Friday, August 26, 2005

Academic Work on CAFE

A comment over at Brad DeLong's blog, in his discussion of this earlier post, suggested that my criticism of CAFE standards is off the mark:

Samwick is simply wrong.

CAFE standards, historically, are extremely effective at increasing efficiency.

The amount of tax you'd need to begin approaching the efficiency under CAFE would be pretty steep. While it could be done in principle, as commenter Rob points out above, it's very unlikely the necessary gas taxes would ever be passed.

I suspect we are not writing about the same exact concepts (e.g., efficiency versus usage), but it did prompt me to recall some academic work on the subject. The best paper I have ever seen presented on this topic is by Penny Goldberg, now at Yale. As far as I can tell, it is still state of the art in the economics literature. The full citation is:

Goldberg, Pinelopi Koujianou. "The Effects of the Corporate Average Fuel Efficiency Standards in the US" The Journal of Industrial Economics, Vol. 46, No. 1. (Mar., 1998), pp. 1-33.

And for those of you with access to JSTOR, you can get it here. She's got a pretty slick model of both automobile demand (including the new and used markets) and the non-competitive elements of the automobile supply side. Using data from 1984-1990 to estimate the model, she does some simulations that compare the effects of CAFE (as it existed in 1989) with a gasoline tax. First, she simulates what would happen if the CAFE standards were eliminated:

The results from these calculations ... indicate that CAFE standards lead to approximately 19 million gallons fuel consumption savings per year. This figure can only be interpreted as a one year ahead effect ... a rough idea about the total impact of the 1989 standard can be obtained by calculating the annual savings in the "steady state," after the current vehicle stock has been completely turned over and replaced by vehicles subject to the 1989 regulation. Assuming that there were no further changes in the standard after 1989, and that the total number of cars on the road remained constant ..., the 1989 CAFE standard alone would lead to approximately 400 million gallons of annual fuel savings.

Even thought this figure is much larger than the 19 million gallons estimated for the first year, it still represents only a small fraction of the approximately 130 billion gallons of gasoline consumed in the US every year.

Okay, so 0.4/130 = 0.3%. Not a very big dent in usage at all. But this doesn't mean that a gas tax is much better, as she shows in her next simulation:

[W]e can compute the gas tax increase necessary to achieve the same fuel savings as with the CAFE regulation. According to our results, this increase would have to be 780% or 80 cents per gallon, implying almost a doubling of gasoline prices.
The gas tax at the time was 10 cents per gallon. So this suggests that neither policy, as they have been implemented to date, have generated much of an impact on total gasoline utilization. So we'll give the commenter 1-for-2: CAFE standards have not been particularly effective, but the gas tax required to mimic their effects on utilization would have to be pretty steep.

Other blogs commenting on this post


Robert Schwartz said...

I am really skeptical about this one. CAFE can be seen as a sales tax on new cars. Manufacturers discount small cars and jack the prices up on big ones, and some big ones carry an additional "gas-guzzler" tax. It operates one time only, at the time of first sale. CAFE goes not kick in very rapidly, unlike a gas tax, because it takes about 17 years to turn over the fleet (allow for a couple of years to roll in the new models). Further, CAFE does not dictate the fleet composition because it does not prevent owners from junking small cars rapidly (you can justify it after about 8 years) and keeping big ones going with extensive and expensive repairs.

I don't know what the current implicit CAFE tax is, but clearly it has no incremental effect.

The major determinant of gasoline consumption is not the fuel efficiency of vehicles, but the number of miles and the conditions they are driven under. CAFE will tend to discourage the purchase of less fuel efficient vehicles, but it does not and cannot affect the miles and conditions they are driven under.

Andrew Samwick said...

I agree with the thrust of your argument. I think that 1989 might have been the high point for CAFE's influence. The target fuel economy for a company's fleet had increased by nearly 10 mpg since introduction--it hasn't moved (much?) since. It was also before loopholes began to be so obviously exploited, with the shift to light trucks.

It seems like the gas tax should have had more of an effect, relative to CAFE. However, consumers seemed to be more sensitive to the price at the point of sale--where CAFE works directly--than to long term costs of operating. That bias may also be changing, as high gas prices turned into large discounts on large vehicles this year. I haven't run any numbers, though.

Anonymous said...

Re: Fuel consumption and Vehicle choice:

Decrying the "poor fuel-efficiency" of a vehicle bothers me for the following reasons:

1) there is more to life than gas-consumption.

People use gas to haul themselves in comfort, haul the toys they enjoy, and live felixbly-i.e. live in the woods, far away from work, and have four-wheel drive.

Without knowing how these benefits acrue, I would not want to retrict the pursuit of other's happiness based on what I may personally consider "waste".

2) Measuring "one's" fuel consumption is very very hard.

For example, sme people use gas very directly to produce goods and services for other people-such as contractors, the self-emplyed etc, while others (like me) are employed by organizations (firms) which use fuel to run their ops.

In the latter case, am "I" using a "lot" of fuel, or a "little? It's hard to tell.

As someone else pointed out, the choice of where one lives realtive to work may be first-order in determing fuel consumption. Differences in distance vary much more than by a factor of four, which seems to me a rough measure of the differences in fuel milage between the most- and least-efficient vehicles out there.

Also, to carry this further: where ones lives in relation to relatives and freinds matters for how much you drive/fly. How many kids you have matters(e.g. soccer moms/dads..)

On a much more banal note, does anyone recall the Toyota prius ad where the whole point was "with amazing fuel economy, I can drive from LA to Phoenix (or somewhere else) for so little...

If this force is operative at all, we should not expect mriacles from imrpoved fuel economy...

Anonymous said...

Andrew Samwick wrote, So this suggests that neither policy, as they have been implemented to date, have generated much of an impact on total gasoline utilization.

" they have been implemented to date..." are weasel words, because of the SUV/light truck exemption, which gutted the standards.

Andrew Samwick said...

I appreciate the comment, but I think you have that backwards. The SUV/light truck exemptions are the "weasel words." Writing "as they have been implemented to date" is an honest assessment of how little use has been made of these measures in the last 30 years. I didn't use the statement to suggest a preference for one way of discouraging gasoline usage over the other. Set the CAFE standards at 35 mpg with no loopholes or the gas tax at $1 per gallon and let's see what happens.