No Free Lunch

How CAFE (doesn't) really work


Historically, the Corporate Average Fuel Economy regulations have had many negative consequences, many of which even supporters of green transportation and environmental issues will find appalling.

In our last segment, Corporate Average Fuel Economy Reality, we discussed the latest CAFE standards and why the policy itself is mainly about public relations rhetoric rather than environmental goodwill. We concluded that the 54.5 miles per gallon number so often touted in the press and by pundits in favor of the CAFE standards is nothing but a mirage and is nowhere a part of the actual standards in the new CAFE updates released last week.

Even with its severely disappointing actual fuel economy standards of only 31-36 mpg real-world (for cars only), many would be willing to say that the new requirements are "at least doing something." That something, however, may not be so good.

TANSTAFL
There Ain't No Such Thing As a Free Lunch is a popular line summed up in the phrase pronounced "tanstafel." One of the arguments often used to claim that higher CAFE standards and better economy in cars as a whole will mean more money in the pockets of everyday people everywhere is compelling. For those who wish to empower the poor and middle class, this seems like a real winner. For those hoping to encourage the purchase of smaller, more efficient vehicles, this also seems like a good thing.

Surprise! The economics don't work that way.

According to the U.S. Energy Information Administration (EIA) in their Annual Energy Outlook 2011 with Projections to 2035, light duty vehicles average about 25.5 mpg in 2010 and sales breakdowns into three categories of vehicle by MSRP were: 32% under $25,000, 49% $25,000 to $35,000, and 19% over $35,000. From these numbers, we can largely guess that lower income households are more likely purchasing the lower-cost vehicles (sub-$25,000) while median and upper-middle incomes are purchasing the bulk of the vehicles on the road. Higher incomes are most likely the only source of purchase for the higher-cost vehicle.

In their prospectus, the EIA assumes higher costs for vehicles to meet a federal CAFE standard of 45.8 mpg – a few miles per gallon higher than the finalized standards released last week. Given those numbers, the EIA saw the number of cars selling for less than $25,000 (inflation-adjusted) dropping to just 15% of the market while the $25,000 to $35,000 market share grew to 61% and the higher $35,000 plus market inflated to 24%. These numbers indicate that lower-income buyers would be squeezed out of the new car market or would be forced to sacrifice a larger part of their income to buy more expensive vehicles. By 2025, if trends continued, then a 60.5 mpg CAFE standard (again, higher than finalized numbers) would mean the sub-$25,000 market shrinking to a mere 9% of total sales and the high-end ($35,000 plus) market growing to a whopping 35% of the market.

Worse for green proponents would be the slower adoption of new technologies as those who cannot afford new cars are forced to extend the life of their less efficient vehicles. This would have a negative impact on projected emissions savings.

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