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Interesting CAFE article

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By Robert W. Crandall and Hal J. Singer

Sept. 6, 2007

Several bills are working their way through Congress that would increase the corporate average fuel economy standard (CAFE) for cars and light trucks by 4 percent per year, reaching a target of 35 miles per gallon by 2018. Aside from economists, whose voices often carry little weight in Washington, there is virtually no opposition to this form of regulation. Not even from a Republican president.

To bolster support for these new rules, CAFE proponents have issued two studies that purport to show that increasing the CAFE standard to 35 miles per gallon would generate fuel savings for car owners in excess of the admittedly higher costs of automobiles; increase carmakers' profits; and generate nearly a quarter of a million U.S. jobs.

A study by the University of Michigan's Transportation Research Institute supports the first two alleged benefits of increasing CAFE, and the third alleged benefit is touted by the Union of Concerned Scientists. Unfortunately, elementary economic principles require one to conclude that the directional change of more stringent CAFE standards on consumer welfare, carmakers' profits, and jobs is exactly the opposite of what these studies suggest.

No one disputes that more stringent CAFE standards would increase the cost of making a car, which would be passed on to buyers. Technologies that improve fuel economy are costly ("there is no free lunch"). Forced to climb to a higher standard, carmakers would embrace the most cost-effective technologies first. But to reach the final rungs on the fuel-economy ladder, carmakers would have to employ very expensive technologies and reduce various aspects of vehicle performance, such as acceleration and vehicle size.

The bone of contention between the carmakers and the regulators (principally the National Highway Traffic Safety Admission) concerns exactly how much those technological improvements would cost in relation to the present discounted value of fuel savings for car owners over the life of the car.

Ask any economist and he'll tell you that estimating the private costs and private benefits of increasing fuel economy is a fool's errand. This is precisely the job of a well-functioning market. For example, if there was fuel-saving technology out there that cost $1,000 but generated $2,500 in the discounted present value of fuel savings over the life of the vehicle, carmakers would surely voluntarily embrace that technology. The carmaker could split the net benefits (equal to the difference between the discounted fuel savings and the cost of the technology) with the car buyer such that both parties to the transaction would be better off.

No need for regulation there. With large numbers of vehicle producers and well-informed consumers, the market is so efficient, in fact, that it ensures that all such transactions will occur, generating the socially optimal level of fuel economy. Markets may generate too little fuel economy if there are social benefits not captured fully by private parties, but CAFE proponents have failed to demonstrate such external benefits. Indeed, external benefits are not even part of their argument.

According to our preliminary estimates, every new GM customer would incur a net loss of several hundred dollars under the newly proposed standard, as the higher cost of the car would exceed the discounted fuel savings. Multiply this loss per vehicle by the number of new vehicles sold and you arrive at annual welfare losses in the billions of dollars.

Regarding the second purported benefit of increasing CAFE, it is naive to think that carmakers need regulations to increase their profits. As explained above, if a carmaker sees an opportunity to add value for their customers in excess of costs, it will do so. The purpose of regulation is to curb behavior that is profit-maximizing but generates some external cost to society. Thus, regulation typically reduces profits. CAFE proponents seem to have forgotten this basic point.

Finally, the claim that increasing CAFE standards would generate nearly a quarter million U.S. jobs cannot withstand economic scrutiny. First, requiring carmakers to spend more money on cars only diverts resources away from more productive endeavors. No country can expand its wealth by employing people in activities that entail more costs than benefits. Second, the costs of excessive fuel-economy standards are added to the price of the vehicles, inducing consumers to buy fewer new cars, thereby reducing overall vehicle sales. Thus, while carmakers would be spending more to come into compliance with the higher standards, car buyers would be spending less on cars in the aggregate because the newer cars would be more expensive. Demand curves slope down, which means an increase in the price of cars would generate fewer car sales.

Any call for regulation must be based on a market "failure" – that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5 percent of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.

When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away. Too bad these proposals will not be subjected to economic scrutiny before they become law.

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and proof the majority of law makers don't listen to the highest educated in fields of law consequences. (that make sense?)

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For example, if there was fuel-saving technology out there that cost $1,000 but generated $2,500 in the discounted present value of fuel savings over the life of the vehicle, carmakers would surely voluntarily embrace that technology.

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For example, if there was fuel-saving technology out there that cost $1,000 but generated $2,500 in the discounted present value of fuel savings over the life of the vehicle, carmakers would surely voluntarily embrace that technology.

Uh.... this would assume that people are smart.

There is this relatively new technology out there that does exactly that. Costs about $1,000 more but offers a lifetime of fuel savings far greater than it's cost. No batteries, no fancy transmissions.....

it's called Diesel.... but it's only been around about 100 years or so....

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Uh.... this would assume that people are smart.

There is this relatively new technology out there that does exactly that. Costs about $1,000 more but offers a lifetime of fuel savings far greater than it's cost. No batteries, no fancy transmissions.....

it's called Diesel.... but it's only been around about 100 years or so....

Yeah, and it's slow, clattery, and dirty. If it's not slow, clattery, and dirty, it'll be very expensive.

HCCI and Twincharging (a 1.4 TSI emits only 8% more CO2 than a similarly-powerful 2.0 TDI and costs $3100 less) seem to be much more viable technologies.

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Yeah, and it's slow, clattery, and dirty. If it's not slow, clattery, and dirty, it'll be very expensive.

Not if it is built like a Duramax. The problem with diesels is that these same "brilliant" legislators that gave us CAFE have made it very hard to bring diesel cars to market.

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Yeah, and it's slow, clattery, and dirty. If it's not slow, clattery, and dirty, it'll be very expensive.

Honda's 2.2L diesel they've had in Europe for a while now is quite the opposite. They haven't brought it here yet for whatever reason, but are readying a version of it with a Urea-free catalytic converter for the U.S. market within the next year. It has gotten very positive reviews, praised for its quiet operation, torque, and mileage.

CR-V Review

CR-V Review

CR-V Review

U.S. 2.2L diesel Accord to hit 52mpg

Multiple by 0.833 to get mileage in U.S. gallons:

Euro Accord (TSX) Diesel

Urban 39.8 mpg

Extra Urban 62.8 mpg

Combined 52.3 mpg

CR-V Diesel

Urban mpg: 34.9

Extra urban mpg: 47.9

Combined mpg: 42.2

The diesel engine is exceptionally refined combining responsive acceleration with low engine noise and vibration.

Honda entrusted the design of this, its first diesel engine, to Kenichi Nagahiro, the same designer who did the V-TEC variable camshaft timing system. Amazingly, despite the complexity of the V-TEC system, there has never been a single warranty claim on it. Nagahiro hated diesels; hated everything about them; hated the noise, the lack of power, the dirtiness of them. Honda gave him carte blanche to create a new type of diesel, and he didn't let his employer down. In fact Honda's advertising campaign reflects this, the annoyingly unrelenting words to the backing song being "hate something, change something".

The diesel engine in the Honda CR-V uses a revolutionary semi-solid casting process which enables the block to be cast in light aluminium alloy, unlike pretty well every other diesel engine, which use a heavy cast iron block. The 2.2-litre diesel engine produces 138bhp at 4000rpm and backs this up with 251lb.ft of torque at just 2000rpm, while returning a claimed 42.2mpg on the combined cycle and conforming to Euro IV emission regulations.

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