NCPA - National Center for Policy Analysis


May 18, 2004

Federal fuel economy standards for cars create market distortions, reduce consumer choice and cost society $3.6 billion per year. A gasoline tax to reduce fuel consumption, however, would likely be more efficient, say observers.

Corporate average fuel economy (CAF') standards are determined not per car, but as an average across each manufacturer's fleet. This creates unintended consequences:

  • The auto market is distorted as automakers must cross-subsidize the production of their smaller, more fuel efficient cars through revenue generated from the sale of larger cars.
  • Consumers who do not want to purchase smaller, less safe cars are forced to buy larger vehicles than they prefer, and vice versa.
  • Consumers must pay an average of $228 in additional cost per vehicle due to CAF' standards.

A study by the Congressional Budget Office reveals that a 46-cent gasoline tax would achieve the government's mandated 10 percent reduction in fuel consumption and:

  • Reduce the overall cost to automakers and consumers to $2.9 million per year.
  • Produce immediate gasoline savings to owners of both new and old cars, as people would be inclined to drive less -- new CAF' standards would not immediately effect fuel savings until all older model cars are replaced

The gasoline tax has a drawback, however -- gas prices already include an average of 41 cents per gallon in federal, state and local taxes. Convincing the populace of the need for an additional 46 cent tax might be difficult.

The National Highway Traffic Safety Association is proposing reforms to the CAF' standards, such as including heavier vehicles in the program and altering standards in a way that consumers will not have to compromise safety for the purchase of a fuel efficient vehicle.

Source: 'CAF' Standards," Regulation, Cato Review of Business and Government, Spring 2004, Cato Institute. "The Economic Costs of Fuel Economy Standards vs. a Gasoline Tax," Congressional Budget Office, December 2003.

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