Werner's Blog — Opinion, Analysis, Commentary
Trump administration: Make America Guzzle Gas Again

‘Guzzling more gas won't make America's roads safer.’

At the beginning of August, the Trump Administration announced that they will roll back the fuel-efficiency standards for cars that were brought in by Barack Obama's administration in 2012. The 2012 revision to the Corporate Average Fuel Economy (CAFE) standard mandated an increase in fuel efficiency to 54.5 miles per gallon (MPG), equivalent to 4.32 liters per 100km, for new cars and trucks by 2024 (i.e., model year 2025). This improvement in fuel efficiency would help reduce greenhouse gas emissions and local pollutants significantly, and it is one of the few policies the U.S. has taken at the national level towards mitigating climate change. The ICCT chart below shows fuel efficiency progress across different countries, and how the new policy would compare to other jurisdictions.

International Council on Clean Transportation - Passenger car fuel efficiency, US proposal, 2018

Source: International Council on Clean Transportation, Aug 2, 2018 press release.
Follow the link for more information about this chart and international comparisons.

The economics of the CAFE policy for individual motorists is sensible too: higher purchase cost for better vehicles would be offset by lower fuel costs. Yet, The U.S. Environmental Protection Agency and the U.S. Transportation Department decided to cancel this rule. Elaine Chao and Andrew Wheeler, the Transportation Secretary and EPA Administrator respectively, called their statement (published in the Wall Street Journal, Make Cars Great Again. A more appropriate name would have been "Make America Guzzle Gas Again". Their statement makes five claims. First, they claim that improving fuel efficiency would make the fleet unsafe and lead to more deaths because it will prevent people from buying newer, safer cars. Second, relatedly, they argue that requiring greater fuel economy makes new vehicles unaffordably more expensive. Third, they also claim that more fuel-efficient cars are unsafer because they are lighter. Fourth, they claim that fuel efficiency gains do not lower fuel use because of a strong rebound effect. Fifth, they assert that California and other states have no right to exceed federal fuel efficiency standards. Let us look at these five claims one by one and see what experts say about them. Let's start with the last because whether California's right to press ahead with their own standard will be the most important politically.

Can California set tougher emission standards than the federal government?

The Trump Administration wants a single federal fuel efficiency standard and prevent individual states from imposing stricter standards. However, with a weakened federal standard, California and other states would press ahead with their own stricter standards. This would divide the nation into two groups: one that followed California's tough standard, and the rest of the country that followed the weak federal standard. Automakers would hate this outcome because they would still have to meet California's standard. Failing to meet the California standard would mean they could lose market share in the California-led markets. The auto industry's lobby probably got more from the Trump administration than they bargained or had hoped for. They were trying to slow down or water down the nationwide rule, but not divide the country's market in two.

What about the legal argument that California cannot go ahead alone? Under the 1970 Clean Air Act, California has a waiver that allows it to set stricter environmental standards than the rest of the country. Other states can choose to opt in and follow California's lead, and a dozen or so usually do. The waiver was a result of California's spearheading of environmental regulation before federal pollution control laws were adopted. California will be fighting the revocation of its waiver. Meredith Hankins and Nicholas Bryner tackle the legal arguments about this in their August 2 article. California's rules target tailpipe emissions (no more than 163 grams of CO2 per mile) in addition to fuel efficiency (54.5 MPG). California, concerned about air quality and greenhouse gases, will take the battle to the courts. As Hankins and Bryner explain, California has a strong legal case. The Trump Administration argues that it has jurisdiction because of the 1975 Energy Policy and Conservation Act that prevents from states enacting their own fuel-efficiency rules. But California regulates tailpipe emissions, and fuel efficiency is a proxy for that. California's primary concern is about air quality, which has been notoriously bad in the past. There are already some court decisions, such as the 2007 case by GM and Chrysler against Vermont that ruled in favour of California's right to set higher emission standards, which implicitly require higher fuel efficiency. California will fight for its right to set stricter emission standards. Ultimately, this dispute will be settled in court. This may take some time, and meanwhile car makers have to plan for whether to meet California's standard or not. This uncertainty is a self-inflicted wound for car makers.

Are fuel-efficient cars so expensive people won't replace unsafe older cars?

The Trump administration also claims that Obama's fuel efficiency standards will cost lives. According to their logic, newer cars are safer, and because more fuel-efficient cars are more costly, motorists will not purchase these cars and will continue to drive their older, unsafer cars. The safety argument is a classic case of twisted logic. It mixes one correct fact with an incorrect assertion. The correct part is that newer cars are safer, as a 2018 NHTSA Report confirms. That is easy to appreciate: better designs, better materials, new safety features such as blind-spot alert systems and automated braking systems, all help to make cars safer. Naturally, there is a cost to that. Now add the faulty argument that fuel-efficient cars are more expensive than older, less fuel-efficient cars. The Trump administration argues that there is a cost-safety trade-off that is aggravated by the perceived extra cost for higher fuel efficiency. This confuses sticker price with life-time cost of a vehicle. A report from the Consumer Federation of America, Fuel Economy Standards, finds that

"[...] newer more fuel efficient vehicles have: 1) more safety features, 2) continue a strong upward trend in sales, 3) provide cost savings that eliminate price increases, and, in fact, 4) sell better as their fuel efficiency increases.

