What’s wrong with CAFE standards

One of my engineering professors once said “there’s a right and wrong way to scratch your ear. The wrong way is like this,” reaching over the top of his head with his right hand to his left ear. “If you want to scratch your ear, do it this way,” raising his left hand directly to his left ear. The principle – for example, to carry a load to the ground by putting a column directly under it where possible – is exquisitely important in the formation and design of public policy and violated by the CAFE (Corporate Average Fuel Economy) approach to energy efficiency. Wading into the discussion earlier today; I love my fellow bloggers even when they are wrongwrongwrong, pant pant pant…

The layers of complex, tortured programs (whose implementation is a bureaucratic nightmare) that we are assembling to reduce oil imports and greenhouse gas releases are scratching our ear the wrong way, but at a Plastic Man level. For one thing, CAFE is only approximately related to actual fuel use, because manufacturers get to count cars as though they were all driven the same amount, and they are not. CAFE does exactly nothing to encourage the most effective thing we can do to slow global warming, which is to drive less.

For another, vehicles that operate on biofuel rather than gasoline holed it below the waterline, so a patch was applied: the CAFE credit for a vehicle designed for ethanol is increased as though that car will be driven on ethanol a lot, but of course E85 fuel is only available here and there, so the policy instrument is still further divorced from the desired effect. The inevitable complexity of calculating and applying CAFE rules invites undermining it with exceptions of all sorts, especially including the exemption of light trucks and SUVs that the manufacturers achieved. Why do we want to suppress petroleum use in a car but don’t care if it’s burned in a pickup? CAFE is part of a leaky policy flotilla, sailing along with the ridiculous 50c ethanol subsidy, on which we are slapping patches without end.

This is the time, with the Stern report out and Gore’s movie still working on public consciousness, to go for the right mechanism for the task, a simple and transparent device that makes attempts to slip spanners between these or those cogs visible: a carbon charge. This charge, imposed on every pound of fossil carbon going through the market (but not atmospheric carbon captured by a plant and sold in, for example, ethanol) will immediately infuse the energy system with efficient incentives to use this scarce resource (atmospheric capacity to accept C) where it does the most good. It will go on working as technologies and habits arise that we can’t imagine now, and therefore can’t explicitly include in a regulatory model like CAFE. It’s adjustable up or down in small increments as we observe its effects without threatening the sudden obsolescence of large amounts of capital or requiring an instant change in living habits from those who have good reason to go slowly. It rewards better behavior instantly without requiring anyone to invest in anything bigger than a good pair of shoes or a bicycle.

Why would we favor a coercive, directive, rigid, and sloppy policy instrument like CAFE standards in preference to something simple, precise, effective, and perfectly targeted? For some reason, my right-thinking green friends have a verbal tic that makes them say “…of course, that’s politically impossible” every time they admit a carbon charge trumps every greenhouse gas reduction alternative. But they’re wrong, and will be wronger if they stop repeating this bromide. It’s no more politically impossible than an excise tax on beverage alcohol. Let’s stop retreating before we even see a flake of Moscow snow.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

14 thoughts on “What’s wrong with CAFE standards”

  1. European countries don't so far as I know, have fuel economy standards at all. High fuel taxes do the job much better. In my Volkswagen Touran turbo diesel, I've just completed a 6,000 km round trip, heavily laden, driving mostly on motorways at 120 km/hr (75 mph). Fuel consumption was 6.1 litres/100 km, or 38.6 mpg (US). OK, the taxes didn't prevent me from making the trip.

  2. You don't seem to get it. Don't you live in England? Maybe that's why. Let me clue you in: for the most part, Americans _can't_ just drive less. Our entire society is built around cars, because, unlike Europe, we have a country that is not very densely populated in most areas. That isn't going to change. Taxing gas isn't at all like taxing alcohol, which is a luxury good. Taxing gas means people pay more to get to and from work and to buy their groceries. It also means that the price of goods goes way up, since they are taken to the stores in trucks.
    A gas tax would be one of the most regressive taxes imaginable and for that reason it is a non-starter. And rightly so.
    CAFE standards are important. Yes, there are loopholes, but that can be fixed. There's no reason for vehicles to be made as inefficient as they are now, especially by Ford and GM (two of the worst offenders). Furthermore, there needs to be a major investment in nuclear power, which generates no greenhouse gases. None of the arguments against nuclear power stands up to close scrutiny when the realistic alternatives are considered.

