That result becomes unimposing once one takes account of the falling relative share of domestically produced automobiles, the decreasing miles per gallon CAFE has induced in the imported[r]
(1)CAFE – the Corporate Average Fuel Economy Mandate David D Haddock Professor of Law, Professor of Economics Northwestern University School of Law RESEARCH SYMPOSIUM ON BAD PUBLIC GOODS (2) B a d P u b l i c G o o d s CAFE – the Corporate Average Fuel Economy Mandate Federico Boffa, David D Haddock, and Stefania Porporato * Abstract Congress established the Corporate Average Fuel Economy mandate to shield the United States from disruptions similar to those that followed the Arab oil embargo of 1973 Retarding the growing stream of small imported automobiles that were entering the nation was an anticipated auxiliary impact Commentators also credit CAFE with a reduction of urban pollution and the slowing of global warming Belief that CAFE has succeeded in those ways results from careless misinterpretation of government data CAFE has perverse impacts on each front Assuming the goals are worth pursuing, an obvious alternative policy would have performed better at less cost Taking advantage of anticipated normal disruptions during the most important of Jewish holidays, Egypt and Syria launched a coordinated surprise attack on Israel on October 6, 1973 The Yom Kippur War did not proceed favorably for the Arab belligerents Neither Egypt nor Syria is a major oil producer, but many citizens of the largest petroleum exporting nations are hostile toward Israel In consequence, eleven days into the war Arab producers placed an embargo on oil exports, explicitly intending that to damage the economies of the United States and some European nations in retaliation for their support of Israel Other members of the Organization of Petroleum Exporting Countries, understanding the opportunity the embargo presented, quickly and substantially increased * dhaddock@northwestern.edu The authors are respectively Associate Professor, University of Macerata, Italia; Professor of Law & Economics, Northwestern University and Senior Fellow, PERC – Property & Environment Research Center; and Business Consultant and CPA, Studio Palea, Torino, Italia The authors initiated this project while Visiting Research Fellows at AIER – American Institute for Economic Research, in Great Barrington, MA We received valuable comments from Marti DeBoer Boffa received additional research support from Freie Universität Bozen / Libera Università di Bolzano, and Haddock received additional research support from the Northwestern University Law Faculty Research Program (3) the prices they charged for oil As intended, the rapid increase in fuel prices was economically disruptive for energy intensive economies such as that of the U.S The disruption led to a stream of policy initiatives throughout the first world, initiatives that assumed a life of their own and continue to evolve today more than a third of a century after the war ended Those evolving initiatives include efforts to simulate the production of ethanol in the U.S and biodiesel in Europe as substitutes for energy sources derived from petroleum, development of hybrid electric-gasoline engines, and use of fuel cells in city buses, among other things Figure 1: Mandated CAFE Standards Source: NHTSA - Average Fuel Economy Standards Passenger Cars and Light Trucks Model Years 2011-2015 40 Miles per Gallon 35 30 Auto Standard Light Truck Standard 25 20 15 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 Year We confine our focus to another element of the U.S response, legislation that empowered the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA), to create and regulate a set of Corporate Average Fuel Economy mandates As figure illustrates, CAFE mandates minimum miles per gallon (4) that a manufacturer’s average car must attain if the firm is to escape sanctions Having remained steady since 1990, the minimum will soon rise to twice the level at which it originated It is important to note that all the data used in this paper originate with NHTSA itself, with the exception of historical gasoline price data CAFE does not require high miles per gallon of each car sold in the U.S Those who are prepared to pay the price can still obtain cars that consume substantial amounts of fuel Instead, the mandates require that each manufacturer meet a specified estimated fuel use averaged over all the cars the manufacturer sells in the U.S during a given model year, which is called the manufacturer’s fleet average In response to manufacturers’ appeals that trucks were innately different – mainly work vehicles that had to be heavier and more fuel using than cars in order to be able to carry their cargos – NHTSA introduced a separate light truck standard in 1982 As one would anticipate, CAFE treats pickups as light trucks while eighteen-wheelers are not For purposes of CAFE, however, the distinction between an automobile and light truck does not hinge on the vehicle’s appearance but on its weight Thus, a van or sport utility vehicle (SUV) ordinarily qualifies as a light truck rather than an automobile In addition to defining the mandatory minimum fleet mileages in Figure 1, NHTSA also reports realized fleet averages of the various