NCPA - National Center for Policy Analysis

Cafe Standards Inefficient In Reducing Air Pollution

November 16, 2000

During the energy crisis of the 1970s, a law was passed requiring automobile manufacturers to meet Corporate Average Fuel Economy Standards (CAFE) with the aim of reducing American dependence on foreign oil. In recent years, environmentalists have advocated stricter standards as a way to reduce air pollution. However, the economic efficiency of these standards is suspect. A recent study argues that gas taxes are more efficient in reducing air pollution than imposing a complicated series of regulations.

The study found that:

  • Automobile companies avoid obeying certain CAFE standards by substituting foreign parts for domestic parts or by relocating production so that their cars can be classified as imports rather than domestically manufactured vehicles.
  • CAFE standards are responsible for reducing smog only 9.94 percent, while higher gas taxes have reduced smog 79.44 percent.
  • The taxes create fewer economic distortions than CAFE standards; while gas taxes have increased the net welfare of society 11.36 percent, CAFE standards have increased social welfare only 0.76 percent.

Thus gas taxes produce the same air pollution reductions with fewer distortions than the complicated CAFE regulations. However, gas taxes do not necessarily create more fuel-efficient automobiles.

Source: Steven Thorne, "The Relative Efficiency of Fuel Economy Standards Versus Taxes as Environmental Policy Instruments," Journal of Economics, No.1, 2000.


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