Should CAFE Standards be Raised?

The Department of Transportation (DOT) and the Environmental Protection Agency (EPA), both federal agencies, have together created new regulations that will require automobile manufacturers to address both fuel economy and greenhouse gas emissions. The rules are expected to save buyers about $3,000 over the lifetime of the vehicle. The regulations require manufacturers to insure a fleet-wide fuel economy of 34.1 miles per gallon by 2016 and a reduction in GHG emissions of about five percent annually. Roughly speaking, this means that SUVs may be a little bit smaller, and sports cars may not accelerate quite as quickly. Nevertheless, many would assert that these are luxuries one can live without. It is possible, though, that increasing Corporate Average Fuel Economy (CAFE) standards in domestic vehicles will lead to perverse incentives for consumers and a reduction in producer innovation.

One of the leading arguments cited by those opposed to a mandated increase in CAFE standards is that increasing fuel economy will lead to an increase in vehicle miles traveled. If a vehicle can travel farther with the same amount of gas because of an increase in mpg , then traveling long distances is less expensive. According to this argument, because an increase in fuel efficiency makes traveling cheaper, then higher CAFE standards actually lead people to travel more and, by extension, consume even more gas.

There are also common arguments against raising CAFE standards that relate directly to automobile producers. In most cases, improving fuel efficiency is not incredibly difficult for manufacturers. Relatively cheap and common technologies, like continuously variable transmissions and improved tires, could be installed on many vehicles and meet the new standards that have been established. While it may seem convenient that the auto industry would not struggle to improve mpg, the mandate has yet another negative consequence. If manufacturers are required to meet a set standard, then they will have to internalize the cost of that measure. This means that automobile makers will spend the money that they could have invested on electric and hybrid advancements on meeting the new CAFE standard. Even if the standard is relatively cheap to meet, the money spent on it cannot go anywhere else. in fact, it is estimated that auto makers will spend about $1.5 billion in order to meet the standard. This could mean that while mpg will improve and GHG emissions will be reduced from the transportation sector, there will be an even longer wait for American producers to capitalize on the technologies already being implemented in places like Japan.

While I do feel that oil consumption and greenhouse gas emissions are incredibly serious issues that will only become even more so by the day, I do not agree with the CAFE standards that have been established. I think that mandating the auto industry to spend money to develop a certain type of product entails an immediate and known cost to an already struggling sector of the economy. At the same time, the benefit of the mandate is unknown and may not ever be realized. If gas lasts longer in the tank, maybe people will drive more and consume more gas. If automakers are required to improve their products by spending an upfront cost, maybe there will be less ingenuity and technological advancement. Because the automobile plays such a massive role in the market of the United States, I believe that market tools, not mandates, should be utilized in hopes of creating more fuel-efficient vehicles that emit less greenhouse gasses. Perhaps subsidizing innovative technologies, like plug in electrics and hybrids, rather than putting them behind the hurdle of a mandate, would lead to more investment by the auto industry.