Eek! Environmental Visionaries!

Tuesday, December 6, 2011

This past week, the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) unveiled their comprehensive plan to regulate the fuel efficiency of all cars and light trucks that operate in the United States. The operative measure for these calculations is known as the corporate average fuel economy (or CAFE) standard.

Congress first introduced the CAFE program in the aftermath of the Arab oil embargo that was imposed following the 1973 Yom Kippur war. The ostensible purpose was to force an increase in domestic fuel economy that would reduce the United States dependency on imported oil from the Middle East. The energy and automotive landscapes have changed much in the ensuing 38 years. Now, the dominant justification for tightening the CAFE standards is no longer to counter our dependence on Middle Eastern oil, but to secure technical innovation and control air pollution, including pollution attributable to carbon dioxide. The CAFE program fails on all three counts.

 Illustration by Barbara Kelley

Unsurprisingly, the new tough standards reflect the increased determination of the Obama administration to use its regulatory powers to the max. The centerpiece of the program sets out fuel standards for the period from 2017 to 2025. Its stated ambition is to require each automaker to produce a fleet that will average 54.5 miles per gallon (from the current standard of 27.5 mpg), which translates to about 36 mpg on a window sticker. This is no modest target, as the program contemplates that fuel efficiency will increase, year after year, by about 5 percent for cars and 3.5 percent for light trucks. The regulators’ proposals here are so detailed that, in a burst of planning optimism, they have set exact fuel efficiency standards for each particular model, based on its “footprint” (which, roughly speaking, is the area under the vehicle’s four tires).

But is it all worth it? To the champions of environmental regulation, the answer seems too obvious to deny. Thomas Friedman, writing in the New York Times, waxes ecstatic about the plan by pointing out that the regulation rests on sound dollars and sensible economics. After all, the EPA estimates that as a result of the new CAFE standards, the cost of the average vehicle will increase by about $2,000, but that there will be $6,000 in fuel savings over its useful life.  As Friedman notes, the measure has gained the support of the major Global Automakers in a deal hammered out with the Obama administration in July 2011 to bring some long-term planning stability to the industry. Environmentalists think that this is a giant step toward the control of global warming, made possible by the 2007 Supreme Court decision in Massachusetts v. EPA, which allowed the EPA to regulate carbon dioxide emissions as pollutants under the Clean Air Act. Friedman himself salivates over the innovation that the deal will spur “in power trains, aerodynamics, batteries, electric cars, and steel and aluminum.”

Unfortunately, for the champions of CAFE standards, the issue requires a good deal more thought. The difficulties start with the basic design of the program. There is no strong connection between the CAFE standards and any intelligent social objective.

Pollution is a problem that does not have a neat market solution.

Back in the 1970s, when the problem was dependence on foreign oil, CAFE standards were of little help. The standard applied to all oil, domestic and foreign. If foreign oil were cheaper than domestic oil, any reduction in oil consumption would hit local production first, which in turn could cede a larger share of the market to the cheaper Middle Eastern oil. A more specific way to deal with the price advantage of Middle Eastern oil would have been to slap a tariff on it, which would negate its price advantage. That purported solution, however, would have been far from painless. It could have easily spurred retaliation from abroad and, like all restrictions on free trade, it would have introduced a major inefficiency into energy markets in the dubious hope of gaining some long-term geopolitical advantage.

A better strategy, therefore, would have been to reduce the cost of opening new energy supplies in the United States, which would have diminished the attractions of cheap Middle Eastern oil without any collateral dislocations in the energy market. Unfortunately, it was just at this time that construction of new nuclear facilities in the United States came to a crashing halt in the wake of the Three Mile Island incident—frightening as it was, it was no disaster—and the rise of the environmental movement in the United States. The latter led to a series of national and state initiatives that slowed down drilling from Alaska’s Prudhoe Bay to the Gulf of Mexico. These retrograde policies continue today with the decision of the Obama administration to put on hold the Keystone XL Canadian pipeline, which could have brought, with high degrees of safety, large quantities of Canadian oil from Alberta to Texas.

Allowing the pipeline to move forward would have avoided the far greater risk of shipment by oil tanker. Recall the massive 1989 oil spill from the Exxon Valdez, which carried 53 million gallons of oil, much of which was released into Alaska’s Prince William Sound. More competition, not more regulation, is the best way to reduce dependence on foreign oil. Today, the resurgence of oil and gas supplies through fracking surely presents difficulties of its own. But if these technologies pan out as expected, the long-term result will be a decline in oil prices. CAFE has long outlived any usefulness that it might have ever had in dealing with our uneasy reliance on Middle Eastern oil.

The entire CAFE program is equally misguided as a means to spur technological innovation in the automotive industry. Let us take at face value the over-confident claim that in 15 years, we will increase the cost of automobiles by only $2,000, but reduce the cost of fuel consumption by three times that amount. If those facts were actually true, there would be no need for this regulation at all. Consumers are not so short-sighted that they cannot factor in the cost of fuel when they compute the cost of transportation. And for those consumers who, at the time of purchase, are a bit slow on the uptake, it is not beyond the power of fuel-efficient vehicle manufacturers to hammer home the good news about their cars and light trucks. By leaving this particular task to the market, we can avoid the CAFE apparatus’s incredible regulatory morass, which provides a dizzying array of credits to those manufacturers who are skillful at gaming the system. Yet somehow, in all the hoopla, the supporters of the new CAFE standard pay little attention to the regulatory and compliance costs that amount to hefty social losses.

