The Hazards of Increased Fuel Standards

Attempts to increase fuel efficiency could end up being a greater burden than benefit for the majority of car owners. A major policy objective for the Obama administration is increased fuel efficiency, and in the past five years, several ambitious regulations have been approved which require that car manufactures produce vehicles with greater fuel efficiency.

An American Action Forum report calculates that the average price of a vehicle will increase by over $3,000, in part due to the new fuel efficiency standards.  Some vehicles, such as combination truck/tractions, could increase by as much as $9,100. Some of these new regulations are part of the Corporate Average Fuel Efficiency regulations (CAFE), which has been initiating fuel standards since the 1970’s.

Better fuel economy seems to be a regulation that most consumers would support. With the current regulations in place, the Obama Administration calculates that by 2025, the fleet-average will be an impressive 54.6 mpg, and by the program’s completion consumers will save over a trillion dollars due to reduced gas consumption. The 2011 regulations, which are mentioned in the AAF report, are part of a gradual move towards these auspicious numbers.

Part of the impetus for the regulations is that they will pay for themselves due to decreased fuel consumption. The CAFE ruling says that this will take 4.4 years for a car and 7.7 for a truck. However, some researchers have found that when fuel economy increases people drive more.

The increased traffic would be bad news for the National Highway Fund, which is seriously in the red. This past week, Congress has been searching for sources to fund the project everywhere from the postal service to corporate taxes laws.  It receives most of its inadequate funding from gas taxes, which could very well rise. In early 2014, the average combined federal and local tax rate for a gallon of gasoline was 50 cents, 18.3 cents of which was a federal tax that goes to improving or maintaining infrastructure. It seems inevitable that in order to make up for more efficient fuel consumption and the possibility of more miles driven, the federal highway administration would need to either propose higher fuel taxes or find the funds elsewhere. The FHWA is already facing budget problems, and the fuel tax is a major source of revenue.

There are other implications to this rule that are neither immediately obvious nor easily quantifiable. One clear effect is that people will buy fewer cars. Increasing car prices would dissuade would be buyers from purchasing new vehicles. This understanding is consistent with real world trends: Americans are keeping their cars for longer periods of time. This effect seems somewhat obvious, but it leads to bigger problems.

Perhaps the largest negative impact will be on lower income brackets, and the reason why could inadvertently counteract the goals of the program. The CAFE standards work when people buy the new cars that have better gas mileage. But, when higher efficiency rules increase car prices by too much, around $2,800 in this case, those who might otherwise purchase a newer car will not. It makes economic sense that new cars would be fairly price elastic, as there are many substitutes available in the form of older, less fuel efficient vehicles. Some might instead opt to repair their older cars rather than trading them in. While it could be argued that increased fuel economy is good for consumers and the environment, the increased costs from increased standards would benefit only those who were able to purchase new cars, and it would leave those with older cars and less cash with yet another barrier to getting a newer, more efficient car.

Yes, this problem will work itself out as the latest model Smart Cars and Priuses eventually move onto used lots. And yes, it will take major investments to increase the efficiency of our cars. But it is important to realize that increased fuel standards are not a magical, costless way to turn every car into America into a gas-sipping, energy saving ride. That change will come at a cost that many aren’t able to afford but sooner or later will be forced to pay.