Burnt CAFE

It's a rare treat to read a dry, technical report and--almost by accident--learn something surprising, counterintuitive, useful and (at least to me) genuinely new. 

Which is exactly what happened when I read this paper (beware, pdf) by Todd Litman at the Victoria Transportation Policy Institute.  The upshot:  raising vehicle fuel-economy standards, which always seemed to me like a good idea, may actually be counterproductive, even if they're truly successful at reducing the amount of gasoline the average vehicle consumes per mile.

Now, I'd long heard the argument that current fuel economy standards (also known as Corporate Average Fuel Economy or "CAFE" standards) were ineffective in practice, because of a big loophole:  current CAFE rules hold big pickups and SUVs to a lower standard than cars.  This has let manufacturers skirt CAFE standards by shifting production away from cars to big trucks, which in turn has led to a gradual decline of the overall fuel efficiency of the US vehicle fleet -- thwarting the purpose of the CAFE standards.

To me, that seemed to be an argument for fixing the big-truck loophole, rather than scrapping the standards outright.  Clearly, the techonology exists to produce more efficient vehicles; and our economy would be better off, and our roads safer, if there weren't as many huge gas guzzlers on the road.  So ratcheting up fuel economy standards for SUVs and pickups--though currently a political non-starter at the federal level--certainly seemed like it would be a wise move over the long term.

Or so I thought.  But Litman's article argues, fairly convincingly, that CAFE standards suffer from the law of unintended consequences.  Improving vehicle fuel economy would reduce the amount of gas a vehicle consumes per mile--which, as a consequence, makes driving cheaper.  And according to Econ. 101 (which I never took, sadly) if something's cheaper, we do more of it.  So, all else being equal, the cheaper it is to drive, the more driving we do.

Here are the numbers: a 10 percent improvement in fuel economy reduces fuel consumption by 6 to 8 percent (a good thing), but also increases driving by 2 to 4 percent.  The increase in driving increases congestion, parking costs, noise pollution, and traffic accidents.  Plus, making driving cheaper fosters sprawl, while an increase in vehicle traffic makes walking and biking more dangerous and less convenient.  Assigning a rough dollar value to these competing effects, it looks as though an increase in fuel economy standards is actually a net economic loss for society, because the costs of increased driving outweigh the benefits of fuel and pollution savings.  Not at all what I expected.

LItman gets similar results for alternative fuel subsidies -- by  reducing the cost of fuel, alternative fuel subsidies encourage driving.  The costs of increased driving largely offset any benefits in petroleum savings.

Fuel taxes are another matter.  On equity grounds, they don't do so well, since fuel taxes tend fall more heavily on the poor than on the well-off.  But otherwise they appear to do a fairly good job of reducing both fuel consumption and driving -- and all the associated costs for pollution, parking, etc.

But even better than fuel taxes, Litman finds, are strategies such as pay-as-you-drive car insurance (PAYD), which turn some of the fixed costs of driving (such as car insurance) into mileage-based fees.  Under PAYD people who drive less would pay less, which is a pretty good deal on equity grounds, and certainly gives people more control over their driving expenses.  But by discouraging low-value car trips, PAYD does well on just about any other measure one can think of.

I'm not quite to the point of thinking that improved CAFE standards are a waste of time.  But Litman's analysis certainly makes me a bigger fan of PAYD than I used to be.