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April 19, 2011

Will Fuel Economy Mandates Increase Car Company Profits?

April 19, 2011
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A recent report put out by Ceres and Citi Investment Research concludes that even the strictest new fuel economy standards under consideration will not only reduce carbon emissions but will also allegedly boost the profits of American vehicle manufacturers.

The analysis unfortunately ignores some basic facts about fuel economy and gasoline consumption, as well as the connection between lighter vehicles and increased crash fatalities. Yet the most ironic aspect is that the report completely undercuts the entire rationale for government CAFE mandates: If the Big Three stand to make so much money from higher fuel economy, then they don’t need the government to force them to make the changes.

The Ceres/Citi Report

The following summary of the findings is drawn from Ceres’ website:

The 42 mpg standard by 2020 is consistent with a 6% annual mileage improvement, starting in 2017, that would boost fleet mileage to 62 mpg by 2025. In addition to increasing profits, these goals are eminently achievable technologically and cost-effective.

Commenting on the reports, Ceres Senior Manager of Transportation Programs Carol Lee Rawn said: “This analysis demonstrates that it’s both feasible and profitable for U.S. automakers to meet the strictest standards under consideration.  Strict fuel economy standards will not only reduce our dependence on oil and cut pollution; they’ll help a major driver of our economy – US auto companies and their suppliers – to compete successfully in the 21st century.”

Walter McManus, an economist at the University of Michigan Transportation Research Institute (UMTRI) and Director of the Automotive Analysis Group, said: “Our research indicates that increasing industry average fuel economy to 42 miles per gallon by 2020 could raise industry variable profit by $9.1 billion, or 8 percent. Most of the added profit, $5.1 billon, could go to the Detroit 3.”

Alan Baum of Baum and Associates, who has produced automotive sales and production forecasts since 1990 plus long-range industry analyses with a focus on fuel economy and electric vehicles, said: “our study shows that the automakers are well positioned to meet the fuel economy requirements necessary in 2020 with a variety of approaches already in their product plans. Consumer interest in fuel economy, and their expectation that gas prices will remain high, suggests that consumers will purchase these products.”

Dan Meszler of Meszler Engineering Services provided estimates of vehicle technology costs and fuel economy impacts for the CAFE study. Meszler, who has analyzed transportation energy and air quality issues since 1982, said: “technology exists to address a number of continuing inefficiencies associated with internal combustion engines.  Between now and 2020 much of this technology is expected to mature, so that a 2020 CAFE requirement of 42 miles per gallon should produce consumer savings starting at gas prices of $2.00 per gallon. Since current and expected future gasoline prices far exceed that price, these technology‑driven fuel savings are extremely cost effective and indicate that a 42 mile per gallon CAFE program will not only reduce petroleum imports, but save consumers money.”

Lily Donge, Manager for Environment and Climate Change at Calvert Asset Management Company, Inc., said: “Investors often view tighter environmental regulations as an impediment to growth but these reports offer a refreshing counterpoint. Stricter environmental standards actually have the potential to spark innovation and improve the competitive positioning of US automakers. So reports like these are important for investors – they shed light on the long-term growth prospects of American industries that are an important slice of our portfolios.”

It’s certainly true that other things equal, American consumers would prefer vehicles with higher fuel economy, and would be willing to pay more for such vehicles because of the implied savings on fuel cost. However, other things aren’t equal. It is well documented that lighter, more fuel-efficient cars aren’t as safe for the occupants as heavier, less fuel-efficient cars.

CAFE Mandates Kill

Writing last year in The American Thinker, J. R. Dunn summarized the grim legacy of CAFE mandates:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

Studies have repeatedly demonstrated the fatal results of mileage regulations, starting in 1989 with the Brookings Institution (in collaboration with the Harvard School of Public Health), followed by USA Today in 1999, the National Academy of Sciences in 2001, and at last the federal government’s own National Highway Transportation and Safety Administration in 2003. This formidable lineup of organizations all came to the same conclusion: Fuel standards kill.

