In anticipation of the Senate debate on
the Corporate Average Fuel Economy (CAFE) program, The
Heritage Foundation (THF) and the Competitive Enterprise
Institute (CEI) recently hosted a panel of four recognized
experts to discuss the public policy implications of the CAFE
program and to examine its effects on consumers and the
economy. Panelists included Dr. Robert W. Crandall, Senior
Fellow in the economic study program at the Brookings
Institution; Barry Felrice, Senior Manager of Regulatory
Affairs for the Daimler Chrysler Corporation; Sam Kazman,
General Counsel of CEI; and Dr. W. David Montgomery, Vice
President of Charles River Associates. Edited excerpts from
this discussion are presented below.
Introduction
Congress established the Corporate Average
Fuel Economy program better known as the CAFE program in 1975.
This program requires auto manufacturers selling in the United
States to meet certain fuel efficiency standards and levels
for their fleet of new cars and light trucks comprised of
pickups, minivans, and sport utility vehicles (SUVs). The
standard for passenger cars is currently 27.5 miles per gallon
and 20.7 miles per gallon for light trucks. Some in Congress,
such as Senator John Kerry, want to drastically increase
standards to force manufacturers to build cars and light
trucks that would get 35 miles to the gallon by 2013.
The goals of CAFE standards were to reduce
US dependence on foreign oil and decrease the consumption of
gasoline. Yet, today the United States imports more oil than
when the CAFE program was enacted and people are driving more
miles. The program has also had unintended consequences.
Excerpts from Dr. Crandall
We needed CAFE in 1975 (or the Congress
thought it did) not because of the Arab oil embargo but
because the way in which Congress responded to it. Having put
regulatory mechanisms in place to keep the price of oil and
gasoline artificially low, they needed to offset those
incorrect market signals so as not to induce General Motors,
Ford and Chrysler to continue to produce gas-guzzling cars.
Had they let the price of oil and gasoline rise market
mechanisms would have taken care of this perfectly well.
CAFE is a solution in search of a problem.
Is the problem global warming? Is it energy security? Is it
traffic congestion and air pollution? Or is it simply the envy
of some people who can't afford to buy large SUVs? I think
that I can say confidently that except for, perhaps, a subset
of that last problem, CAFE is not the right solution to
whatever the problem advocated is.
That's the problem with any CAFE standard:
it only targets a very, very small subset of those people
using energy, namely, those people who buy new motor vehicles
principally for pleasure usage. It doesn't target those people
who drive older motor vehicles. It doesn't target those people
who use oil to burn in industrial boilers. It doesn't target
those people who use oil to burn for home heating. Therefore,
it's an extremely inefficient policy because it doesn't equate
the marginal cost of the policy across all
uses.
A CAFE policy does not target carbon-rich
fuels but only oil that is used solely in new vehicles. That
can't be a very efficient way to deal with the global warming
problem.
The current proposal would cost something
like $17 or $18 billion a year in lost consumer surplus.
That's what an economy is designed to do- to produce goods
that people really want which generates surplus for them.
To the extent that we make cars less safe
through CAFE people will trade off against it; that is, they
will find ways to protect themselves against these awful light
unsafe cars by buying more safety equipment, strapping their
belts on, buying air bags, and so forth.
Plus, the latest research suggests that
air bags don't improve safety. All of the surplus in increased
safety is taken up by driving less safely.
Excerpts from Barry
Felrice
I will talk about the promise of
technology, but also the limitations of technology. When we
talk about CAFE particularly as part of the current debate in
the Senate, it's allegedly a technological debate. But I will
argue that some of the numbers floating around are way beyond
the capabilities of technology as we in the auto industry or,
I think, anyone on this planet can conceive in the time frames
that we're talking about.
During the time of the steep rise in
gasoline prices the actual fleet CAFE increased significantly.
From model year '79 till about '82 it went up from about 18 to
over 25 miles a gallon. Was this due to CAFE standards? I
would argue that CAFE standards were somewhat if not totally
irrelevant during that period of rising gasoline
prices.