  3. Have you ever worked in a corporate engineering environment? The principle of economy also applies to the process of corporate engineering itself: do the least work to get the job done. Which often translates to "squeeze another 20 horsepower out of the engine and damn the 0.8 mpg loss of economy". Generally speaking internal corporate norms and marketing strategies work against 'better fuel economy' being a real design goal or having an internal constituency. CAFE operates to force this goal into the design process and enforce it.
    Look, I love fast powerful cars. But go to a car show and look at a fast powerful car from 1970, then compare it to even a basic econobox from 2006 (say a Scion xA or Ford Fusion). The newer cars are 2 orders of magnitude better. And a lot of that improvement was forced by CAFE and the California emissions restrictions, not by any invisible marketing forces. With gas prices see-sawing up and down for the last 20 years those signals were drowned out by customers demanding "more more more"; it was the hammer of CAFE and California that pushed for "better".
    Cranky

  4. Cranky –
    1. In the long run, if gas prices were higher, the demand for urban sprawl developments would plummet. And people would drive less.
    2. I am not at all sure that demand is as inelastic in the short run as you say it is. Commuting does not constitute a majority of driving behavior as far as I know.
    3. Concerning European efficiencies, I've read that Germany taxes automobiles based on the size of the engine. That is, gas guzzlers are more expensive. This drives demand towards more efficient cars.
    4. How do you account for the rapid increase in efficiency of European cars over the past 30 years? Are you arguing that it is due to American CAFE standards?

  5. > 3. Concerning European efficiencies,
    > I've read that Germany taxes automobiles
    > based on the size of the engine. That is,
    > gas guzzlers are more expensive. This
    > drives demand towards more efficient cars.
    Here is the problem: from the moment of the first Clean Air Act (1971 IIRC), the German automakers refused to export their top-line cars to the United States. Impossible to meet the onerous US regulations (as if the 1971-1991 regulations were "onerous"). Can't be done. Violates the laws of physics. An affront to German engineering.
    In 1984, facing the rise of the Green Party, the German Parliment enacted not the US EPA but the actually onerous California EPA regulations into German law.
    Within 12 months, every German automaker had at least one of their top-o-the-line models meeting or exceeding those requirements. Now, it takes 5 years to fully develop a new model line and/or technology. Which means that the German automakers had been working on this, and probably had qualifying technology available, since _1979_. But they chose not to bring it to market.
    And the kicker of course is that meeting the California emissions requirements while maintaining high-end market share forced the automakers to greatly improve engine efficiency. More power + better fuel economy! I thought that violated the laws of physics… (well, I didn't really since I once owned a 1984 Honda).
    Again, IMHO the "CAFE doesn't work" argument fails to take into the account the internal politics of the car companies and the prisoners' dilemma nature of their markets.
    Cranky
    By the way, I love the Jane Jacobs central-city model myself. But regardless of the reasons, the vast majority of Americans today loathe the central-city model and believe that exurbs are the only way to live. I doubt that will change in the next two generations, and physically speaking it would be very hard to change due to the housing stock situation. So much as it pains me we have to figure out a way to get those suburb-dwellers into Honda Fits and Scion xBs, not how to get them to move downtown and take the trolley. Cause they won't do the latter.

  6. Cranky
    I pretty much entirely agree with your arguments.
    We here (UK) have the highest gas prices in Europe. But sprawl is still desired (planning restricts it, but where it is allowed, it happens).
    One of the fastest growing communities in the UK is Milton Keynes, which is entirely car-centric. (think Irvine California ie a 1970s planned community, with an (unusual for the UK) square grid road system (with roundabouts at every interesection) and almost universal single family semi-detached dwellings. Also a statue in the town square of concrete cows).
    We have expensive petrol, but we drive very fast (at 70mph on the highway, you will get tooted at for driving too slow).
    1/12 cars sold is an SUV. 1/8 in London, which has snow drifts every 10 years or so, and no unpaved roads.
    Car taxation (especially company car taxation) is tilted towards lower CO2 emission cars, but not by enough to change purchasing decisions, except at the margin.
    AFAIK UK fuel economy is falling, not rising *except* for the switch to diesel.
    And it costs you the equivalent of USD18 to drive into London 7am-7pm, Monday to Friday. Believe me, the streets are still jammed with private passenger vehicles, with one or two occupants.
    It's a bit like the CFC problem. We couldn't tax CFCs until people didn't use them, we had to *ban them outright*.
    I (like Stern) have more hope for tradable carbon permits for high polluting industries like cement, aviation etc.

  7. 1/12 of new cars in Britain are SUVs? If higher gas taxes in the US could do that, I'd be thrilled. The figure I've heard is that 1/2 of new cars are SUVs here.

  8. Re. the Milton Keynes observation above. Yes, MK is pretty car-oriented, BUT trips are generally much shorter than in the US–a lot of them are fairly short school runs and trips to Waitrose. Also, there are plentiful trains in and out of London–on an average morning from 7-8, there are something like nine trains into Euston station. Compare that to almost any suburb in the US. Also, London has a substantial charge for driving into the central city. The combination of the cost of gas and London charging puts a high price on commuting. And even though 1/12 of cars in Britain may be SUVs (I'm assuming this is correct) because travel distances are so much lower, the global warming impact of them is much less than in the US. Remember, the global warming impact is the fuel economy X distance driven. You can influence global warming either by getting fuel economy up or by reducing driving distances. CAFE standards do nothing about the latter.

