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

1、The Economic Costs of Fuel Economy Standards Versus a Gasoline TaxThe Economic Costs of Fuel Economy Standards Versus a Gasoline TaxCHAPTER1IntroductionRecently, there has been much discussion, in the Congress, in the press, and among public interest groups, about fuel economy standards for cars and

2、 light trucks. The average fuel economy of new vehicles has been declining for more than a decade, as consumers have increasingly switched from cars to trucks or more powerful cars. At the same time, there has been increasing concern about the energy security of the U.S. economy and about the role o

3、f carbon dioxide emissions in global climate change.(1) Proponents of higher fuel economy standards hope that reducing gasoline consumption will help address those concerns. A recent Congressional Budget Office (CBO) study provided a qualitative comparison of the effects of three policies that could

4、 decrease gasoline consumption: an increase in the corporate average fuel economy (CAFE) standards that govern passenger vehicles, an increase in the federal tax on gasoline, and a cap-and-trade program for the carbon dioxide emissions that result when gasoline is burned.(2) That study weighed those

5、 policies against four major criteria: whether they would minimize costs to producers and consumers; how reliably they would achieve a given reduction in gasoline use; what implications they would have for the safety of driving; and what effects they would have on factors such as traffic congestion,

6、 requirements for highway construction, and emissions of air pollutants other than carbon dioxide. This study extends CBOs previous work by providing a quantitative comparison of the costs that producers and consumers would bear as a result of two of the policies: an increase in CAFE standards and a

7、n increase in the federal tax on gasoline. A significant feature of this study is that it compares the costs of those policy options on the basis of a consistent set of assumptions-in particular, assumptions about consumers preferences concerning fuel economy and about the costs of technologies for

8、improving fuel economy. Higher CAFE standards would reduce gasoline consumption by raising vehicles fuel economy, while an increase in the federal gasoline tax would discourage consumption by raising the price of gasoline. The study considers two alternative designs for the CAFE program. The first,

9、based on the existing design, would require each manufacturer individually to meet the standards. Under the second design, manufacturers could trade fuel economy credits; that is, firms exceeding the standards could sell credits to firms that would otherwise fall short of the standards. The trading

10、of fuel economy credits would lower the costs of raising the CAFE standards; this study estimates the resulting savings. The Rationale for Decreasing Gasoline Consumption Proponents of higher CAFE standards point out that the standards are a way of improving energy security and reducing climate chan

11、ge. The energy-security cost of gasoline consumption can be measured as the risk of macroeconomic losses from higher oil prices due to disruptions in the world oil supply. Some analysts argue that the United States would be less vulnerable to such disruptions if it used less oil.(3) The use of motor

12、 gasoline (which is derived from oil) accounts for about 43 percent of U.S. petroleum use and about 11 percent of world petroleum use. Gasoline consumption can contribute to climate change because it produces emissions of carbon dioxide, the predominant greenhouse gas. Although climate change might

13、benefit some regions, it could ultimately cause extensive physical and economic damage in others. That damage is uncertain, but it could include higher sea levels; wider ranges for tropical diseases; disruptions to farming, forestry, and natural ecosystems; and greater variability and extremes of re

14、gional weather. Carbon emissions make up about 84 percent of U.S. greenhouse gas emissions, with motor vehicles accounting for approximately 20 percent of U.S. carbon emissions. Reducing gasoline consumption could cut the amount of oil that the United States consumes and the greenhouse gases that it

15、 emits. But, as this study discusses, determining whether or not increases in CAFE standards would have the potential to improve social welfare-that is, including not only the value derived from the goods and services that people consume but also factors that diminish the quality of life, such as po

16、llution-requires considering the role that the existing tax on gasoline plays in reducing gasoline consumption. Further, one must consider the increase in driving that could result from higher CAFE standards (as people enjoyed the lower operating costs of higher-mileage vehicles) and the resulting s

