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Trading Credits Could Improve Cafe Requirements
Daily Policy Digest

Regulatory Issues / Automobile Fuel Efficiency

Thursday, January 31, 2002
Last July the National Academy of Sciences (NAS) issued a report advocating higher Corporate Average Fuel Economy (CAFE) standards for new cars sold in the U.S. Changing the standards will require action by Congress, which for several years has kept them at 27.5 miles per gallon for cars and 20.7 mpg for light trucks.

Critics of the report, while lamenting the NAS conclusions, acknowledge there is much to commend in the report.

  • It takes seriously the question of whether government action is warranted and examines alternatives, including a cursory look at broader policies like a gasoline tax.
  • The report acknowledges tradeoffs, including the "blood for oil" sacrifice implicit in the safety penalty CAFE standards cause.
  • It strives to give unbiased estimates of risk, recognizes CAFE standards hurt consumers and urges making the standards as flexible as possible.
  • The report calculates the benefits of reduced gasoline consumption equal about 30 cents per gallon.
One market-oriented suggestion is to allow the trading of CAFE credits, denominated in "saved gallons" among manufacturers. This would allow one manufacturer to specialize in limousines that another specializes in subcompacts.

Using this approach, which might be called Joint Automaker Vehicle Averaging (JAVA), the firms could make whatever type of automobile they like as long as their combined fleet meets the standard.

Nevertheless, critics add, there are still hidden costs in any system that forces consumers to buy a mix of vehicles that meet the regulatory constraint. In effect, attributes that tend to reduce fuel economy are taxed, and those that tend to improve it are subsidized.

Source: Brian F. Mannix (Mercatus Center at George Mason University), "Bringing JAVA to the CAFE," Regulation, Fall 2001.

For Regulation text
http://www.cato.org/pubs/regulation/
regv24n3/mercatusreports.pdf

For more on Automobile Fuel Efficiency
http://www.ncpa.org/iss/reg/
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