CAFE standards are a clumsy tool for dealing with air pollution.

The situation gets only worse once we realize that the government’s estimates on costs and benefits are wrong. After all, any regulator who thinks he can map out how cars and light trucks will work in 2025 just has to ask whether the best predictions made in 1997 about the operation of this market have held true today. They have not. In dealing with changed conditions, markets are in a position where they can continually update their practices. Successive five-year plans under CAFE have little or no built-in flexibility, so that the cost of error-correction will require elaborate political renegotiations of the present deal. On this score, the apparent unanimity of all the big auto manufacturers counts as a demerit for the scheme. These collective negotiations give the manufacturers a cartel-like advantage that could easily make it more difficult for new players to enter the market in light of the high technical standards tailored to the incumbents.  

Nor is there anything about this particular settlement that counts as a spur to technical innovation. Innovation has been with us since the beginning of the automotive era, driven largely by market forces. CAFE regulations have not been the only effort to jump-start an industry through government intervention. When NHTSA first came on the scene in the 1960s, the great cry was over the failure of the automobile industry to deal with safety issues. There is no doubt that automobiles are vastly safer today than they were 45 years ago, but the issue of causality remains very much in doubt.

The rate of fatal automobile accidents has dropped continuously since 1925, with huge declines between 1925 and 1950. A significant portion of that steep drop occurred after World War II, once new wartime technologies were rapidly incorporated into the civilian market. It is very difficult to find any connection between government regulation and automobile safety in the post-NHTSA era, when in fact the decline in the rate of fatal accidents starts to slow down. The picture is still more complicated because in recent years, close to one-third of fatal accidents have been related to drunk driving. People really want to drive in safe and comfortable cars, and they will seek out the benefits from technical innovation no matter what the CAFE standards are. Indeed, the rate of advancement could easily be more rapid without CAFE standards, as firms would have freed up additional resources for these advances.

CAFE standards are also a clumsy tool for dealing with air pollution. For starters, the relationship between the new standards and global warming is flimsy. There is already enough reason to be cautious about any close or linear relationship between carbon dioxide levels and climate change. But even if that connection were rock solid, the only deal that makes sense on that issue is one that ropes both China and India into the net, since their annual increases in emissions dwarf anything that the United States has done or could do about the issue, as it relates to either automobiles or stationary sources. Even if the United States somehow held high cards in this game, the CAFE standards are not likely to help much. The increase in the costs of new cars and light trucks will not affect all people equally. Consider a group of owners of old vehicles who don’t drive very much but who emit large amounts of pollution for each mile they do drive. These people will not be attracted to the savings in fuel economy, and thus can emit huge amounts of pollutants from their antiquated and broken down systems, even if they drive only a few miles.

Environmentalists are more concerned with their visionary goals than with sound policy.

More generally, the key mistake of the CAFE standards is that they measure one input of pollution creation. They make no attempt to measure either the level of pollution output or the social harm that particular pollutants are likely to cause in discrete settings. Ideally, the proper measure of pollution takes both these factors into account, so that drivers of cars and small trucks are taxed appropriately for the harm they cause. When we move away from carbon dioxide to the pollutants that really affect the general health (like sulfur dioxide and nitrous oxide), the ideal measure looks at the number of miles driven and the places where they are driven. Pollution in the Los Angeles basin is likely to harm far more people than the same amount of pollution in the Nevada desert. Even a simple tax on gasoline that varied with the location and timing (by time of year) of the purchases is more likely to prevent pollution than a one-size-fits-all CAFE standard that remains rigid regardless of use or harm levels.

The point here is that one can oppose the use of CAFE standards without falling into the class of alleged know-nothings who think that one job saved is worth a thousand lives lost to pollution. Quite the contrary: The battle here should not be one of epithets, but one of technique, and it should be informed by two key principles. First, pollution is a problem that does not have a neat market solution, but which must be subject to overall emissions regulations. Second, improvements in technology make it sensible to demand ever-tighter standards on pollution over time, which in turn could be reflected in the various taxes and other social controls that are used to secure these results.

But the acceptance of these two non-controversial premises does not bolster the case for the new CAFE standards. It weakens it. We can do better. A sounder position abandons the use of the CAFE standards.  In its place, it encourages the control of pollution by imposing the same standards on new and existing sources of it.  Higher taxes on older vehicles that pollute, for example, will help drive them to the junkyard. An insistence that emissions from old stationary facilities are taxed at the same rates as the new ones will lead the industry to abandon inefficient plants without the protracted legal battles that are so common today.

The key point in securing this transition is not to have specific input standards on new vehicles and new facilities that are beyond their current level. The EPA and the CAFE enthusiasts are wrong because they do not understand the correct principles of institutional design for pollution control. The debate here depends both on the selection of the right set of ends and the right set of means to achieve them. The great failure of committed modern environmentalists, like Thomas Friedman and Lisa Jackson, is that they adopt unsound techniques to secure visionary goals. 

How About a Well Designed CAFE Program?

CAFE standards ARE indeed a clumsy tool, but absent the force of the regulatory environment, we would be relegated to driving Corvair-like vehicles without seat belts.

I agree with Mr. Epstein’s final point that environmentalists tend to throw common sense to the wind while grinding away toward their visionary goals. Sound policy and reasonable choices dictated by market forces will always prevail.

Surely a well designed CAFE program blended with other improvements in automobile design, like lighter and stronger materials and better aerodynamic design, could make a combined contribution toward benefiting everyone.

---Frank M. Buselli