No Free Lunch at the Auto CAFE

• Author: Robert N. Stavins
• Position: Albert Pratt Professor of Business and Government at the John F. Kennedy School of Government, Harvard University, and Director of the Harvard Environmental Economics Program
• Pages: 16-16

Page 16 ❧ THE ENVIRONMENTAL FORUM Copyright © 2009, Environmental Law Institute®, Washington, D.C. www.eli.org.

Reprinted by permission from The Environmental Forum®, July/August 2009

By Robert N. Stavins

No free Lunch at

the Auto CAfE

In May, President Obama announced

new federal fuel-ef‌f‌iciency standards

for motor-vehicles that would make

the current standards — known as

Corporate Average Fuel Economy —

signif‌icantly more stringent. ese

CAFE standards measure compliance

as the average of a company’s f‌leet of

cars, and so are more f‌lexible and less

costly than model-by-model standards,

better matching consumer preferences

and reducing production costs.

e administration’s proposal will

yield a single standard nationwide,

rather than two fuel ef‌f‌iciency stan-

dards, one for California and the other

states that chose to follow its more

stringent Pavley standards (named after

California State Senator Fran Pavley),

and another standard for the rest of

the country under the existing CAFE

program. e result would have been

that the states adopting the more strin-

gent California standard would have

brought about little incremental ben-

ef‌it for the environment beyond the

national CAFE program, because auto

manufacturers and importers would

have largely undone the ef‌fects of the

more stringent state-level fuel-ef‌f‌icien-

cy requirements by selling more of the

less fuel-ef‌f‌icient models in their f‌leets

in the non-Pavley states. us, dual

standards would have increased costs,

but with little or no additional benef‌it

to the environment.

ese new federal standards pro-

posed by the Obama administration

can therefore be one small step along

the path to meaningful reductions in

greenhouse gas emissions that cause

climate change. at’s the good news.

But it’s also true that the new stan-

dards are inferior to other possible ap-

proaches.

First of all, CAFE af‌fects only the

cars we buy, not how much we drive

them, and so CAFE standards are less

cost-ef‌fective than gasoline prices at re-

ducing gasoline consumption, because

gas prices (whether ref‌lecting market

conditions or government taxes) af-

fect both which cars we buy and our

choices about driving.

Some people may think that CAFE

standards — unlike gas taxes — are

costless for consumers. But according

to the administration, the increases

in CAFE standards (including both

scheduled increases already on the

books and the new Obama proposal)

will add on average $1,300 to the cost

of producing a new car.

Because CAFE stan-

dards increase the price

of new cars, the stan-

dards have the uninten-

tional ef‌fect of keeping

older, dirtier, and less

fuel-ef‌f‌icient cars on

the road longer. is counterproduc-

tive ef‌fect is typical of any vintage-dif-

ferentiated-regulation, a topic which I

have previously addressed in this col-

umn.

Also, by decreasing the cost per

mile of driving, CAFE standards —

like any energy-ef‌f‌iciency technology

standard — exhibit a “rebound ef‌fect,”

namely, people have an incentive to

drive more, not less, thereby lessening

the anticipated reduction in gasoline

usage.

e bottom line is that gasoline

prices are a much more ef‌fective —

and more cost-ef‌fective — means of

cutting gasoline demand. But if in-

creasing gasoline prices through gas

taxes is politically impossible, which

certainly appears to be the case in the

current political climate, why raise all

of these objections? Am I allowing the

(politically infeasible) perfect to be the

enemy of the good? Not at all.

ere is, in fact, another policy in-

strument available that has the same

desirable impacts as gas taxes on gaso-

line prices (and, more importantly, on

all other fossil fuel prices, as well), but

inspires dramatically less political op-

position. And this instrument is not

only politically feasible, but has been

achieving remarkable political support

and action in Washington. I’m talking

about the economy-wide CO2 cap-

and-trade system in the House’s Wax-

man-Markey legislation. eir cap-

and-trade system will serve to increase

the price of gasoline, cut demand, and

reduce emissions. But, in addition,

its impacts will go far beyond auto-

mobiles and trucks, and beyond the

transportation sector, as well.

To seriously address climate change,

it is essential to put in place a single

carbon price that af‌fects all fossil fuels

and all uses throughout the econo-

my — not only in the

transportation sector,

but also electric power,

and the manufacturing,

commercial, and resi-

dential sectors. is is

precisely what cap-and-

trade does. A meaning-

ful, upstream, economy-wide cap-and-

trade system will serve to increase the

price of gasoline, as well as other fuels,

electricity, and all goods and services

in proportion to their carbon-intensity

in production, and it does this in the

right proportions for each fuel, energy

source, and product, so that the over-

all cap is achieved at the least possible

cost. Put simply, cap-and-trade is the

cheapest, best, and only politically fea-

sible approach that can achieve the sig-

nif‌icant reductions in CO2 emissions

that will be necessary to meet President

Obama’s ambitious climate goals.

Prices are a much

more eective — and

cost-eective —

policy instrum ent

Ro ber t N . St avi ns is the Albert Pratt Profes-

sor of Business and Government at the John

F. Kennedy School of Government, Harvar d

University, and Dir ector of the Har vard En -

vironmental Economics Program. He can b e

reached at rob ert_stavins@har vard.edu.

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