And that's one of the fatal flaws of the
program: that is, it assumes that we could set these CAFE
standards and that they could be met through technology.
Everyone thought in the mid-seventies that the real price of
gasoline was going to rise. One constant in the 25 years of
CAFE has been the inability of everyone, government,
economists, auto manufacturers, to predict future prices of
gasoline.
So when gasoline prices rise CAFE becomes
somewhat irrelevant. When gasoline prices drop or steady then
they become a constraint on manufacturers and on consumers and
they limit consumer choice.
EPA has stated that fuel efficiency -- how
much gasoline it takes to move a ton a mile down the road --
has increased by 1-1/2 percent a year for each of the last 20
years. This means there is more fuel-enhancing technology
going into light-duty motor vehicles.
Why are vehicles increasing in weight
again as they have since the initial downsizing of the early
'80s? A lot of that is safety and not just regulatory safety
improvements but voluntary safety improvements, everything
from antilock brakes to side air bags to electronic stability
controls and traction controls. All these things add weight.
And yet at the same time fuel economy has
not suffered. Our engineers have been working like crazy to
keep the fuel economy the same even in the face of all these
increases in weight. Some of that technology, some of the
benefits, are getting eaten up by moving more mass or
providing more power because that's what customers want.
Industry needs sufficient lead time if
CAFE standards are to change to get a return on our investment
in technology. We spent $3 billion on the new 2002 Dodge Rams
which included a new assembly plant, a new engine, and a new
drive train. We probably will need six to eight years of
production to make that money back and get some decent return
on it.
If CAFE standards change too quickly and
are too high, we will have to scrap that investment where
we'll lose more money, which is hard to imagine for some of us
these days. We can't get to these new levels through
technology. When that happens we start cutting back on the
least fuel-efficient vehicles which lessens our revenue flow
so then we have less revenue to invest in new technology. It's
a vicious cycle.
Some say there's a lot of technology out
there that you're not putting on your vehicles that are
cost-effective for consumers. I'm not sure many consumers want
to wait fourteen years to get $3,000 back.
[The Kerry bill] is technologically
unfeasible. We know of no basis in science, fact, data, or any
report (especially the National Academy of Sciences report)
that would lead one to the conclusion that the 35mile per
gallon average level is achievable through cost-effective
technology in that timeframe (2013). It just ain't
so!
For example, let's look at Daimler
Chrysler. Assume we could achieve at 28-mile-a-gallon truck
fleet. For us to average 35 miles per gallon, our car fleet
has to get 78 miles a gallon. Now, if those trucks only get 27
miles a gallon, then our car fleet has to get something like
111 miles a gallon.
So any law that talks about a combined
standard has disparate competitive effects which I would
argue, the Congress is not fully considering.
So Senator Kerry's [CAFE] bill is really
not even a 35-mile-a-gallon bill by 2013. It's more like a
40-mile-a-gallon bill.
Excerpts from Sam
Kazman
The debate we're seeing right now over
CAFE is a fundamentally dishonest debate. Before the National
Academy of Sciences issued its CAFE report this past summer I
had never met a single defender of CAFE who admitted it kills
anyone. Now, after that report, they still don't admit it
kills anyone at all.
None of ITS defenders had ever said CAFE
kills. They didn't admit CAFE kills anyone after Bob Crandall
and John Graham published their 1989 study, which found
between 2,200 and 3,900 deaths annually from CAFE. They didn't
admit it kills anyone when, in 1999, USA Today
published its extensive analysis finding over 40,000 deaths
from CAFE over the lifetime of its program in
1999.
And then the National Academy of Sciences
issued its report last August, which found that CAFE kills
between 1,300 and 2,600 people per year due to its
constraining effect on producing larger cars. But CAFE's
proponents still don't admit it kills anyone at all. For that
reason, the debate over CAFE is a fundamentally dishonest
debate.