manufacturers, as well as several averages aggregated over various sectors of the industry One major objective of CAFE was to induce U.S producers to downsize automobiles, so the press often focuses To prevent firms from selling a few freakish cars that achieve astounding mileages while continuing to produce gas-guzzlers for the rest, the CAFE average is harmonic rather than the more familiar algebraic average That distinction is largely irrelevant here and we refrain from mentioning it further Where we construct alternative versions of CAFE mileages, however, we employ the harmonic average (5) on changes in the realized average for all automobiles produced domestically during the most recent model year Figure shows that time series The average miles per gallon actually realized by the average car produced in North America has usually, but not always, exceeded the mandatory minimum by a small margin, increasing from 19.3 mpg in 1979 to 30.6 mpg in 2007, an increase of nearly 60% Figure 2: Realized Domestic Auto CAFE Source: NHTSA - Summary of Fuel Economy Performance, March 2008 U.S Dept Transportation 31 29 Miles per Gallon 27 25 Realized Domestic Auto CAFE 23 21 19 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 Year Credits under CAFE are earned if a firm’s fleet average miles per gallon is above rather than at the mandated average, and deficits are incurred if the fleet average is below the mandated average A firm may save credits or borrow deficits for up to three years, both at an interest rate of zero One firm cannot purchase CAFE credits from another firm Instead, when a firm’s credits cannot cover its deficits within the permitted timeframe NHTSA imposes substantial fines That penalty is imposed on every car the (6) manufacturer sold during the model year, even on the units (if any) that met CAFE’s requirements Many of the CAFE’s details are of marginal interest here and thus ignored, but one final detail will prove relevant When Congress debated the legislation establishing CAFE, General Motors, Ford, and Chrysler – the so-called U.S Big Three – all had subsidiaries that operated abroad, producing the small cars that European and Japanese drivers preferred The United Auto Workers union feared that CAFE would merely induce the Big Three to begin importing the small cars that they were already producing on foreign soil, thus reducing employment in the automobile industry of the U.S In consequence, Congress inserted an added stipulation into the mandates – companies producing both domestically and abroad must meet the CAFE fleet average for domestically produced cars, and as a separate calculation, they must also meet it for the fleet of vehicles imported from their foreign operations If a company’s domestic fleet is in deficit after three years the company must pay a fine on the cars in that fleet regardless of any credit realized by the cars in the company’s import fleet, and vice-versa I The Institutional Setting As Congress debated CAFE in 1975, the most common supporting argument was that it would reduce U.S dependence on foreign petroleum and moderate potential disruptions to the economy similar to those that had followed the 1973 Arab Oil Embargo The apparent way to meet fuel saving objectives, at least in the short-run, was to build smaller and lighter vehicles, and to some observers that implied a second CAFE advantage A A car is defined as domestic if 70% or more of its cost arises from U.S or Canadian materials In consequence, some cars that are assembled in North America qualify as imports for CAFE purposes (7) stream of small automobiles imported into the country had been growing gradually since Volkswagen entered the U.S market in 1949 Some non-Big Three U.S manufacturers had specialized in smaller varieties of automobile such as American Motors Corporation’s Rambler, but those were small-scale operations that ultimately had been unable to compete with Volkswagen and ceased production By inducing the Big Three to decrease the average size of domestically produced automobiles, Congress anticipated renewed domestic competition in the small car sector of the market, thus reducing the chronic U.S balance of payments deficit More recently, commentators have begun to credit CAFE with a reduction of urban pollution and a slowing of global warming It is important at the outset to put aside issues that we not address In this paper, we not quarrel with the desirability of the articulated objectives of CAFE but instead ask whether CAFE’s regulatory structure can reach those objectives Some careful observers believe that few if any of the motivations detailed above are sufficient to warrant CAFE For instance, some embargo-induced disruptions in 1973 were selfinflicted The imposition of wage and price controls with the ensuing time-wasting queues and other more subtle distortions certainly exacerbated the disruption by far more than CAFE could have ameliorated it, had CAFE already been in place Similarly, a trade deficit can afford benefits rather than costs People can save the money they not immediately require in any of a number of currencies, and prefer to avoid the danger of losing value due to unanticipated changes in the selected currency’s purchasing power When the future value of