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CAFE: Useful But Not Efficient

If the goal is to reduce the dependency on foreign oil and reduce greenhouse gas, CAFE standards aren’t the most efficient means.

According to the U.S. Energy Information Administration (eia.gov), in 2008 the average price of a gallon of gas in the U.S. was $3.44. In 2009 that figure was $2.49. In 2010 it rose to $2.90. Last year it was $3.56. One of the things about 2008 that the annual average doesn’t show is that in mid year it hit $4.11 per gallon, which had profound effects on consumers that watched the digital numbers on gas pumps roll up like on one of those giant slot machines in Vegas. But then like many of the fortunes of people playing in Vegas, gas prices took a serious tumble.

So imagine if you were in charge of product planning for powertrains or even platforms? Go small? Or not? Build SUVs? Or CUVs? Or crank up work on hybrids and electric vehicles? Or stay the course?

These are bets in the billions, not chump change.

One thing that is pretty much a certainty that planners have to work with are CAFE standards. Since 1990, the CAFE standard for cars has been 27.5 mpg and 23.5 mpg for trucks (remember this is Corporate Average Fuel Efficiency, so it is the average of the fleet); by 2016 the respective numbers are 37.8 mpg and 28.8 mpg, for a fleet-wide average of 35.5 mpg. This is argued to be a means by which we will reduce our dependency on foreign oil and have a reduction in greenhouse gas emissions.

But if the goal is to truly reduce the dependency on foreign oil and to reduce greenhouse gas emissions, then CAFE standards are not the most efficient means of achieving that goal, according to Christopher Knittel, William Barton Rogers Professor of Energy Economics, Sloan School of Management, MIT. He conducted a study looking at vehicles between 1980 and 2006 and found that cars and trucks have gotten bigger and more powerful, so the fuel efficiency gains that could be realized didn’t happen. There were a variety of factors contributing to this, such as gaming the system (e.g., given the differences in the way that cars and trucks were measured, there was an “SUV loophole” created; one consequence was that whereas in 1980, Knittel points out, about 20% of all light vehicles purchased were trucks, a number which rose to 60% by 2004).

But the biggest reason was that gas prices were comparatively low. Note well that Knittel is not critical of vehicle manufacturers for doing things like increasing the average horsepower of cars by 107% and the curb weight by 26% during the period he studied, nor is he critical of consumers for buying these more powerful, beefier vehicles: “I don’t fault the automobile industry for producing those cars and the consumers for buying them. The issue here is basic economics 101.” If there are externalities, such as goals that society wants to reach as a whole (e.g., reduce dependence on foreign oil), then it is necessary for policies to be put in place like CAFE. Knittel says there are two major problems with that policy. One is that it affects new cars and trucks, and that is a small percentage of what’s on the road. Another is that CAFE focuses only on fuel economy, ignoring how many miles are driven. In fact, CAFE moves us the wrong direction in terms of miles driven since if you had a car that got 20 mpg and now have one that gets 25 mpg (thanks to CAFE), you simply might drive more. So how does that work out for that societal goal?

He thinks a more efficient means is through the implementation of a tax on gasoline. (Yes, here is where you can start thinking about the snowball in Hell metaphor.)

There’s no gaming this. Everyone is affected, whether you have a new car or old. This would increase the efficiency of the fleet because those with less-efficient vehicles are going to (1) get rid of them or (2) drive them less. And even those who have opted for the 25-mpg car vs. the 20-mpg one are likely to drive less (unless they like to pay more). You want a big, fuel-inefficient SUV? Fine. You want an econobox the size of a shopping cart? It’s yours. OEMs could plan accordingly. And everyone would have skin in the game.

But Knittel is a realist. “If you look at the relative costs of CAFE or gas taxes, CAFE is as much as five times more expensive, but they’re politically cheaper.”

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