Why does CAFE kill? It does so because it
constrains the production of larger cars and, in most modes of
collision, larger, heavier cars are more protective of their
occupants than are small cars.
About 50 percent of all occupant deaths
occur in single-vehicle crashes. Extra mass in a car involved
in a collision with a tree or a bridge abutment or a brick
wall is incredibly protective. You find differences in
survival rates between sub-compacts and large cars on the
order of four times as great or eight times as great, a four
to eight times DELETE 'THE' higher death rate in very small
cars as in the larger cars. There is simply no question
whatsoever that in single-vehicle crashes larger, heavier cars
are safer.
The other half of all occupant deaths,
however, occurs in multi-car collisions, largely in two-car
collisions, and there the issue gets a little more
complicated.
In multi-car collisions adding mass to
your car protects you more but it does put the occupants of
the other car at somewhat greater risk. And so the question
is, what is the net effect?
When the two cars involved in that
multi-car collision are pretty much identical, larger mass
helps the occupants of both cars. When they're not identical
but are still pretty similar to each other, adding mass to
your car protects you. It tends to hurt the occupants of the
other car, but its net effect overall is more protection, and
so society benefits from added mass.
In other scenarios involving very
different cars, adding mass to one car may reduce overall
social safety. But whatever the multi-car effect of added mass
may be, it is totally outweighed by the protection of added
mass in single-car collisions. For that reason, to use the
words of Dr. Leonard Evans (head of the International Traffic
Medicine Association and a researcher in this issue for three
decades) , CAFE kills and more stringent CAFE standards will
kill even more.
What arguments do proponents of CAFE
offer, especially those who want to make CAFE more stringent?
The first argument is that new technology
can get us out of this bind. It can give us much higher fuel
economy and improved safety. But picture such a high-tech car
in your mind and then add a few additional cubic feet and a
few additional pounds to that car. Make it a little bit bigger
and a little heavier.
Two things happen. Once you've made it
bigger, this high-tech car is a bit safer and it's also a bit
less fuel efficient. In short, you've still got a tradeoff
even at this incredible high-technology frontier between
safety and fuel economy. And so high technology does not get
you out of this bind.
Defenders of CAFE also argue that CAFE
can't be deadly because, after all, it's endorsed by Ralph
Nader, Joan Claybrook, and Clarence Ditlow. But long before
large cars became so politically incorrect these very same
folks stated very forthrightly that larger cars are safer
cars. In a 1989 magazine interview in which he was asked for
his advice for buying a safer car, Ralph Nader said, first buy
one with an air bag and second, buy a larger
car.
In 1972, Nader and Ditlow published a book
called Small on Safety: A Critique of the Volkswagen
Beetle. Page after page has such statements as "Small size
and light weight impose inherent limitations on the degree of
safety that can be built into a vehicle."
What's happened? Back then large cars were
not politically incorrect. Now they are.
Why have these CAFE converts like Nader
taken this view on this position? Because for them the line
has been this all along: you want more safety, you need more
government. You need another government regulation if you want
a safer product. With CAFE all of a sudden it's exactly the
opposite.
Another example of the political
incorrectness of large cars and how it has skewed consumer
information can be found in Consumer Reports. Every
year Consumer Reports has an annual buying guide issue
which includes a very extensive discussion of how to buy a
safe car. You have to dig through that safety article mid-way
or more to find any mention of the fact that larger cars are
more safe. In some years it's not mentioned at
all.
On the other hand, the auto industry
probably has the most direct stake in accurately accessing
vehicle crashworthiness. Go to the web site of the Insurance
Institute for Highway Safety, and look under their "Tips for
Buying a Safer Car". One of the very first factors they
mention is that large cars are safer than small cars. You
don't find it in Consumer Reports because I believe
they have somewhat of a political agenda.
Proponents of more stringent CAFE
standards always present the image of a Ford Explorer
devastating a GEO Metro, a large SUV just killing everyone
inside a subcompact when there's a collision between the two.