the dollar is more predictable than competing currencies, many foreigners supply real goods and services to the U.S in (8) exchange for dollar-denominated savings in banks That makes some internal resources available for alternative uses Just such trade deficits financed much of the growth that converted the U.S from an economic backwater to an economic powerhouse during the course of the nineteenth century As continues to be true today, many of those nineteenth century creditors ultimately immigrated to the U.S., so from a national accounting standpoint the nation as a whole never repaid those loans, although individual debtors did That is to say, the debtor repaid a new citizen rather than the foreign creditor the immigrant had once been Likewise, serious debate continues regarding the mechanism that seems to portend global warming, and poorly designed panic-driven responses are likely only to make matters worse For the purposes of this paper, however, we take no positions regarding those debates We take as given that the asserted motivations led to passage of the CAFE statute, and then proceed from there Our challenge is different In light of those (possibly misguided) motivations, supporters of CAFE claim that the mandates provide several nonrivalrous and nonexcludable – hence public – goods: Shelter for the domestic economy against potentially hostile foreign governments; a reduced balance of payments deficit; decreased urban smog; slower global warming The issue that we address, then, is not whether the hoped for results are worth pursuing but whether CAFE is well designed to achieve those targets If a readily available alternative policy would have provided a more secure shelter from hostile attempts to disrupt the U.S economy at the same or less cost, CAFE has failed at its assigned task If CAFE augments the balance of payments deficit rather (9) than reducing it for no better reason than enforcing the statute, again CAFE has failed Similarly, the mandate is defective if alternative policies would have, at equivalent or lower cost, led to less urban smog and lower carbon emissions As we will detail below, CAFE seems to have failed on each score II An Alternative to CAFE An increase in fuel taxes would be the most straightforward means of curtailing the consumption of petroleum Higher prices at the pump would induce many drivers to opt for automobiles that could squeeze more miles from the fuel the driver purchased That most cars sold in Europe and Japan are notably smaller than those driven in the U.S is due in substantial part to higher tax-driven European and Japanese fuel prices Certainly, some drivers would decide to continue to drive large cars and bear the increased fuel costs However, CAFE also permits some drivers to opt for large cars, and under CAFE, those drivers not even have to pay augmented fuel costs Perhaps, as many allege, the rich will just buy their way out of their duty to conserve fuel, but there is no apparent reason to let the rich buy their way out as cheaply as CAFE does This observation should be interpreted neither as an argument for nor against an increased fuel tax We intend to show only that the economy-wide impact of an increased fuel tax would have been more advantageous than CAFE’s impact from the viewpoint of those favoring measures intended to reduce fuel consumption, and less disadvantageous from the viewpoint of those opposing such a policy Automobile drivers would, of course, resist an increase in fuel taxes, but CAFE has increased the cost of producing cars, a cost that is passed on to buyers, and that amounts to a hidden tax of the sort sometimes referred to as taxation-by-regulation (10) Adopting an indirect and hidden CAFE-induced tax increase rather than increasing the fuel tax acts against the goals of curtailing carbon emissions and urban smog The purchase price of a new car is higher, which certainly dissuades some potential buyers For the subset of buyers who purchase a new car despite the increased price, however, CAFE does nothing to curtail the incentive to drive and burn gasoline Moreover, few of those who delay or forgo purchase of a new car will turn to walking, biking, or riding buses; most of them will consider a used car to be the best substitute Often that will merely mean simply keeping the old jalopy an extra year or two However, throughout the history of the automobile industry, hence well before CAFE came on the scene, gradual reductions in fuel use have been the norm rather than the exception Henry Ford’s Model T burned a gallon of gasoline about every 15 miles, but could generate only 20 horsepower and a maximum speed of 45 miles per hour in the process The Model T was an extraordinarily impressive automobile for its day, but by today’s standards it would only be extraordinary in its deficiency Thus older cars burn more fuel than the postponed replacement model The implicit CAFE tax fails to exert the marginal disincentive to emit carbon that an increased fuel tax would have achieved Moreover, a car’s emissions increase as it ages, so a car that continues in service for an extra year or two will contribute more pollutants than would the new car that would otherwise have replaced it More subtly but also of more importance, an increased