The Economic Costs of Fuel Economy Standards Versus a Gasoline Tax.docx

The Economic Costs of Fuel Economy Standards Versus a Gasoline Tax.docx

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TheEconomicCostsofFuelEconomyStandardsVersusaGasolineTax

TheEconomicCostsofFuelEconomyStandardsVersusaGasolineTax

CHAPTER

1

Introduction

Recently,therehasbeenmuchdiscussion,intheCongress,inthepress,andamongpublicinterestgroups,aboutfueleconomystandardsforcarsandlighttrucks.Theaveragefueleconomyofnewvehicleshasbeendecliningformorethanadecade,asconsumershaveincreasinglyswitchedfromcarstotrucksormorepowerfulcars.Atthesametime,therehasbeenincreasingconcernabouttheenergysecurityoftheU.S.economyandabouttheroleofcarbondioxideemissionsinglobalclimatechange.

（1）Proponentsofhigherfueleconomystandardshopethatreducinggasolineconsumptionwillhelpaddressthoseconcerns.

ArecentCongressionalBudgetOffice（CBO）studyprovidedaqualitativecomparisonoftheeffectsofthreepoliciesthatcoulddecreasegasolineconsumption:

anincreaseinthecorporateaveragefueleconomy（CAFE）standardsthatgovernpassengervehicles,anincreaseinthefederaltaxongasoline,anda"cap-and-trade"programforthecarbondioxideemissionsthatresultwhengasolineisburned.

（2）Thatstudyweighedthosepoliciesagainstfourmajorcriteria:

whethertheywouldminimizecoststoproducersandconsumers;howreliablytheywouldachieveagivenreductioningasolineuse;whatimplicationstheywouldhaveforthesafetyofdriving;andwhateffectstheywouldhaveonfactorssuchastrafficcongestion,requirementsforhighwayconstruction,andemissionsofairpollutantsotherthancarbondioxide.

ThisstudyextendsCBO'spreviousworkbyprovidingaquantitativecomparisonofthecoststhatproducersandconsumerswouldbearasaresultoftwoofthepolicies:

anincreaseinCAFEstandardsandanincreaseinthefederaltaxongasoline.Asignificantfeatureofthisstudyisthatitcomparesthecostsofthosepolicyoptionsonthebasisofaconsistentsetofassumptions--inparticular,assumptionsaboutconsumers'preferencesconcerningfueleconomyandaboutthecostsoftechnologiesforimprovingfueleconomy.HigherCAFEstandardswouldreducegasolineconsumptionbyraisingvehicles'fueleconomy,whileanincreaseinthefederalgasolinetaxwoulddiscourageconsumptionbyraisingthepriceofgasoline.

ThestudyconsiderstwoalternativedesignsfortheCAFEprogram.Thefirst,basedontheexistingdesign,wouldrequireeachmanufacturerindividuallytomeetthestandards.Undertheseconddesign,manufacturerscouldtrade"fueleconomycredits";thatis,firmsexceedingthestandardscouldsellcreditstofirmsthatwouldotherwisefallshortofthestandards.ThetradingoffueleconomycreditswouldlowerthecostsofraisingtheCAFEstandards;thisstudyestimatestheresultingsavings.

TheRationaleforDecreasingGasolineConsumption

ProponentsofhigherCAFEstandardspointoutthatthestandardsareawayofimprovingenergysecurityandreducingclimatechange.Theenergy-securitycostofgasolineconsumptioncanbemeasuredastheriskofmacroeconomiclossesfromhigheroilpricesduetodisruptionsintheworldoilsupply.SomeanalystsarguethattheUnitedStateswouldbelessvulnerabletosuchdisruptionsifitusedlessoil.（3）Theuseofmotorgasoline（whichisderivedfromoil）accountsforabout43percentofU.S.petroleumuseandabout11percentofworldpetroleumuse.

Gasolineconsumptioncancontributetoclimatechangebecauseitproducesemissionsofcarbondioxide,thepredominant"greenhousegas."Althoughclimatechangemightbenefitsomeregions,itcouldultimatelycauseextensivephysicalandeconomicdamageinothers.Thatdamageisuncertain,butitcouldincludehighersealevels;widerrangesfortropicaldiseases;disruptionstofarming,forestry,andnaturalecosystems;andgreatervariabilityandextremesofregionalweather.Carbonemissionsmakeupabout84percentofU.S.greenhousegasemissions,withmotorvehiclesaccountingforapproximately20percentofU.S.carbonemissions.

ReducinggasolineconsumptioncouldcuttheamountofoilthattheUnitedStatesconsumesandthegreenhousegasesthatitemits.But,asthisstudydiscusses,determiningwhetherornotincreasesinCAFEstandardswouldhavethepotentialtoimprovesocialwelfare--thatis,includingnotonlythevaluederivedfromthegoodsandservicesthatpeopleconsumebutalsofactorsthatdiminishthequalityoflife,suchaspollution--requiresconsideringtherolethattheexistingtaxongasolineplaysinreducinggasolineconsumption.Further,onemustconsidertheincreaseindrivingthatcouldresultfromhigherCAFEstandards（aspeopleenjoyedtheloweroperatingcostsofhigher-mileagevehicles）andtheresultingsocialcosts--suchasgreatertrafficcongestionandanincreasedriskofaccidents.