Better fuel efficiency and higher safety go hand in hand. When automakers will change to greater use of carbon fibers, safety improves because carbon fibers are stronger than steel and aluminum, while lower weight improves fuel economy. This is a win-win for consumers.

Are fuel-efficient cars unsafer because they are lighter?

A further argument is that fuel-efficient cars are less safe in accidents because they are smaller and lighter. The argument is based on the assumption that bigger and heavier cars are safer than smaller and lighter cars, and thus anything that makes people choose smaller cars will make them more likely to die in a motor vehicle accident. I call this argument "battle tank logic": the only "safe" vehicle on a road is a battle tank, as it will always prevail in a collision. The US NHTSA held a symposium on mass/size and safety in 2013, and researchers found that the estimated effects of weight reduction on fatalities are small and statistically insignificant. Weight is simply not the most decisive factor. If drivers of heavy vehicles are more reckless than drivers of lighter vehicles, than you could imagine the effect even going the opposite way. As Brad Plumer pointed out in his article Trump Officials Link Fuel Economy Rules to Deadly Crashes, there are two competing effects. Reduced weight itself reduces accident severity. However, greater weight differences increase accident severity. So the question is about if the vehicle fleet is becoming more homogeneous in weight, or less so. It turns out that automakers are reducing the weight of their heaviest SUVs because of changes in materials, and this compresses the weight distribution and makes our roads safer.

Are fuel efficiency gains offset by increased driving?

Yet another claim is that fuel efficiency gains are offset by increased driving. Fuel cost savings from better fuel economy are spent on more gas purchases for more driving. Economists know this as the rebound effect, and it has been much studied empirically. The Trump administration argues that the rebound effect is 100% or even more (which then is known as the Jevons paradox). Theoretically, a few economists such as Harry Saunders claimed that efficiency gains facilitate more economic growth, leading to a high rebound effect. Ultimately it is an empirical question. It requires estimating all three types of the rebound effect: (1) the direct rebound effect due to substitution (driving becomes cheaper, so fuel use goes up); (2) the indirect rebound effect due to higher income (driving is cheaper, and savings are spent on other energy-using activities); and (3) the macroeconomic effect as cheaper driving stimulates economic growth. Empirical evidence on the direct effect is very solid. A survey by Sorrell et al. (2009) concluded:

For personal automotive transport, household heating and household cooling in OECD countries, the mean value of the long-run direct rebound effect is likely to be less than 30% and may be closer to 10% for transport. Moreover, the effect is expected to decline in the future as demand saturates and income increases.

A more recent survey by Gillingham et al. (2016) takes all effects into account and concludes that "the existing literature does not support claims that energy efficiency gains will be reversed by the rebound effect." The difficulty is estimating the macroeconomic rebound effect, driven by sectoral reallocation of resources, induced innovation, and a fiscal-multiplier effect. The best estimates we have to date on the size of the macroeconomic effect are in the neighbourhood of 20-30%. All effects combined, this puts it still well below 100%. The rebound effect story sold by the Trump administration is far from standing on sound empirical footing.

Even if the rebound effect was indeed a big empirical concern, there is an easy cure. Increasing the fuel tax would eliminate cost savings from greater fuel efficiency. The revenue from such fuel taxes could then be used to alleviate the (possibly) higher cost of more fuel efficient cars. In short, whether the rebound effect is small or large doesn't matter much as long as there is a willingness to use fuel taxes as a corrective measure.

Will greater fuel efficiency make cars much more expensive?

Lastly, there is the argument that fuel-efficient cars are more expensive. This argument is closely linked to the earlier point about the cost-safety link. Certainly, better technology adds extra cost. But how much? The Trump administration claims that the 2025 standards will cost abut $1,800-$2,300 more. The International Council on Clean Transportation finds that these estimates

[...] are 3-4 times the ICCT's own estimate of $550, based on existing and emerging technologies. They are also about twice the costs estimated by EPA ($894) and NHTSA ($1,245) in their 2016 Technical Assessment Report.

The inflated cost estimates in turn justify the hypothesis that higher cost will reduce new vehicle purchases. In fact, most efficiency gains will not come from buying battery-electric vehicles (which remain expensive) but from changes to materials (reducing weight) and improving internal combustion engine technology (hybridization).

So why Make America Guzzle Gas Again?