17、ocial costs-such as greater traffic congestion and an increased risk of accidents. The Existing CAFE Standards and Gasoline Taxes The Energy Policy and Conservation Act of 1975 mandated CAFE standards. Currently, those standards are 27.5 miles per gallon (mpg) for cars and 20.7 mpg for light trucks

18、(which is due to increase to 22.2 mpg by 2007). All manufacturers that sell more than 10,000 passenger vehicles per year in the United States must comply with the standards. Firms must comply by ensuring that the average fuel economy of the vehicles that they sell each year meets or exceeds the appl

19、icable CAFE standard. Compliance is determined separately for each firms domestic and imported car fleets (a distinction no longer made for light trucks). Producers that fail to meet a CAFE standard must eventually pay a penalty of $5.50 per vehicle for every tenth of a mile per gallon that their fl

20、eet average falls short. Firms have some leeway in complying over time, as they can undercomply in one year provided that they overcomplied by an equivalent amount during the three preceding years or that they overcomply within the next three years. Actual compliance, then, depends on firms fleet av

21、erages over several years. The federal government began levying a tax on gasoline in 1932. Historically, the tax has supported the Highway Trust Fund, providing a dependable source of funding for the Interstate highway system. Today, gasoline tax receipts are also earmarked for mass transit projects

22、. The federal tax has increased gradually over the years, from an initial rate of 1 cent per gallon to todays 18.4 cents per gallon. Including state and local taxes on gasoline, which average 22.6 cents per gallon, the average tax in the United States is about 41 cents per gallon. Three Policy Alter

23、nativesIncrease CAFE StandardsCBO has modeled the effects of raising the car and light-truck CAFE standards in half-mpg increments up to 38 mpg and 31.2 mpg, respectively. This study estimates the resulting reductions in gasoline consumption, estimates the overall costs of raising the standards and

24、breaks out those costs for producers and consumers, and explores the concomitant changes in the composition of the new-vehicle fleet. An increase in CAFE standards would directly affect automobile producers and indirectly affect automobile consumers. Producers would face higher manufacturing costs f

25、rom adopting new fuel-saving technologies in their vehicles and a reduction in profits if they adjusted their pricing to increase the sales of their higher-mileage vehicles. While consumers with a relatively strong preference for fuel economy could come out ahead, on average consumers would face hig

26、her vehicle prices and, in effect, share compliance costs with the manufacturers. The CAFE program analyzed in this study differs from the actual program in several ways. First, while in theory manufacturers are free to pay a penalty in lieu of complying with CAFE standards, in fact, U.S. manufactur

27、ers 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. As a result, this study presumes compliance annually. Second, because relevant data are unavailable, this analysis does not

28、distinguish between domestic and imported automobiles. Thus, CBO considers compliance based on the fuel economy of each firms domestic and imported vehicles combined. Finally, in CBOs analysis, firms compliance is defined in terms of their production in a single year. The actual CAFE programs flexib

29、ility in allowing firms to comply on a multiyear basis is largely a response to the uncertainty inherent in sales forecasts and related production decisions and thus need not be a focus of CBOs analysis. Increase CAFE Standards and Introduce Credit TradingAllowing firms to trade fuel economy credits

30、 would lower the costs of improving fuel economy for any given increase in CAFE standards. Under a credit-trading system, firms that exceeded one of the CAFE standards would generate credits that they could sell to firms that fell below that standard. The selling and buying of credits would be volun

31、tary. A credit would be denominated in gallons of gasoline saved,(4) and its price determined by the dynamics of demand and supply. Each firms compliance would be based on the average fuel economy of the vehicles that it sold plus the fuel economy credits that it held. Aggregate cost savings would r

32、esult when automakers with lower marginal compliance costs (the additional costs of achieving incremental increases in average fuel economy) exceeded the CAFE standards and sold the resulting credits to firms with higher marginal compliance costs. A firm would buy a credit as long as the price was l

33、ess than the cost of an equivalent increase in the firms average fuel economy. Essentially, firms would choose the means of complying that was least expensive for them. Increase the Federal Gasoline TaxThe gasoline tax could also be used as a policy tool for reducing gasoline consumption. By raising