Just tightening failed CAFE standards will not work out

Xiaojiao Chen February 3 rd , 2010

Criterions of judging governmental interventions: • • Whether the intervention could achieve its objectives; Whether the intervention is cost-effective. Are there other less costly alternatives to achieve the same objectives?

CAFE doesn’t achieve its initial objectives in the cost-effective way.

• Objectives of CAFE: To reduce oil intensity and therefore decrease oil consumptions; • In this way CAFE is supposed to: mitigate externalities of both oil dependency and environmental impacts; correct the imperfect.

CAFE doesn’t achieve its initial objectives in the cost-effective way.

• Check out the cruel facts: 1. CAFE didn’t not increase average fuel economy in U.S.; 2. The effect of addressing global warming problems is ambiguous and CAFE even increases local pollutions slightly; 3. Costs of correcting the imperfect market of fuel economy may exceed the benefits.

CAFE doesn’t address environmental externalities well • Global warming • Local pollutions

Costs of correcting the imperfect market • Costs of implementing a new technology • Forgone performance enhancements • Forgone R&D opportunity costs

Other unintended consequences of CAFE • The rebound effects • Opportunity costs of consumers • Fleet mix effects

The rebound effects

• Congestion costs=the value of travel time * the extra time of driving Parry and Small 2001: 3.5 cents per mile • Accident costs: Parry and Small 2001: 3 cents per mile The rebound effects=(congestion costs + accident costs) * 15% * 20miles/gallon= 19.5 cents per gallon • Compare: externalities----24 cents per gallon

Opportunity costs of consumers

• The happiness of consumers If consumers correctly perceive fuel savings but value technologies more: Technology transfer from other techs(high value) to fuel economy techs=welfare loss See Mckinsey Abatement Cost Curve:

Mckinsey Abatement Cost Curve

Fleet Mix effect

• • If CAFE leads to lighter vehicles, how would this affect safety?

Weight reduction of cars increase fatality risk while weight reduction of light trucks decrease fatality risks;

Suggestions

• Modifications of CAFE • Alternatives

Modifications of CAFE: tradable fuel economy credits • • • Problem: same standard regardless of costs High marginal costs VS low marginal costs Caution: appropriate cap

Alternatives

• • • Tax breaks or rebate Financial source; Hard to stop; No influence on the actual driving amount; Insurance No incentives to spur fuel economy; hard to track Broad oil tax Political feasibility? Fairness?