It has been noted that the Trump Administration is strongly anti-regulation. They dislike any regulation that constrains what they think of as "free enterprise". The president himself has made it clear that he thinks that climate change is not real and just a "canard" or a "hoax" (see here). Therefore, using more gas is good for business, and nothing needs to be done to mitigate climate change and reduce fossil fuel use. The blatant scientific ignorance of Trump and his acolytes is all too apparent. Meanwhile, it can only be hoped that California continues its enlightened policies towards weaning our society off fossil fuels, one step at a time.

The road towards making vehicles more fuel efficient combines advances in material science that make vehicles lighter (which requires less energy to propel them) and use hybrid-electric drive trains. The 2012 CAFE standards are perhaps ambitious, but far from impossible. Of course, standards are less efficient than using the price mechanism. Raising gasoline taxes would be more effective economically, but remains a political no-go area in the United States. The CAFE rollback will leave the United States with more air pollution, but not with safer roads. The claims in support of the rollback lack a sound scientific basis.

The International Council on Clean Transportation agrees. In their press release in response to the announcement they state: The Trump Administration's vehicle efficiency proposal is not supported by underlying data and runs counter to global trends.

So is the Trump Administration doing this to please US automakers who may fear losing out on innovation from overseas? Whatever the motives are, they may backfire. Not only does the rollback risk dividing the United States into two separate automotive markets, reduced incentives for US automakers to innovate may ultimately make them less competitive, not more. Their short-term gains will come at long-term costs.

What should Canada do?

Historically, Canada has followed the US lead on fuel economy standards because our automobile market is highly integrated across the border. This made good sense. Without intervention, Canada's 2025 standards automatically align with the US standards. Canada would have to explicitly move to adopt separate standards. Should Canada do that? If California and the group of 19 states that challenge the Trump policy move ahead with their own rules, Canada should join them and align their policies with these leaders, not the laggards. The benefits for Canada outweigh the costs as automakers will essentially have to align with the stricter California rules, if they like it or not. In any case, the European Union is considering stricter post-2020 standards for new vehicles as well, and Canada should not fall behind. Even China is pressing ahead with new regulations because it allows the country to focus innovation, as Greg Dotson points out in his article Why EPA's U-turn on auto efficiency rules gives China the upper hand.

What should auto makers do?

The automobile manufacturers who lobbied for the relaxtion of CAFE standards were probably surprised that the Trump administration gave them more than they asked for. Lobbyists always overstate their case: to get what you really want, you have to ask for more than what you want. Their lobby efforts may have backfired as now they face the specter of a divided automobile market in North America. If Calfifornia and the group of 19 US states wins their court battle to set their own stricter standard, automakers face a quagmire of their own making. Automakers should not rely on the Trump administration carrying the day. Political landscapes change, but climate change will be with us and thus the need to reduce greenhouse gases. And as cities grow, per-capita fuel consumption needs to decline to keep local air pollution in check. Automakers balk at investing too heavily into fuel-efficient cars if they sense insufficient demand for them. The problem, ultimately, is that fuel prices in the U.S. are too low compared by international standards (see my 1 March 2015 blog). Motorists need a stronger financial incentive to buy more fuel-efficient cars. Perhaps auto makers should appreciate the fact that higher gasoline taxes are actually good for business for them, and allow for more flexibility than standards.

How trustworthy are fuel economy standards anyhow?

The fuel economy measures used by regulators use specific test cycles that have been criticized for being unrealistic. The empirical evidence says they are indeed increasingly questionable. However, as long as improvements are measured consistently using global harmonized standards, these numbers are still useful because they track changes over time in a consistent manner. Nevertheless, these biased measures are problematic (1) when determining your expected fuel cost when you buy a new vehicle, or (2) when computing environmental impacts of driving because they underestimate the true fuel use. What is alarming is that research by the ICCT has found a widening gap between real-world fuel efficiency and official fuel efficiency measures, in particular in Europe. This growing gap means that the advertised fuel economy improvements are less than what they claim to be. At least the US FuelEconomy.gov web site tries to provide some real-world adjustments, but this information is still quite incomplete. Germany's SpritMonitor.de site works much better because it has thousands of participants who report their real-life fuel use. This crowd-sourced information is much more reliable than official figures from manufacturers. At the very least, regulators should improve on standardized laboratory test and develop tools for predicting realistic on-road performance. Meanwhile, motorists should use caution when looking at fuel consumption numbers advertised by automakers. Some improvements are being made to testing. In 2015, Canada adopted a 5-cycle testing procedure that better approximates typical driving conditions that allows for driving in cold weather, using air conditioning, and using more realistic high speed and quick acceleration. As a result, Canadian fuel economy ratings are probably more reliable than others, and certainly more reliable than what manufacturers offer as information. Check out your vehicle's ratings in the Natural Resources Canada 2018 Fuel Consumption Guide. (N.B.: the five tests are averaged into two published "city" and "highway" numbers.) Before you buy a new vehicle, spend some time comparing fuel efficiency ratings.

Further readings:

Posted on Saturday, August 18, 2018 at 08:18 — #Transportation | #US
© 2024  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]