TheExistingCAFEStandardsandGasolineTaxes

TheEnergyPolicyandConservationActof1975mandatedCAFEstandards.Currently,thosestandardsare27.5milespergallon（mpg）forcarsand20.7mpgforlighttrucks（whichisduetoincreaseto22.2mpgby2007）.Allmanufacturersthatsellmorethan10,000passengervehiclesperyearintheUnitedStatesmustcomplywiththestandards.

FirmsmustcomplybyensuringthattheaveragefueleconomyofthevehiclesthattheyselleachyearmeetsorexceedstheapplicableCAFEstandard.Complianceisdeterminedseparatelyforeachfirm'sdomesticandimportedcarfleets（adistinctionnolongermadeforlighttrucks）.ProducersthatfailtomeetaCAFEstandardmusteventuallypayapenaltyof$5.50pervehicleforeverytenthofamilepergallonthattheirfleetaveragefallsshort.Firmshavesomeleewayincomplyingovertime,astheycanundercomplyinoneyearprovidedthattheyovercompliedbyanequivalentamountduringthethreeprecedingyearsorthattheyovercomplywithinthenextthreeyears.Actualcompliance,then,dependsonfirms'fleetaveragesoverseveralyears.

Thefederalgovernmentbeganlevyingataxongasolinein1932.Historically,thetaxhassupportedtheHighwayTrustFund,providingadependablesourceoffundingfortheInterstatehighwaysystem.Today,gasolinetaxreceiptsarealsoearmarkedformasstransitprojects.Thefederaltaxhasincreasedgraduallyovertheyears,fromaninitialrateof1centpergallontotoday's18.4centspergallon.Includingstateandlocaltaxesongasoline,whichaverage22.6centspergallon,theaveragetaxintheUnitedStatesisabout41centspergallon.

ThreePolicyAlternatives

IncreaseCAFEStandards

CBOhasmodeledtheeffectsofraisingthecarandlight-truckCAFEstandardsinhalf-mpgincrementsupto38mpgand31.2mpg,respectively.Thisstudyestimatestheresultingreductionsingasolineconsumption,estimatestheoverallcostsofraisingthestandardsandbreaksoutthosecostsforproducersandconsumers,andexplorestheconcomitantchangesinthecompositionofthenew-vehiclefleet.

AnincreaseinCAFEstandardswoulddirectlyaffectautomobileproducersandindirectlyaffectautomobileconsumers.Producerswouldfacehighermanufacturingcostsfromadoptingnewfuel-savingtechnologiesintheirvehiclesandareductioninprofitsiftheyadjustedtheirpricingtoincreasethesalesoftheirhigher-mileagevehicles.Whileconsumerswitharelativelystrongpreferenceforfueleconomycouldcomeoutahead,onaverageconsumerswouldfacehighervehiclepricesand,ineffect,sharecompliancecostswiththemanufacturers.

TheCAFEprogramanalyzedinthisstudydiffersfromtheactualprograminseveralways.First,whileintheorymanufacturersarefreetopayapenaltyinlieuofcomplyingwithCAFEstandards,infact,U.S.manufacturersinvariablychoosetocomply.Theydoso,accordingtoanautomobileindustryrepresentative,toavoidorreducethepossibilityoflegalorpublicrelationsramifications.Asaresult,thisstudypresumescomplianceannually.Second,becauserelevantdataareunavailable,thisanalysisdoesnotdistinguishbetweendomesticandimportedautomobiles.Thus,CBOconsiderscompliancebasedonthefueleconomyofeachfirm'sdomesticandimportedvehiclescombined.Finally,inCBO'sanalysis,firms'complianceisdefinedintermsoftheirproductioninasingleyear.TheactualCAFEprogram'sflexibilityinallowingfirmstocomplyonamultiyearbasisislargelyaresponsetotheuncertaintyinherentinsalesforecastsandrelatedproductiondecisionsandthusneednotbeafocusofCBO'sanalysis.

IncreaseCAFEStandardsandIntroduceCreditTrading

AllowingfirmstotradefueleconomycreditswouldlowerthecostsofimprovingfueleconomyforanygivenincreaseinCAFEstandards.Underacredit-tradingsystem,firmsthatexceededoneoftheCAFEstandardswouldgeneratecreditsthattheycouldselltofirmsthatfellbelowthatstandard.Thesellingandbuyingofcreditswouldbevoluntary.Acreditwouldbedenominatedingallonsofgasolinesaved,（4）anditspricedeterminedbythedynamicsofdemandandsupply.Eachfirm'scompliancewouldbebasedontheaveragefueleconomyofthevehiclesthatitsoldplusthefueleconomycreditsthatitheld.

Aggregatecostsavingswouldresultwhenautomakerswithlowermarginalcompliancecosts（theadditionalcostsofachievingincrementalincreasesinaveragefueleconomy）exceededtheCAFEstandardsandsoldtheresultingcreditstofirmswithhighermarginalcompliancecosts.Afirmwouldbuyacreditaslongasthepricewaslessthanthecostofanequivalentincreaseinthefirm'saveragefueleconomy.Essentially,firmswouldchoosethemeansofcomplyingthatwasleastexpensiveforthem.

IncreasetheFederalGasolineTax

Thegasolinetaxcouldalsobeusedasapolicytoolforreducinggasolineconsumption.Byraising