In the words of Adrian Lund at the Insurance Institute, that
is a highly unrepresentative example; the real issue isn't so
much the larger size of that Explorer but the small size of
that subcompact. If you want to improve auto safety you have
to do something about those subcompacts.
It is instructive to look at the
Ford/Firestone tire fiasco. According to a detailed report in
Public Citizen last April, Ford had requested Firestone to
redesign the Explorer's tires so it was more fuel efficient.
Firestone attempted to do that, and the result was a defective
product. Here is an example of one company in its quest for
higher fuel economy producing a defective product. Yet, that
was never the focus of any attention
whatsoever.
No one pushing for higher CAFE admits that
it kills anyone. One thing they do argue is that higher CAFE
would be keep us out of all of these blood-for- oil wars. But
in a sense CAFE itself is a blood-for-oil battle and it's
waged not with knowing soldiers, not with a military that
knows that it's being put at risk, but with civilians who have
no idea that they're being put at any risk
whatsoever.
What does happen when the public learns
about the safety costs of CAFE? Well, lately we've seen a slew
of polls about how 300 percent of the American public wants
higher CAFE standards. But the questions in those polls never
mention the safety issue.
Once you tell the public about the safety
issue, their views about CAFE change dramatically, and that is
something that folks in Congress should keep in mind. The
safety issue is an issue that can change this debate as well
as public opinion.
Excerpts from Dr. Montgomery
The economy is an engine for producing
goods and services that consumers want. And what you've heard
about so far today is exactly how CAFE standards fundamentally
interfere with efficiently allocating the resources we have in
order to produce the goods and services that people want. And
that means they're going to be a bad idea in terms of how well
the economy operates. We need to work through where those
inefficiencies in the resource allocation process come from
and how large they are. We should also consider other ways we
could go about remedying whatever defect in the economy CAFE
standards are supposed to remedy but without so much
interference the economy.
So let me start by talking a bit about
what the costs of CAFE standards are.
There are three kinds of costs that need
to be considered. One is the cost of technical fixes - what
you would do to a car in order to make it produce more fuel
economy without changing anything else about
it.
Second, there's the cost of what is called
mix-shifting in the debate. Mix-shifting means meeting
near-term standards. In particular meeting tight CAFE
standards requires figuring out some way of getting motorists
to buy smaller, less powerful vehicles that are inherently
more fuel efficient with constant technology than larger
vehicles.
And the third cost is the cost of lost
performance and other attributes of vehicles which consumers
show that they value by actually going out and spending more
for vehicles that have these attributes than vehicles that
don't have them.
All of these [costs] tend to be either
underestimated or left out completely in the studies cited by
proponents of CAFE standards.
I've never seen a CAFE standard proposal
that took into account the fact that there's a cycle that
manufacturers go through of design and tooling and production
which, if interrupted, can increase costs many fold in
actually getting these hypothetical technologies into
vehicles. Second, there's a cost associated with mix-shifting.
What are you going to do in order to meet the fuel economy
standard where you simply can't get cars up to 100 miles per
gallon?
Well, this does force you to price your
product so that people will stop buying your high-fuel
consumption vehicles like trucks and start buying your
smaller, higher fuel economy vehicles instead. And, obviously
this is what occurs in the industry whenever CAFE standards
are binding from the first year they take
effect.
What CAFE standards do is force the
subsidization of unsafe purchases by causing the subsidization
of purchases of these small vehicles that then get crushed
when they run into anything or when something heavier runs
into them.
This kind of cross subsidization, which is
driven by a regulatory program, induces people to choose
vehicles which would not have been their first choice if
they'd been allowed to see correct market signals as to what
it costs to produce those vehicles. That's why the cross
subsidization produces an inefficiency in our allocation of
resources within the economy.
This is basically a frustration of
consumer preferences. We're not equating the marginal cost of
everything that we produce. We're not equating marginal costs
to the marginal value that the consumer puts on something.
