb. 2009.] Then gasoline prices went down about as fast as they went up, and by early 1986, real pump prices were below where they had been in 1978. We continued to have cheap gas for 17 years until 2003.

From Energy Information Agency.

Yet new domestic vehicle fleet economy did not go down because the CAFE standards were providing a floor.

I agree that at some high level fuel prices will drive people to buying more efficient vehicles, but we don't know what price level is required to achieve which level of fuel demand reduction. And, as we saw in 1980-81--and are seeing again now--prices high enough to have a substantial effect on new car preferences also have a ruinous effect on businesses and people's lives by crowding other goods and services out of people's budgets. This is why I cringe when I hear it said that high petroleum product prices are the only way to decrease our use of petroleum, or even that manipulating prices is the best way to achieve that goal.

For at least 20 years, we consumed much less petroleum than we would have without the CAFE standards, and we did it without ruinously high prices and giant transfers of American wealth to oil-producing nations. We can have less consumption and low prices at the same time. We've done it already. CAFE standards were a brilliantly successful energy policy. We should do more energy demand regulation like this and stop throwing federal cash and tax incentives at the supply side.

Update on Thursday, April 24, 2008 at 11:47AM by

Skeptic

I was disappointed that I could not reproduce Figure 2.2 in the NRC report with sufficient clarity and went looking for a better copy in one of the NRC sources. No luck with that, but I found additional interesting data in EPA's annual Light-Duty Automotive Technology and Fuel Economy Trends: 1975 Through 2007.

According to this first graph [inserted 2 Feb. 2009] in the Executive Summary, actual on-road fuel economy for cars has been essentially level since the mid-1980s. (Actual on-road performance is generally about 25% below the laboratory results used to measure CAFE compliance.) On-road fuel economy for light trucks peaked in the mid-1980s--coincident with the CAFE peak--and then gradually declined until 2004 when the revised CAFE standards for light trucks began to force efficiency upward again. (In order to argue that light truck efficiency was forced up by increasing fuel prices instead of CAFE standards, one would have to explain why automobile efficiency did not move up in the same time frame.)

Before this graph there is an interesting chart comparing selected characteristics of light duty vehicles for 1975, 1987, 1997, and 2007. It reveals that once the auto industry got fuel economy up to the CAFE maximum, it used all additional efficiency-improving technology to add back weight and horsepower to the vehicles, not to further improve fuel economy. Trucks went from 19% of sales to 49%. Average vehicle weight in 2007 is 29% higher than it was in 1987 and horsepower increased 89%. No doubt, those design changes gave us buyers more of what we wanted--bigger and more powerful vehicles--and no more of something we didn't care much about--still better MPG.

I think one can still argue that government ought not do anything to influence the fuel economy of the vehicle fleet. Certainly there is a libertarian argument and possibly an economic efficiency argument. But once the nation has made the political decision that, for whatever reason, we must limit or reduce our consumption of highway fuels, the issue is just how best to do that.

Since the Reagan Era, the conventional wisdom has become that "regulation" is always bad and that "markets" are always better. From that has evolved the idea that if we really, really do need to regulate something, an externality for example, we should regulate indirectly by manipulating market prices. This approach requires the perverse procedure of first figuring out what level of highway fuel consumption we want and then trying to translate that into the right size tax to achieve the desired result. The imprecision of the taxation step is just unnecessary and pretty much assures that the results we get will vary from the results we wanted. CAFE is direct regulation that works really well. There is no reason whatever to take a leap of faith into a market manipulation alternative.

Update on Saturday, November 22, 2008 at 11:13AM by

Skeptic

Here via The Oil Drum are graphs from an excellent American Physical Society report on energy efficiency in buildings and transportation. It illustrates that after CAFE standards were met, further efficiency gains after about 1985-86 were used to support additional vehicle mass. It also shows that in the 30 years after 1975, the efficiency (measured in ton-miles per gallon) increased by a factor of just under 3 for cars and just over 3 for trucks. Simultaneously, vehicles became safer and less polluting. There is no reason to think this technological triumph is exhausted.

Update on Monday, December 15, 2008 at 01:57PM by

Skeptic

Robert Rapier proposes improving highway fuel efficiency by phasing in a tax of up to $2 per gallon of gasoline (and reducing income taxes) in this post at The Oil Drum. I pressed him to quantify the expected demand destruction that would result, but got nothing. Another commenter, Neil1947, reported that the EU will impose (or raise?) CAFE standards in 2012. Apparently the EU is not satisfied with the demand-reducing effects of their gas taxes, which have been for decades up to twice as much as Rapier's proposed $2 per gallon.