CAFE Standards

Last week the Trump administration announced its intent to freeze Corporate Average Fuel Economy standards (CAFE) at 2020 levels. Rules implemented in 2012 under the Obama administration would require a fleet average fuel economy of 54.5 miles per gallon (mpg) by 2025, but the new rule change would instead hold average fuel economy at about 37 mpg.

Predictably, the announcement created a flurry of criticism, with the New York Times editorial board characterizing the plan as reckless in the face of climate change. Much of this criticism misses a key point: CAFE has been repurposed to manage a problem for which it was not designed and is thus a very costly and imperfect remedy. 

Enacted after the 1973-74 oil shock, CAFE was a political solution to a political problem: soaring oil prices. The standards were premised on the belief that consumers would not pay more for cars that used less fuel even if the reduced fuel use more than paid for the extra initial cost. Instead, CAFE sought to force automakers to produce higher mileage cars and thereby reduce fuel use despite the supposed myopia of consumers. But subsequent economic research has shown that consumers were not myopic. Consumers’ willingness to pay for higher mileage capability approximately equals the expected future fuel cost savings without government intervention.

Even though the original rationale for CAFE has been undermined by the evidence, CAFE lives on with a new purpose: climate change. Since the 2007 Supreme Court decision in Massachusetts v. Environmental Protection Agency that the EPA has authority to regulate tailpipe greenhouse gas emissions, CAFE has become a tool for CO₂ emissions reduction. But, as I have previously argued and my colleague Randal O’Toole recently discussed, CAFE is an inefficient and clumsy tool because it targets only one source of greenhouse gas emissions and it does so indirectly. Directly taxing carbon emissions would much more effectively incentivize businesses and consumers to reduce their greenhouse gas emissions.  The indirect CAFE program costs the economy at least six times as much as a carbon tax that reduces emissions equivalently. If reducing greenhouse gas emissions is a worthwhile goal, we should pursue policies that directly address the problem and utilize market forces to reduce emissions.

Another key component of the Trump administration’s plan is its proposal to revoke a waiver that allows California to set its own vehicle emissions standards and allows other states to follow  California’s lead. Currently, California standards are set to continue on the Obama 2012 path. So, if the Trump administration freezes national standards but California’s separate standards are permitted, then automakers would be forced either to sell different cars in California and the states that follow its lead or comply with California standards in all states.

The origin of the California waiver, like CAFE in general, is divorced from its original intent. The waiver’s purpose was to allow California to impose its own regulations on conventional emissions because of unique weather and geographic conditions around Los Angeles that make it especially susceptible to smog.

Smog forming pollutants and greenhouse gases are very different emissions. As I noted in the 2017 Cato Handbook for Policymakers, regulation of pollutants that affect local air quality should be decentralized because both the costs and benefits are local. But reduction of CO₂ emissions is a global public good. Any benefits accrue to the world’s climate even though the costs are local. This mismatch between the geographic incidence of costs and benefits imply that a waiver that exempts one state makes no sense in the context of CO₂ emissions and has the potential to unduly increase compliance costs for automakers.

CAFE should have ended a long time ago.  The problem for which it was designed (consumer myopia) never existed.  Because that is not politically possible the proposed freeze is defensible.  In contrast state control of conventional pollutants is appropriate, but the California waiver should not be repurposed for greenhouse gas emissions.    

Written with research assistance from David Kemp.