Last year, transportation became the sector with the largest CO2 emissions in the United States. While the electricity industry has experienced a decline in CO2 emissions since 2008 because of a shift from coal to natural gas and renewables, an equivalent turnaround has not yet occurred in transportation. Reducing emissions in this sector is critical to avoiding the effects of extreme climate change, and the Corporate Average Fuel Economy (CAFE) and Greenhouse Gas (GHG) emissions standards are an important mechanism to do so.
The most recent vehicle standards, which were issued in 2012, are currently undergoing a review. The Department of Transportation (DOT) is initiating a rulemaking process to set fuel economy standards for vehicle model years 2022-2025. At the same time, DOT is also taking comments on its entire policy roster to evaluate their continued necessity (including the CAFE standards).
A number of criticisms have been raised about fuel efficiency standards, some of which are based more in confusion and misinformation than fact. An intelligent debate about the policy depends on separating false criticisms from those that are uncertain and those that are justified.
In fact, as new research I did with Meredith Fowlie of UC Berkeley and Steven Skerlos of University of Michigan shows, the costs of the standards could actually be significantly lower than other policy analyses have found.
Costs and benefits of the regulations
What my co-authors and I have found is that automakers can respond to the standards in ways that lower the costs and increase the benefits.
Many policy analyses do not account for the tradeoffs that automakers can make between fuel economy and other aspects of vehicle performance, particularly acceleration. We studied the role that these tradeoffs play in automaker responses to the regulations and found that, once they are considered, the costs to consumers and producers were about 40% lower, and reductions in fuel use and GHG emissions were many times higher.
The study finds that the fact that automakers can tradeoff fuel economy and acceleration makes both consumers and producers better off. A large percentage of consumers care more about paying relatively lower prices for vehicles than having faster acceleration. Selling relatively cheaper, more fuel-efficient vehicles with slightly lower acceleration rates to those consumers allows manufacturers to meet the standards with significantly lower profit losses. Consumers that are willing to pay for better acceleration can still buy fast cars.
Debunking some common criticisms
One common criticism is that the regulations mandate fuel economy levels that far exceed any vehicles today. This misconception stems from the frequently quoted figure when the regulations were first issued that they would require 54.5 mpg by 2025. But, the regulations do not actually mandate any fixed level of fuel economy in any year. The fuel-economy standards depend on the types of vehicles that are produced each year. If demand for large vehicles is up, the standards become more lenient; if more small vehicles are sold, they become more strict. The 54.5 mpg number was originally estimated by EPA and DOT in 2012 when gas prices were high. EPA has since revised it to 51.4 mpg to reflect lower gas prices and higher sales of large vehicles. Taking into account flexibilities provided in the regulations and the fact that this number is based on EPA’s lab tests, which yield higher fuel economy than drivers experience on the road, the average target for 2025 is equivalent to approximately 36 mpg on the road. Fueleconomy.gov lists 20 different vehicle models that get at least this fuel economy today.
Another common but unjustified criticism of the standards is that they push consumers into small vehicles. The regulations were specifically designed to reduce any incentive for automakers to make vehicles smaller. The standards are set on a sliding scale of targets for fuel economy and GHG emissions that depend on the sizes of the vehicles. As a result, an automaker that sells larger vehicles has less stringent fuel economy and emissions targets than one that sells smaller vehicles. Research has shown that the policy likely creates an incentive for automakers to produce bigger vehicles, not smaller.
Two easy ways to strengthen the fuel economy standards
There are, of course, advantages and drawbacks to any policy, including today’s vehicle standards, which focus entirely on improving the efficiency of new vehicles. Fortunately, there are improvements that can be made to the CAFE and GHG regulations to increase their effectiveness and lower costs.
The first is ensuring that automakers that violate the standards pay very high penalties. Companies who cheat steal market share from those that follow the standards, effectively raising the regulatory costs for the automakers that are playing fair.
The second improvement involves the way automakers are able to trade “credits” with each other. These credits were created to equalize regulatory costs across companies. So, if one automaker finds it relatively easy to reduce emissions, it can reduce more than its share and sell credits to another automaker having trouble reducing emissions. This trading is currently negotiated individually by each pair of automakers, which raises the costs of the transaction. Creating a transparent market to trade these credits would help to achieve the target emission reductions at lower costs.
The Department of Transportation (DOT), which implements the Corporate Average Fuel Economy (CAFE) standards, is currently soliciting comments on regulations “that are good candidates for repeal, replacement, suspension, or modification.” The comment period ends December 1.