fuel tax would have induced all consumers of fuel to conserve, whereas CAFE applies only to passenger cars and light trucks The heavy trucks, railroads, ships, barges, and air freighters that carry nearly all commodity shipments, burning enormous quantities of fuel in the process, are (11) subject to no CAFE restraints Indeed, to the extent that CAFE exerts a notable downward pressure on the fuel consumed by passenger cars and light trucks it will moderate fuel prices, thus encouraging rather than discouraging fuel use in the heavy freight sectors For at least some uses, various fuels are substitutes in both production and consumption For example, the proportion of a barrel of petroleum distilled into fuel oil rather than gasoline is a choice variable In consequence, the same considerations apply to all fuel use People experience pressure to conserve the gasoline they burn in their cars, but CAFE provides no incentive to conserve the fuel oil or methane that heats their homes or the electricity that cools them In brief, even if CAFE works as planned to reduce the consumption of fuel by cars and light trucks, it affords a ridiculously flimsy shelter for a national economy targeted by a hostile government It is as though we are preparing for a hurricane (which incidentally may never make landfall) by ramping up the production of umbrellas III The Size of Automobiles A reasonable person may ask why U.S consumers seem so determined to purchase larger cars than European and Japanese drivers There seem to be three principal reasons for the difference First, as alluded to above, fuel prices gross of tax are higher in Europe and Japan – even today U.S motor fuel prices are lower than in any other first world nation Second, Europe and Japan urbanized long before automobiles came on the scene Their streets and lanes are narrow, winding, and dense with vehicular and pedestrian 10 (12) traffic A small car may afford less comfort during the occasional high-speed jaunt along a wide, straight rural highway, but it is more maneuverable in tight quarters and around the obstructions encountered on a daily basis Third, the U.S is enormous relative to Japan and western European nations, so American drivers are more accustomed to high-speed long-distance trips where the comfort and safety of a larger and therefore heavier car becomes important Neither France nor Spain is substantially larger than California, but they are the two biggest nations in western Europe Japan has an area similar to Montana’s but a population density similar to that of Massachusetts The United Kingdom is an Oregon-size nation with the population density of Connecticut In brief, U.S drivers, as well as Canadians, Australians, and other residents of large, sparsely populated, and dispersed nations, have understandable reasons to prefer larger vehicles than English or Japanese drivers CAFE did not change those preferences but merely created an incentive for U.S drivers to find alternative ways to obtain vehicles appropriate for their circumstances Supporters expected the mandates to force lighter cars from domestic manufacturers, but as an empirical matter, CAFE exhausted that impact within three years As figure indicates, however, the weight of domestically produced automobiles did shift from one very nearly horizontal trend to a different though still nearly horizontal trend that is roughly a half-ton lighter Figure 3, however, illuminates a more remarkable change – the introduction of CAFE corresponds to a replacement of a nearly horizontal trend in the weight of imported automobiles sold in the U.S by an upward trend Before CAFE, imported 11 (13) automobiles were roughly half the weight of domestically produced cars; today the imports and their domestic counterparts are of virtually the same weight on average Note also that light trucks have been steadily increasing in weight Figure 3: Test Weight Source: NHTSA - Domestic & Imported Passenger Car Fleet Average Characteristics http://www.nhtsa.gov/portal/site/nhtsa/menuitem.43ac99aefa80569eea57529cdba046a0/ 6000 5000 Pounds 4000 Import Auto 3000 Domestic Auto Light Trucks 2000 1000 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 1955 The upward trends in imported automobile and light truck weights are not incidental Those trends are a direct result of CAFE Because imports were relatively small and therefore light at the inauguration of CAFE, they had large CAFE cushions, as shown in figure We define a cushion to be the divergence between the average miles per gallon that a firm realizes and the average the mandate requires that the firm meet Thus, a positive cushion implies exceeding the mandated average during a particular year and a negative cushion implies falling short of the mandated average Due to their cushions, imports immediately began earning credits following implementation of CAFE 12 (14) NHTSA would bank those credits to the company’s account for three years but then the credits expired Figure 4: Cushions: Realized CAFE minus Mandated CAFE Source: NHTSA - Summary of Fuel Economy Performance, March 2008 U.S Dept Transportation 10.0 8.0 Miles per Gallon 6.0 Domestic Auto Cushion 4.0 Import Auto Cushion Light Truck Cushion 2.0 0.0 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 -2.0 