Manufacturers spend a great deal of time
and a great deal of money figuring out how much their
customers value certain attributes in order to figure out what
package to put together to make as much money as possible when
they sell a vehicle. This is not something they do for PR
purposes. They do it for purposes of making money. They don't
it because they have a cause.
Defenders of CAFE don't take into account
factors such as acceleration, what's called noise vibration
and harshness, towing capacity, about driveability, and other
attributes that consumers value. And all of these things tend
to be affected adversely by the technologies that are
generally proposed for making cars that are cheaper and have
greater fuel economy.
The one that I like best is front-wheel
drive. You know why there are not very many front-wheel drive
pickup trucks? Because they can't tow anything and towing is
an important attribute for those who purchase trucks. So if we
want to pretend that trucks are really cars, then we can
impose fuel economy standards that turn them into cars when
you are losing something that has a clear, identifiable value
in the market place that consumers reveal when they pay
something for a vehicle with the characteristics it has today.
So these, I think are the costs of CAFE
standards.
We (Charles River Associates) put together
some estimates of the cost of technology fixes. What we came
up with was that a proposal for something like the
28-mile-per- gallon SUV standard that if it was implemented
over a 12-year period with a careful phase-in to match the
cycle of rebuild, would increase the cost of a new SUV by
about 10 percent. Anything above 35 miles per gallon for new
cars is hard to even conceive of over the period that we're
looking at but it would add more than 20 percent to the cost
of a new car. That includes both the technology fixes and the
downgrading of the quality of the vehicle in the consumer's
preference. It's not the hardware. It's the combination of
everything that either increases the cost or increases the
value of the vehicle.
So what we're talking about there is
probably something like a reduction in new car sales of about
15 percent when a standard like this comes in and starts to
bite.
The larger economic modeling we've done
suggests that that would produce about a 10-percent drop in
employment in the auto industry during the shock
period.
There is clearly a shock effect in the
short run.
But, remarkably, the costs we came up with
were almost identical to those that Bob Crandall talked about,
which was a loss of about $17 billion per year in consumer
surplus from these changes.
CAFE standards are about the worst
strategy you could think of if you wanted to solve any of the
problems that people have talked about, as Bob mentioned,
except envy. Because it is true that CAFE standards would do
something about the fact that some people have a lifestyle
campaign to prohibit SUVs in the guise of fuel economy
standards.
The problem with applying this only to new
cars is that it certainly has the effect that I just talked
about on new car sales but that's not just bad for oil
companies and bad for autoworkers. It's actually bad for
consumers and it's particularly bad for the
environment.
First of all, it means that a large part
of the fuel savings you would expect from CAFE standards go
away because, what happens if people don't buy new cars? The
first thing that happens is that they keep their old cars
longer. Even today old cars get worse fuel economy than new
cars, so delaying the replacement of old cars by new cars
takes back some of the fuel economy
improvements.
With CAFE standards we're also imposing on
people higher fuel economy in their new cars than they would
have chosen. What's that mean? Since they're not paying a
higher price for gasoline, better fuel economy means it costs
less to drive so people will drive more. There's another
take-back effect, the additional driving that's stimulated by
the CAFE standard.
So here we have two effects which I would
call new-source bias. And basically the liberal environmental
bias in environmental policy is let's require new sources of
pollution, that is, new investment that makes the economy
grow, pay considerably higher costs than what's out there
already. That discourages new investment. In this case it
discourages replacing older, dirtier cars with new cars and it
encourages actually driving cars more. That only defeats the
purpose of CAFE standards.
Furthermore, the take-back effect of lower
new car purchases, slower turnover of the fleet, on fuel
consumption is not very large, but it's huge on air pollution
because the difference between a 10-year-old car and a new car
on air pollution is immense compared to the difference in fuel
economy between a 10-year-old car and a new car. So, in
addition to killing people in accidents , what the CAFE
standards do is that they kill people through higher levels of
urban air pollution because that's what you get out of this
new source bias and reduced turnover of the fleet.
Conclusion
Thank you to panelists and
audience.