Tuesday, May 19, 2009

New fuel standards costly? Not really

The Obama administration is announcing new emissions and mileage rules for cars.
The Obama administration today plans to propose tough standards for tailpipe emissions from new automobiles, establishing the first nationwide regulation for greenhouse gases.

It will also raise fuel efficiency targets to 35.5 miles per gallon for new passenger vehicles and light trucks by 2016, four years earlier than required under the 2007 energy bill, sources close to the administration said.
The new rules are the result of negotiations intended to bridge differences between California and other states that were pushing for their own tougher standards, the White House, and automobile manufacturers. In return for the tougher new national standards, California will drop its fight to establish its own standards.

While cleaner air, fewer oil imports, and a more uniform regulations are big pluses, there will be added costs for manufacturers and ultimately consumers.
A senior administration official said the new standards would raise the cost of an average car by $1,300, $600 of which could be attributed to the rules being announced today. The remaining increase would stem from previous energy policy.
At first glance those costs seem high. However, upon closer inspection, they will be more than balanced by fuel cost savings over the life of each car.

The current CAFE standards for passenger cars are 27.5 mpg. Assuming that gas prices are $2.25 per gallon, it costs just under $818 to drive each ten thousand miles. The new passenger car standards will be 39 mpg. Assuming the same gas prices, it will cost just under $577 to drive the same distance, a savings of about $241. Ignoring discounting, a driver would recoup the $1,300 after about 54,000 miles driven or about four years of driving. If gas prices rise, the costs would be recouped even sooner.

That's not a bad deal at all.


Roch101 said...

Thanks for pointing that out. If gas prices rise at a restrained 6% per year, by 2016 the price per gallon will be $3.38. At that price, a driver recoups the higher cost of the more fuel efficient car in about two years.

Dave Ribar said...


That's a good point. I tried to be as "conservative" as possible in the calculations. Less conservative calculations would note that the marginal cost of the policy is actually closer to $600 (many of these changes were going to take place anyway), that gas prices are likely to be higher, and that car companies were moving toward more fuel efficient cars anyway (again, reducing the up front cost).

Anonymous said...

Dave, I'm with you up to a point. That point is that if this is a good deal, consumers should be driving (excuse the pun) the transition, and government intervention wouldn't be necessary. Why don't consumers want this? Is it credit constraints? If so, let's fix the credit market rather than the car market. Or is it something else?

The best argument I can see for regulation of the car market is externalities from pollution & congestion. Addressing these results in a "good deal" in the sense of a potential for Pareto improvement, but any one consumer would still prefer to opt out.

Pino said...

establishing the first nationwide regulation for greenhouse gases.
First you have to accept that the greenhouse gases emitted by cars impacts the world in any substantial negative manner.

While cleaner airDo the new regulations speak to clean air quality or are they speakin to fuel economy?

fewer oil importsAre we really trying to reduce oil imports? I don't think that we are.

more uniform regulationsThis I agree with. However, you could also argue that simply reducing the level of regulation would do the same thing.

upon closer inspectionMany folks feel that the only way that such fuel economy levels can be reached is through reducing the size of the car. And by reducing the size of the car, you increase the deaths due to car accidents. Has anyone examined that added cost?

That's not a bad deal at all. Unless I like driving big, safe and fast cars.

Dave Ribar said...


As you mentioned, there are externalities in terms of pollution, national security, etc.

In addition, (though I hate to say it given the title of the blog), there may be some irrational behavior. Specifically, many car-buyers seem to be myopic (or at least hyperbolic discounters).

Dave Ribar said...


Re emissions: The new rules include both mileage targets and emissions standards.

Re safety: If you drive a small car while everyone else drives big cars, you are undoubtedly less safe. However, if all car sizes come down the net results are less clear. There's also evidence that people's driving adjusts to the level of safety afforded by the car.

The new rules will apply to all vehicles, so even if you continue to insist on that big car, you should see net savings.

Pino said...

Lastly on the cars thing.

As gas prices moved north of $4 we saw the amount of miles driven by Americans go down. Has there been any study that shows how, as driving gets cheaper we simply drive more?

That is, any savings in mileage is simply lost due to extra driving?

Dave Ribar said...


Driving does appear to be at least somewhat sensitive to prices. It would make sense that higher MPG would lower the effective price of driving and therefore promote more driving. That would be good for consumers but not so good for the environment.

Of course if your argument holds, the types of cars that get higher MPG would be less enjoyable to drive, which would mean that people would want to spend less time in them.

I'm not aware of a study that looks at MPG and driving habits, though it wouldn't be surprising if something were out there.

Pino said...

I would seem that the idea of consumption going up as price goes down has been thought of before.

I am surprised that as an economist, you would fail to note that as the price of a thing goes down, more of it is purchased.


Dave Ribar said...


There's no evidence that driving is so price sensitive that the total amount of fuel consumed would go up as a result of the requirement.

Mileage standards do appear to save fuel on net. A 2002 National Academy of Sciences report (p. 3)concluded "The CAFE program has clearly contributed to increased fuel economy of the nation's light-duty vehicle fleet... Improved fuel economy has reduced the dependence on imported oil, improved the nation's terms of trade, and reduced emissions of carbon dioxide...relative to what they otherwise would have been."

The NAS went on to recommend a modified system (a sort of CAFE cap and trade).