Year CAFE credits are inalienable to other firms, so if a credit is to have value to its owner it can only be use value, not sale value If one firm, say General Motors, has a deficit, it cannot purchase an offsetting credit in a competitive market consisting of all the other firms whose fleets have realized average miles per gallon above the mandated average Instead, there is but one supplier of the required offsetting credit, NHTSA, and GM’s purchase is compelled GM has no option but to purchase from NHTSA, though the transfer is characterized as a fine rather than a purchase As one would anticipate, since a legal monopoly is the only seller of the credit, the price (fine) is substantial Because it is unsalable, a credit is valuable to a company only if the company can find an opportunity to use it CAFE forced domestic companies to curb the average 13 (15) weight of the automobiles they produced, which they accomplished by decreasing the sales of larger and thus heavier models and increasing the sales of smaller and lighter ones The reduced supply of larger cars increased their market price while the countervailing increased supply of smaller cars decreased the market price of that variant The profit margin consequently became higher for larger than for smaller cars, but only the imports had the CAFE cushions necessary to take advantage of the divergence Companies such as Honda that had been producing high mileage cars now had artificial incentives to take advantage of the increased profit margin on large cars and to cut back on production of the small ones whose profit margin had fallen In brief, CAFE forced the Big Three to increase average mileage, which sounds good at least to a casual observer, but it simultaneously induced companies such as Honda that had been producing high mileage cars to decrease average miles per gallon, and that should sound good only to petroleum producers That NHTSA imposes fines on producers but forbids them to purchase available credits from other companies is worse than vindictive The policy curtails the value to a small-car producer of continuing to produce small cars to accumulate credits to sell to other companies Thus, CAFE induced companies that understandably had specialized in large cars to begin manufacturing small ones while inducing companies that understandably had specialized in small cars to begin manufacturing large ones If economy-wide petroleum imports are the same in either case, artificially homogenizing the industry in that way provides no national advantage against hostile petroleum producers; it only increases the cost Therefore the price of automobiles is forced to higher levels than should be necessary to achieve the stated goals 14 (16) As figure shows, the resulting impact is startling when one compares domestic and import sales in large and small segments NHTSA divides automobiles by size into six categories Although incorporating all that detail would alter none of our conclusions, figure would become nearly unreadable Consequently, we have combined NHTSA’s three small categories into two sums that we call small import autos and small domestic autos, and we have combined NHTSA’s three large categories into two sums that we call large import autos and large domestic autos Figure 5: Consolidated Domestic and Import Segments Source: NHTSA - Domestic & Imported Passenger Car Fleet Average Characteristics http://www.nhtsa.dot.gov/portal/site/nhtsa/menuitem.43ac99aefa80569eea57529cdba046a0/ 100 80 60 Percent Small Import Autos Large Import Autos Small Domestic Autos Large Domestic Autos 40 20 20 20 0 20 19 19 19 19 19 19 19 19 19 19 19 Year Amazingly, over the history of CAFE the proportion of domestic automobiles that fall in NHTSA’s three small categories has actually declined – after the three-year period of emergency adaptation by domestic manufacturers that we have mentioned already, the those companies have met the mandates by altering engine performance Equally notable, the distribution of imported automobiles, which initially were well more than 90% small category automobiles, now closely mirrors the domestic distribution Figure 15 (17) shows that absolutely no Asian imports were included among the three large car categories until 1982; today that proportion verges on 90% Figure 6: Consolidated Domestic, Asian, and European Large Segment Source: NHTSA - Domestic & Imported Passenger Car Fleet Average Characteristics http://www.nhtsa.dot.gov/portal/site/nhtsa/menuitem.43ac99aefa80569eea57529cdba046a0/ 120.0 100.0 Percent 80.0 Large Domestic 60.0 Large Asian Imports Large European Imports 40.0 20.0 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 0.0 Year Domestic and import cushions have now become comparable so convergence seems nearly complete What gain has resulted from inducing European and Asian automobile manufacturers to resemble their North American counterparts so closely? Before CAFE they were and should still be specializing in smaller cars Alienable CAFE credits could have achieved an identical level of petroleum imports into the U.S with a more rational worldwide distribution of automobile production Domestic producers have not pushed imports out of the small categories; instead, due to the incentive to exploit their CAFE