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.

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.

Other cost increases would be indirect. With higher efficiency and (supposed) less fuel use, tax revenues from fuel sales would also drop. Some states are already seeing this as fuel tax paradigms built in the 1970s and 1980s to fund road infrastructure are beginning to crumble as funds for maintaining and improving those roads drops. Although they don't seem to see it that way, they should feel lucky that the projected fuel savings from the first CAFE standards set in 1975 never happened, otherwise our highways would be in a world of hurt.

If the CAFE standard did actually reduce fuel usage by the amounts that proponents claim they will, then those tax revenues would drop more than significantly. They would, literally, be cut almost in half from present numbers. Obviously, the reaction by states would be to raise taxes to compensate. These could be directly raised on fuel, though that avenue is politically unpopular, but taxes would be raised somewhere. That would mean the "savings" won by having a higher-efficiency vehicle, which supposedly paid for the higher up-front cost of that vehicle, would be lost, resulting in a likely higher payment overall. Using the EIA's projections for market sales, that would almost entirely come from the poor and lower middle class.

Higher Fuel Economy = More Fuel Use
The good news on the tax front is, historically, higher fuel economy has usually meant more driving, not less, thus evening out the loss of revenue. Despite growing mpg numbers in today's cars, fuel usage in this country has grown. When measured by both total fuel use and miles driven per capita, we see that better fuel economy has meant more driving.


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