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Auto Fuel Economy Standards

Would Less Be More?


alan krupnick is the co-director of Resources for the Future’s Center for Energy and Climate Economics. Joshua Linn is a senior fellow at RFF and heads up its Transportation Initiative.

Published March 30, 2017

 

As part of the Trump administration’s campaign to roll back regulation, the White House has set its sights on the Obama initiative to toughen automakers’ mileage and greenhouse gas emissions requirements for new passenger vehicles. The original deal between the government and the industry included a mid-course review, which the Obama administration rushed through in the waning days of the Obama presidency. So, reopening that review is not unreasonable on its face. Here, we suggest a closer look at some important changes in marketplace conditions since the deal was made in 2011.

First, some background. In 2011, the Environmental Protection Agency and the Department of Transportation set standards for passenger vehicle fuel economy and greenhouse gas emissions that extend through 2025, which they projected would roughly double new vehicle fuel economy from 2012 levels. When they set the standards, the EPA was required to do a mid-term review, during which they would consider whether new circumstances (economic and technological) made it desirable to modify the standards.

That review started last year and was to be completed by early 2018. But in a surprise move, President Obama’s EPA completed its own analysis just months ago, ratifying the original plan. The agency asserted that this “administrative action” was not subject to veto under the Congressional Review Act or other avenues that might be used to reverse such “midnight regulations.” The DoT needs to do a new rulemaking — and, in any case, the Trump administration is determined to revisit the process.

In fact, several economic developments since 2011 may affect the feasibility and desirability of sticking to the original standards and timetable. To be clear, though, the net impact of these developments doesn’t necessarily favor weakening the 2012 standards.

Cheap Gas

Start with the fact that one benefit of requiring automakers to increase fuel economy is to save money for consumers at the pump. But since the standards were set, real (inflation-adjusted) fuel prices have dropped by about 30 percent. In a recent policy brief, Josh Linn and two of our colleagues at Resources for the Future pointed out that lower gas prices affect consumer choices about which vehicles they buy and how much they drive them. In fact, these indirect effects on manufacturer costs and consumer benefits roughly cancel out for vehicles sold in 2015. So the main impact of lower gasoline prices is to lower consumers’ potential savings on fuel, suggesting the standards should be weakened. The EPA’s new analysis started down this route.

The Fracking Revolution

By the same token, the cost-benefit analysis made by the Obama administration included an energy security benefit: the less fuel burned, the less dependence on oil imports from countries that might not be willing or able to deliver it. Their analysts put this benefit at $8 per barrel (here), their estimate of the cost of an unanticipated oil supply disruption on the U.S. economy.

But advances in macroeconomic modeling and changes in the structure of the economy — notably the vast increase in domestic oil production made economical by fracking technology — argues for new estimates of the energy security benefits. And research at RFF suggests that the benefit has fallen significantly, arguing for weaker fuel economy standards.

Climate Woes

The benefit from reducing a ton of carbon dioxide emissions in the original regulatory impact analysis ($26/ton) was far lower than the one that was updated by the Interagency Working Group ($42/ton) and used in the EPA’s latest RIA. This bolsters the case for keeping or even tightening the standards. Yet, the Trump administration could zero this number out or use a much lower number than even the original, making the case for relaxing the standards.

Federalism

One other aspect of the standard is worth another look. California and nine other states currently have a waiver from the federal program, permitting them to supplement the mileage standard with a mandate to sell a minimum number of zero emissions vehicles (ZEVs). But part of the 2011 pact included an agreement to harmonize the federal standards and California’s own mileage standards (which traditionally were tighter than the federal standards). So if the federal standards are weakened as part of the upcoming review, the California standards would also have to be weakened in order to avoid returning to the old, inefficient situation in which automakers must build two vehicle fleets — one for California and one for the rest of the country.

The Trump administration is also considering revoking the ZEV waiver — a move California is preparing to fight in court. In our view, the ZEV mandate and the two-fleet issue should be included in the review process so a comprehensive agreement can be reached that recognizes states’ preferences regarding CO2 emissions and technological solutions to reduce them.

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Mileage standards are problematic for domestic carmakers because they add to production costs and — more important from their current perspective — make it harder to sell SUVs that are particularly profitable given today’s cheap gas prices. For that matter, there are more efficient means to providing more fuel efficient/lower carbon-emitting vehicles and driving them less to boot — raising taxes on fuel. With that in mind, it is not a mistake to reassess the terms of the regulation and even its form in light of changing estimates of the societal costs and benefits — but such a change would require legislation. One can only hope, though, that the Trump administration makes its decisions on the basis of facts and evidence.

main topic: Climate Change
related topics: Environment, Regulation