credits in the higher-profit-margin large-car segment imports have increasingly pushed domestic producers out of those categories The CAFE mandates have induced foreign manufacturers to design larger cars intended 16 (18) mainly for sale in the U.S market Rather than reducing the U.S balance of payments deficit, CAFE has increased it IV CAFE’s Impact On Miles Per Gallon Of Fuel Due to their higher weights, according to CAFE rules most vans and SUVs are included in a manufacturer’s light truck rather than automobile pool Though light as contrasted with commercial trucks, light trucks are by NHTSA’s definition heavier than cars, and therefore typically obtain fewer miles per gallon of fuel Because CAFE holds light trucks to less stringent mileage requirements than cars, many drivers opt for larger, more fuel using vehicles than they would have purchased in the absence of the mandates Perhaps the most stunning illustration of the impact is that U.S manufacturers no longer produce a single model of station wagon, which NHTSA would evaluate as a car for CAFE purposes Before CAFE, station wagons comprised a substantial part of North American automobile production, but few foreign producers made any station wagons at all Buyers who prefer a station wagon must now purchase an imported variety such as Volvo or BMW (companies that previously manufactured none) or substitute a domestic vehicle that is heavier than the thwarted station wagon would have been Sharing overhead such as initial design costs across a sizeable number of units is necessary, or consumers refuse to pay prices that are high enough to make a model profitable Given that minimum viable scale of production for any particular model, it seems unlikely that Hummers would exit without CAFE Figure illustrates the perverse impact of the CAFE disadvantage that domestic automobiles experience compared to light trucks and imported cars Before CAFE, light 17 (19) trucks were the lowest sellers of the three segments with less than 10% of the market Most of them were working vehicles used for hauling animals, freight, materials, and tools – pickup trucks for the most part but also some vans SUVs remained in the future Now that segment accounts for about half of all new personal vehicle purchases, a minority of them directly employed in the owner’s job Before CAFE, domestically produced automobiles sold well over four times as many units as imported cars; today the shares are similar and converging Figure 7: Market Segment Shares Source: NHTSA - Summary of Fuel Economy Performance, March 2008 U.S Dept Transportation 0.800 0.700 0.600 0.500 Domestic Auto 0.400 Import Auto Light Trucks 0.300 0.200 0.100 0.000 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 It is also noteworthy that today many of those domestic cars are Toyotas, Hondas, Volkswagens, and such that meet NHTSA’s 70% domestic content cutoff Car buyers should applaud the appearance of new North American producers were that a natural evolution, but that transformation is worrisome to the extent that the motivation for entry hinged on artificial CAFE-created incentives 18 (20) Recall from figure – replicated by the lighter series in figure – that the realized miles per gallon averaged over all automobiles produced and sold domestically has increased by nearly 60% over the life of CAFE That result becomes unimposing once one takes account of the falling relative share of domestically produced automobiles, the decreasing miles per gallon CAFE has induced in the imported automobiles sold in the U.S., and the dramatic shift away from cars and toward light trucks with their less stringent CAFE standards Figure 8: DOMESTIC AUTOMOBILE versus AGGREGATED CAFE MILEAGES Source: NHTSA - Summary of Fuel Economy Performance, March 2008 U.S Dept Transportation 31.0 29.0 Miles per Gallon 27.0 Domestic Automobile CAFE 25.0 CAFE for Aggregated Vehicles 23.0 21.0 19.0 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 Year Because they fail to consider such compositional shifts, characteristic press reports of CAFE averages are grossly misleading Figure shows the corrected CAFE harmonic average after taking into account the compositional shift Not only are the CAFE averages less impressive than shown in figure 2, the properly computed national CAFE mileage actually decreased nearly continuously from 1987 until 2004 The major 19 (21) impact of CAFE seems to have been to alter the shapes of the vehicles people drive and the prices they are required to pay for them, not the miles of travel they realize from the fuel they purchase Figure 9: Fluctuations In U.S Gasoline Prices Even the initial run up in miles per gallon between 1979 and 1982 as well as the more recent one that began after 2004 may have less to with the mandates than with changes in the price of fuel Adjusted for inflation, the price of a gallon of gasoline increased from less than $2.00 (in today’s prices) immediately before the Yom Kippur War to $3.44 in early 1981 Gasoline prices then fell quite rapidly before stabilizing between the latter 1980s and the early years of the new millennium The prices then took a sharp upward trend that continued to the recent peak of $4.17 in July, 2008 As in 20 (22) Europe and Japan, high fuel prices induced U.S car buyers