Month: July 2011

By Marlo Lewis, Jr.
July 29, 2011, Competitive Enterprise Institute

President Obama today announced a deal with 13 automakers to boost new-car fuel economy standards from 35.5 mpg in 2016 to 54.5 mpg in 2025. Obama claimed the new standards will save Americans $1.7 trillion over the lifetime of vehicles and $8,000 per vehicle by 2025.

But you’ve got to wonder, if the fuel-saving technologies requisite to meet the new standards are such a great bargain, why do we need a law forcing automakers to adopt them? After all, auto companies are in business to make money, they compete for customers, and there’s not a consumer alive who enjoys pain at the pump.

What we can likely expect from the new fuel economy standards is more costly vehicles that impose net losses on consumers, lighter vehicles that provide less protection in collisions, and a less competitive auto industry.

The U.S. government’s 40-year-old corporate average fuel economy (CAFE) program is a case study in unintended consequences. During its first 25 years, CAFE boosted domestic sales of Japanese and European imports, which typically had a 50% higher mpg rating than American automobiles in 1975. Partly as a consequence of CAFE, the U.S. market share of foreign-designed vehicles increased from 18% in 1975 to 29% in 1980 and 41% in 2000 (National Research Council, p.15). Few members of Congress anticipated or desired such disastrous results when they created the CAFE program in 1975.

There are two main ways to increase a car’s fuel economy: (1) downsize the vehicle and (2) add new technology. Adding new technology raises new car prices, “forcing some consumers, especially those with low incomes, to hold on longer to their old cars,” observes my colleague Sam Kazman. In general, old cars are more polluting than comparable newer vehicles. In any event, lawmakers did not think they were voting to keep clunkers on the road when they created CAFE.

In addition, Kazman notes, CAFE “restricts consumer choice, since manufacturers are forced to pay more attention to what the law requires rather than to what consumers want.” Indeed, CAFE destroyed the market for what once was America’s most popular family car — the large station wagon. Automakers could not comply with CAFE and produce millions of large, low-mpg station wagons. In 1975, how many members of Congress knowingly voted to kill the family car?

A related unintended consequence was the much-derided SUV boom of the 1990s. No longer able to purchase big wagons, consumers started buying trucks with car-like body designs. Fuel economy zealots decried what they called the “SUV loophole” in the CAFE rules. But to millions of consumers, the supposed loophole was an escape hatch. The caption of a New Yorker cartoon on bureaucratic myopia should be required reading on Capitol Hill: “These regulations will fundamentally change how we get around them.”

Last and certainly not least, CAFE kills. This is hard for some folks to swallow, but it’s a matter of physics. Fuel economy regulation restricts the sale of larger, heavier vehicles. Such vehicles get fewer miles to the gallon than similarly equipped smaller vehicles, but they provide more protection in collisions. Heavier vehicles have more mass to absorb collision forces, and larger vehicles provide more space between the occupant and the point of impact.

A 2002 National Research Council study (p. 26) estimates that in a typical year (1993), CAFE contributed to 1,300-2,600 additional auto fatalities and ten times as many serious injuries.

We’re often assured that the reformed CAFE program established via the 2007 Energy Independence and Security Act (EISA) fixed the problem (often by the same folks who denied there was a trade-off between fuel economy and safety under the original CAFE program). However, even under the reformed program, which supposedly constrains down-sizing in favor of technological innovation, EPA and the National Highway Traffic Safety Administration (NHTSA) estimate that achieving fuel economy standards of 47 to 62 mpg will require weight reductions of 15% to 30% (Interim Joint Technical Report, p. 3-8).

Automakers will undoubtedly incorporate new technology to meet the 54.5 mpg standard. Nonetheless, Kazman explains, “No matter what fuel-saving technologies we put into the car of the future, adding weight to the car will both lower its fuel efficiency and increase its safety.” Inevitably, fuel economy standards prevent people from buying all the vehicle safety they’re willing to pay for.

Why did automakers agree to the deal? “Government Motors” has to be careful about defying a White House that props them up financially. Auto companies also feared ending up with something even worse: a 62 mpg standard enforced via a “patchwork” of state-by-state fuel economy regimes spearheaded by the California Air Resources Board (CARB).

Auto industry analyst Henry Payne notes another reason:

“We’ll agree to anything that’s 15 years out,” a highly-placed auto industry insider told me today about the fairy tale 54.5 mpg-by-2025 mandate for America’s auto fleet that Barack Obama and Big Auto execs finally — officially — announced Friday in Washington.

The rule has no grounding in reality. An engineering rule of thumb is that gas engine efficiency improves by 1.5 percent a year (a gain that, in the cheap gas U.S. market, has traditionally gone to power upgrades rather than mpg improvements). The EPA’s rule will mandate that light trucks gain 3.5 percent a year and cars, 5 percent. Really.

Environmental groups claim there’s no problem because automakers could comply even with a 56 mpg standard just by selling lots of hybrids. But according to the Center for Automotive Research (CAR), the market share for hybrids would have to increase from less than 3% in 2011 to 76% by 2025 — almost eight times higher than the projected market share. And mass reductions of at least 15% would also be required, reducing vehicle safety in crashes.

CAR estimates that a 56 mpg standard would impose on consumers a net loss (sticker price increase minus fuel savings) of $2,858 over five years if gasoline prices average $3.50/gallon. The 62 mpg that CARB, green groups, and (very likely) Obama preferred would impose a net loss of $6,525. Without regulatory coercion limiting our options, most consumers would avoid this “bargain.”

Fuel economy standards compel automakers to please government planners rather than satisfy consumers. That’s a recipe for an auto industry with lower sales, reduced profits, and fewer jobs.

Team Obama and their green allies undoubtedly think it is great fun to gamble with other people’s assets and livelihoods, even if it means imposing safety risks on motorists. If we were living under a constitution of liberty, that sort of mischief would not be allowed.