18 August, 2005

The fleet

As we've pointed out before here, average fuel economy in this country has been slipping for quite a while. This is not the result of any technological backsliding; in fact, cars have been getting more fuel-efficient over time, and trucks have remained relatively constant in their fuel-efficiency. So why has fuel efficiency been backsliding? Easy: the fleet has been transitioning towards a greater percentage of SUVs. In 1980 cars made up 80% of the U.S. fleet; in 2004 they make up 50%, with SUVs having taken up most of the difference. Why did this happen?

For years many conservative economists (and conservatives more generally) have been pushing the line that CAFE standards themselves are to blame: by exacting a heavier penalty on the light-duty fleet, consumers were encouraged to transition to SUVs, classified as light trucks and subject to lower standards.

But this is nuts. It's absurd to suggest that consumers would be swayed to move to vehicles that cost on average between $31,000 and $48,000, far more than they would be paying for a passenger car. Especially when you hear what the actual CAFE penalty is: $5.50 for each tenth of a mile a manufacturer is over the standard, times the number of units sold. In other words, even if the manufacturer's fleet average is a full 5 mpg above the standard, they need only increase the sticker price by $275 - not nearly enough to make SUVs competitive. And of course, this example is absurdly hyperbolic. Domestic manufacturers have never failed to meet CAFE standards, and the total penalties collected since 1983 amount to only $475 million - which amounts to a few tenths of a point on average.

Then there's cars like the Hummer H2, entirely exempt from CAFE standards because it weighs more than 8,500 pounds. This is what's known as "rewarding bad behavior".

CAFE standards are applied separately to a manufacturer's passenger and light-truck fleets. That is, a manufacturer must meet an average of 27.5 mpg for its passenger car fleet, and 20.5 mpg for its light-truck fleet in order to avoid penalties. So regardless of how many people move from one to the other, it's the average efficiency of each fleet by itself that determines whether CAFE standards are met. Thus, even if fuel efficiency is improving in the passenger car fleet, overall fuel efficiency can drop. This encourages auto manufacturers to transmogrify their cars into light trucks by packing on weight and giving them removable seats so they can be defined as such. The National Highway Traffic Safety Administration still lets manufacturers be the ultimate arbiter of this classification.

And within a fleet there's reasonable evidence that CAFE is pretty good at distorting the market. Most manufacturers stick pretty close to CAFE standards despite market demands. Why should they do so when the penalty is so slight? A Congressional Budget Office study says:
while in theory manufacturers are free to pay a penalty in lieu of complying with CAFE standards, in fact, U.S. manufacturers invariably choose to comply. They do so, according to an automobile industry representative, to avoid or reduce the possibility of legal or public relations ramifications.
So actually, given the two-fleet rule, CAFE should push in the opposite direction and encourage people to buy more fuel-efficient passenger cars: say that consumers prefer gas-guzzling cars. In a normal market, these would be more plentiful, and thus cheaper. But a CAFE standard requires that manufacturers restrict the number of gas-guzzlers sold and push more efficient cars, in order to meet the required fleet average. This would make the undesired efficient cars even cheaper (less demand, more supply), and up the cost of gas-guzzlers (more demand, less supply).

So why did the fleet migrate towards SUVs? My preferred explanation is hubris, but there are other possible market-distorting explanations. For example, since 1997 there's been a "tax loophole" allowing small businesses to deduct $25,000 of the cost of vehicles weighing over 6,000 pounds as a "business expense". This loophole was upped to cover $75,000 of the cost in 2003 and extended for three years in October of 2004. That might have done a little bit to encourage sales of SUVs.

Creating a uniform standard would prevent this possibility. This was one of the recommendations of an NAS study that almost resulted in a uniform standard (27.5 mpg) for both fleets in 2001... but was overwhelmingly defeated.

There's a whole host of other improvements to be made. For one, the "Gas Guzzler" tax, which penalizes cars with lower average assessed fuel efficiency, only applies to passenger cars; this could be extended to light trucks. CAFE credits - when manufacturers exceed standards for a year - could be traded and sold, encouraging companies to improve their efficiency. And, most straightforward, fuel economy standards could simply be raised (e.g. to 37.5 mpg for passenger cars and 29 mpg for light trucks, as proposed by Ed Markey of Massachusetts a few years ago). Between 1974 and 1985, fleet average fuel economy nearly doubled, from 12.9 mpg to 27 mpg. This was largely driven by technological improvements; there's no reason this couldn't be done again. All indications suggest we're poised to do so. We just need a little nudge.

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