to shift the composition of their purchases toward vehicles that achieve greater mileage V Conclusion Agricultural, chemical, energy, and freight interests were influential lobbies opposing increasing taxes on petroleum and other energy minerals command-and-control CAFE structure instead Congress authorized the As command-and-control regulations inevitably do, CAFE has had a material impact on collateral matters that have absolutely nothing to with the stated objective While the naïve believe that CAFE substantially reduces petroleum imports, almost the entire impact has been to distort people’s car buying decisions CAFE has not merely distorted the decisions of citizens; because its economy is a world giant, the U.S has managed to distort the automobile industry worldwide The literature discusses many other aspects of CAFE that we have ignored here due to space constraints (Liu 2008) The most important of those may relate to the safety aspects of the mandate Reducing an automobile’s weight increases miles per gallon, and the adoption of new materials has led to substantial weight reductions in domestic automobiles, even as imports and light trucks have grown heavier Some of those materials offer less protection in the event of an accident than the materials they replaced, however Reducing acceleration capability also increases miles per gallon, but that can leave a driver unable to avoid an onrushing vehicle Our scrutiny of NHTSA’s own data leaves us wondering where CAFE’s hypothesized energy-saving benefits are hiding If no benefits exist they cannot merit the sacrifice of even one life 21 (23) By inducing conservation throughout the economy rather than limiting itself solely to the personal vehicle sector, a fuel tax increase would have provided a more secure shelter from hostile attempts to disrupt the U.S economy at the same or less cost than CAFE Conclusion: CAFE has failed at that assigned task CAFE has augmented rather than reduced the U.S balance of payments deficit Most economists take naturally occurring deficits in stride, but there is nothing natural about a CAFE-created deficit augmentation Conclusion: CAFE has failed at that assigned task An increased fuel tax would have led to less urban smog and lower carbon emissions Conclusion: CAFE has failed at those assigned tasks Perhaps an increased fuel tax would have imposed more economic costs on the U.S than it provided benefits We make no claim to have addressed that issue A fuel tax would certainly have done better than CAFE, however, increasing the benefits from reduced energy consumption if those benefits exist, decreasing the costs otherwise Either way the conclusion remains that this government initiative has failed to provide properly for public goods CAFE has had a perverse impact with respect to every task it was assigned The public and the press have a tendency to overlook a disappointing fact – legal mandates have a way of calling into being new interest groups that benefit from the mandate’s continued existence One of the least commonly recognized of the evolved interest groups consists of those bureaucrats employed to administer the mandate Interest groups make mandates difficult to dislodge even when they prove inappropriate 22 (24) CAFE certainly shows no signs of dissolving despite its many failings Instead, as individual failings become undeniable Congress and NHTSA propose to address them by further and even more rigid mandates that are bound to generate still newer interest groups Other uses of energy face uncoordinated command-and-control regulations of their own rather than simpler coordinated controls that would permit those with better information than government bureaucrats to make their own less fettered decisions Logically, CAFE and an energy tax are substitutes, not complements Regardless of ones opinion of the latter, the former is unavoidably a calamity Unfortunately, CAFE is likely to continue needlessly distorting automobile production and purchase decisions even if those concerned about global warming succeed in obtaining some form of energy tax CAFE has not been nor will it ever be a good tool for providing the public goods claimed to flow from it It will be with us for a long time unless those who discover CAFE’s failings blow the whistle long and hard 23 (25) References Liu, Peggy 2008 Regulation or Taxation? An Analysis of the Corporate Average Fuel Economy Standards Versus a Gasoline Tax in the U.S Evanston: Northwestern University Economics Department working paper U.S Department of Transportation: National Highway Traffic Safety Administration 2008 Asian Imported Car Domestic Passenger Car Fleet Characteristics European Imported Car Flexible Fuel Credits (2003-2006) Historical Passenger Car Imported Passenger Car Light Truck New Passenger Car Fleet Characteristics Summary of CAFE Fines (Updated 12/13/2007) Summary of Fuel Economy Performance, March 2008 Summary of Fuel Economy Performance, Oct 2007 (revised Jan 15, 2008) Summary of Fuel Economy Performance, March 2007 Summary of Fuel Economy Performance, October 2006 Summary of Fuel Economy Performance, March 2005 Summary of Fuel Economy Performance, March 2004 http://www.nhtsa.dot.gov/portal/site/nhtsa/menuitem.43ac99aefa80569eea57529cdba046a0/ 24 (26)