According to the Brookings Institution, a 500-lb weight reduction of the average car increased annual highway fatalities by 2,200-3,900 and serious injuries by 11,000 and 19,500 per year. USA Today found that 7,700 deaths occurred for every mile per gallon gained in fuel economy standards. Smaller cars accounted for up to 12,144 deaths in 1997, 37% of all vehicle fatalities for that year. The National Academy of Sciences found that smaller, lighter vehicles “probably resulted in an additional 1,300 to 2,600 traffic fatalities in 1993.” The National Highway Transportation and Safety Administration study demonstrated that reducing a vehicle’s weight by only one hundred pounds increased the fatality rate by as much as 5.63% for light cars, 4.70% for heavier cars, and 3.06% for light trucks. These rates translated into additional traffic fatalities of 13,608 for light cars, 10,884 for heavier cars, and 14,705 for light trucks between 1996 and 1999.

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Ironically, in exchange for increased traffic fatalities, CAFE standards don’t achieve the environmental benefits that their supporters allege.

CAFE Standards An Inefficient Way to Achieve Emissions Reductions

In the first place, it’s not obvious that higher fuel economy standards should achieve any emissions benefits, because people drive more when the relative cost of driving is reduced. Of course we at IER have pointed out numerous problems with a direct carbon tax, but at least it makes the alleged problem (emitting carbon dioxide) more costly. Perversely, higher CAFE standards actually make it cheaper to drive (in terms of fuel expenses) and so unwittingly encourage more fuel consumption, more emissions, more imported oil, and so on.

The general principle here is known as Jevons’ Paradox, which states that as energy use becomes more efficient, historically people often increase their total energy usage. In practice, a particular increase in energy efficiency might increase or decrease total energy usage, but the point is that the supporters of stricter CAFE standards often assume that energy efficiency automatically translates into lower energy usage—and this is simply not the case historically. (Oil imports have dramatically risen since the introduction of CAFE standards in the 1970s, for example.)

Even if we accept the premise that the government should manipulate fuel economy standards in an effort to reduce gasoline consumption, the CAFE approach—which sets ever-higher mandates for newly produced vehicles—is nonsensical. This short YouTube video put out by two researchers at Duke University explains that the very focus on “miles per gallon” is itself misleading, and should be replaced with the concept of “gallons per mile.”

I spell out the argument more fully in this post, but we can see the gist of it with a simple numerical example: Suppose for the same amount of tax dollars, the government can either (A) replace 10 mpg vehicles with ones that get 15 mpg, or (B) the government can replace the same number of 25 mpg vehicles with ones that get 100 mpg. Assuming that people don’t alter their driving behavior in response to the new fuel efficiency, which policy would save the most gasoline?

Most people would think that option (B) would be preferable, since it achieves such a dramatic increase in fuel efficiency. But this is wrong, assuming that motorists drive the same amount in either vehicle. For an average motorist who drives 6,000 miles per year, the first policy reduces fuel consumption from 600 down to 400 gallons, saving 200 gallons per vehicle per year. In contrast, the second policy reduces gasoline consumption from 240 down to 60 gallons per year, a savings of only 180 gallons per vehicle.

This is not to suggest that it would a good idea for the government to implement policies to remove older, very fuel-inefficient vehicles from the road. The point is simply that the CAFE approach is incredibly inefficient, even on its own terms.

If the Move Is So Profitable, Why Is Coercion Necessary?

The final observation on this whole episode is that the Ceres study, if true, would completely undercut the case for mandating fuel efficiency standards in the first place. At least the standard case for imposing a tax on carbon dioxide relies on a “market failure” argument, in which emitters don’t take into account the full environmental costs of their actions.

Yet if the Ceres study is to be believed, the Big Three are foolishly waiting around for the government to force them to make gobs more money. And in this case, there isn’t even the patina of a “market failure” or “externality” argument. If indeed consumers would be willing to pay more for vehicles with greater fuel efficiency, then one farsighted manufacturer could capture all of the looming profits for itself by rushing the vehicles into production. There is no need for government mandates at all, if these higher standards really would mean greater profits for the industry because of happier consumers.

Conclusion

Increased CAFE standards fail to achieve their alleged benefits for various reasons, and they come at a high price in terms of increased traffic fatalities. Furthermore, if the promoters of the Ceres study really believed the results, they would admit that there is no need for government action to promote higher standards.

 

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