CAFE standards not as effective as gasoline tax

The Obama administration recently reversed a Bush-era policy that prevented states from imposing some of their own environmental policies with respect to corporate average fuel efficiency, or CAFE, standards.

This ruling permits California to establish its own separate CAFE rules for fleets sold within their state. This was a wise move.

Effective public policy in the United States has long depended upon state-level experimentation. Perhaps the best example of this is the 1996 Welfare Reform Act. This legislation adopted most of the best practices from a decade of state trials. It also allowed the nation to sidestep the mistakes made by individual states. The result was a balanced, effective and, ultimately, very good piece of federal legislation.

Environmental policy is a superb place for state-level experiments. The federal government is too unwieldy to enforce most environmental standards, and states face very different priorities. As a result, we get a pretty diverse set of standards.

These are tested in courts and before federal regulatory hearings. Of course, these are maddening to businesses and residents, but far less so than a failure of a uniform federal policy.

I applaud President Obama for this decision, and hope it heralds experimentation in lieu of federal mandates on health care. That being said, CAFE standards represent weak public policy. Here’s why.

Vehicle emissions damage the environment and impose morbidity and mortality costs on humans. These costs most likely run into the hundreds of dollars annually per car. Since individual automakers and car buyers do not pay these costs, too many emissions are produced.

CAFE standards purport to remedy this by setting standards companies have to meet for their fleet. But the rules cannot do so as efficiently or as effectively as gasoline taxes. However, taxes are unpopular, and to change them requires an understanding of how markets work. That is an anathema to many in the environmental movement.

Auto companies easily dodged the CAFE bullet, and will do so again. The last time they did so by creating the SUV, a vehicle that was immune to CAFE since it was considered a truck. Car companies will always find ways to dodge purely regulatory restrictions on emissions because their living depends on it. They cannot dodge an increased tax on gasoline.

It is ironic, of course, that the environmental movement helped create the SUV through its unwillingness to tackle the hard task of explaining the costs of vehicle emissions and embracing a truly economic solution.

It was easier to claim a victory with CAFE standards than achieve one with an environmental tax. The environmental movement is full of soft-hearted folks. Far too many are also soft-headed—culturally afraid of the hard, but effective math of a benefit-cost analysis. But, then again, maybe that is why the CAFE standards are all the rage in California.
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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.