  9. Ragout
    If true, an horrific number (50%)
    http://www.wachoviasec.com/wachoviasec/WSIComment
    about 55% of US sales in October were light cars and trucks.
    (we have a lot of van sales, and I wasn't including that in the number)
    I did notice how many SUVs there were in New York. In *Manhattan*, where there can be no case for them (where does one park an SUV in NYC?).
    I would, however, note that the price in petrol in the UK is just about double what it is in the US.
    90p/litre = about USD1.60/litre = over $6/gal.
    For which, we get, AFAIK, about 12mpg more per car (we use a bigger gallon, remember).
    Yes we drive fewer miles, but our country is only 700 miles long, it is a pain to drive on the Continent (steering wheel on the wrong side) and our GDP/ head is only 60% of the US one.
    So if the US applied new taxes of $3 per gallon, then the long term effect might be to increase fuel economy from the mid 20s to the mid 30s.
    *that* is if the US imposes a tax on gasoline that is beyond any possible, imaginable sum.
    As I said, a trebling of world oil prices hasn't scared Americans off their SUVs, nor the Chinese off buying more cars. It isn't going to, either.

  10. Valuethinker: "So if the US applied new taxes of $3 per gallon, then the long term effect might be to increase fuel economy from the mid 20s to the mid 30s."
    Or we could just pass laws saying cars have to get the desired gas mileage – i.e. higher CAFE standards. (And close the SUV loophole.) That would have the advantage of putting the burden on businesses that can handle it, rather than middle-class consumers who haven't had a raise since 1973.

  11. Firebug
    The costs of CAFE will fall on consumers. That is simple economics.
    It would only fall on car makers (their shareholders and employees) *if* they were not operating in a competitive market. But the new car market is highly competitive– there was a time in 2002 when after financing incentives, it looked like GM was giving away cars for free (or at least at a severe loss).
    The argument for CAFE is that it will spur innovation by car makers, thus lowering the cost of fuel economy.
    Right now any individual car maker is in an impossible position. If it devotes R&D and capital investment to making more fuel efficient cars, it will lose out to car makers who devote those resources to making sexier cars, faster cars, higher acceleration cars, safer cars, etc.
    This is precisely what happens with the arms races to build more SUVs.
    It is what economists call a 'coordination problem'.
    And once those cars are sold (eg the large class SUVs) they will sit out there for 15 years. If gasoline prices go up, the middle class people who bought them will buy fuel efficient cars, and those SUVs will fall into the hands of poor people, students etc. who cannot afford new cars.
    So they'll still be out there, burning resources.
    If car makers have to meet a minimum average fuel economy standard, they will devote resources to creating and selling fuel efficient cars which are profitable.
    It's a blunt ended instrument, whereas a 'carbon tax' is a clever and finely tuned instrument.
    However fuel is only 20% of the total lifecyle cost of owning a new vehicle. Insurance and depreciation (and in the case of a car lease, consumer finance) are the big costs of owning a car.
    The carbon tax necessary is going to be so large, to meaningfully change consumption habits, that it is not practicable.
    We can minimise some of the costly effects of CAFE by allowing car makers to *trade* their allowances. So for example if one year BMW doesn't meet its CAFE, it can buy average fuel economy from another car maker (say Hyundai) that has exceeded its per vehicle CAFE.

  12. I would add to the debate, generally, that California is an interesting example.
    California has about half the Kwhr consumption per capita of the US as a whole (about the 5th most efficient state).
    And despite the fact that California is notorious for its love of cars, I believe that Californians drive more fuel efficient cars, and therefore don't look too bad from a CO2 emission per person basis (the US as a whole is a disaster, but California less so).
    This may be the result of high electricity prices (some of the highest domestic electricity prices in the nation) and high gas prices (ditto).
    But also California has some of the strictest regulations in the Union re, eg, energy efficient building construction. You could call it 'America's Sweden' in this regard.
    There is a lot about California that leads me to query its sustainability (chiefly: water. There is evidence that in the past few thousand years, southern California has had 100 year periods where it *did not rain*. Australia is going through what it calls 'the thousand year drought' right now, but there is evidence that the previous, relatively wet climate, is the anomaly, not the drought. What if California were to enter into a similar period?).
    But the example of California also indicates how much can be achieved with intervention.
    Anyone know more? I've not studied it much, other than to note peak electric power demand in California (about 55GW I think) v. Ontario (c. 35GW). But:
    – both have a summer peak. Ontario is much cooler in summer than southern California (but more humid)
    – Ontario has 12 million people, California has over 30 million
    – GDP per head in California is at least 50% higher than Ontario
    – Ontario has more primary industries (pulp and paper, chemicals etc.) but California has high tech, aerospace etc.
    So what is going on? How (why) are Californians so virtuous?

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