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CAFE standards are much better than high gasoline prices.

The question came up at lunch two weeks ago and again today in Paul Krugman's blog. Has the increase in average fuel economy of automobiles and light trucks been driven by higher fuel prices or the federal CAFE (Corporate Average Fuel Economy) standards?  Here's the answer and the evidence. 

In 2002 the National Research Council in Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards published these conclusions (at 15):

Figure 2.2 suggests that the CAFE standards were not generally a constraint for imported vehicles, at least until 1995, if then. Domestic manufacturers, on the other hand, made substantial fuel economy gains in line with what was required by the CAFE standards. The fuel economy numbers for new domestic passenger cars and light trucks over the past 25 years closely follow the standards. For foreign manufacturers, the standards appear to have served more as a floor toward which their fuel economy descended in the 1990s.

When in 1980-81 inflation-adjusted motor fuel prices were in the same high range they are now, new vehicles purchased were on average more fuel efficient--even getting ahead of the CAFE standards by about a year.  (Sorry I can't reproduce Figure 2.2 here; please follow the link.)  [Image of Figure 2-2 inserted 2 Feb. 2009.]  Then gasoline prices went down about as fast as they went up, and by early 1986, real pump prices were below where they had been in 1978.  We continued to have cheap gas for 17 years until 2003. 

From Energy Information Agency

Yet new domestic vehicle fleet economy did not go down because the CAFE standards were providing a floor. 

I agree that at some high level fuel prices will drive people to buying more efficient vehicles, but we don't know what price level is required to achieve which level of fuel demand reduction.  And, as we saw in 1980-81--and are seeing again now--prices high enough to have a substantial effect on new car preferences also have a ruinous effect on businesses and people's lives by crowding other goods and services out of people's budgets.  This is why I cringe when I hear it said that high petroleum product prices are the only way to decrease our use of petroleum, or even that manipulating prices is the best way to achieve that goal. 

For at least 20 years, we consumed much less petroleum than we would have without the CAFE standards, and we did it without ruinously high prices and giant transfers of American wealth to oil-producing nations.  We can have less consumption and low prices at the same time.  We've done it already.  CAFE standards were a brilliantly successful energy policy.  We should do more energy demand regulation like this and stop throwing federal cash and tax incentives at the supply side. 

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Reader Comments (1)

One concern is that auto makers will produce much lighter cars in order to meet the CAFE regulations. Lighter cars are great for mpg but not so great in case of an accident.

Enterprise Car Sales

November 4, 2011 | Unregistered CommenterJackie

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