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August 30, 2005

Andrew Samwick Says: Don't Linger in this CAFE

Andrew Samwick gives a very good version of the economists' rant against the CAFE standards. I, too, was abashed to discover that my Subaru Legacy is an "SUV."

From Congress's point of view, CAFE is useful because it keeps people from thinking that Congress is taxing them. What CAFE does is to impose a tax on fuel-inefficient vehicles which is then rebated as a subsidy on fuel-efficient vehicles. This tax, however, is collected and then rebated by the auto manufacturers themselves--they reduce prices on fuel-efficient vehicles below what they would otherwise be in order to meet their CAFE targets, and make it up by raising margins on fuel-inefficient vehicles.

Thus Congress is far from the scene of the tax. The problem is that, as Andrew says, it is a lousy tax to be levying. What we want to tax is gasoline usage, and taxing fuel-inefficient vehicles is a lousy substitute.

Twelve years ago the Clinton administration proposed such a tax--an energy usage ("BTU") tax. Think how much better off we would be on how many dimensions if that tax had been passed back in 1993.

Vox Baby: Don't Linger in this CAFE: ...driving an SUV... a vehicle subject to the lower standards of fuel economy for light trucks under the CAFE regulations. Like many of my liberal friends in rural New England, I drive a Subaru Outback. I had no idea at the time I purchased it that it qualifies as a light truck.... I think the CAFE standards are lunacy as currently conceived, and I'll cite three issues. The first issue, as I've alluded to earlier, is that the problem we care about is total usage of gasoline. Total use is the amount of miles driven divided by fuel economy. CAFE standards, at best, address fuel economy, but they provide no incentive to economize on the number of miles driven. This is why a gas tax is better--it allows people to decide how they want to conserve on fuel usage, fewer miles or fewer gallons per mile.

The second issue is that the CAFE standards operate at the level of a fleet of vehicles produced by one manufacturer.... Why provide an incentive for Toyota to make larger cars just because it happens to make good small cars? If the objective is to regulate the average fuel economy of all cars on the road, then there ought to be a tradable permit system established. We would get a better variety of cars on the market, though not at any one particular dealer. Pure welfare gain.

The third issue is that the CAFE standards operate in a hidden fashion, and as a result there have been plenty of abuses. CAFE standards are negotiated behind the scenes with a few entities (the manufacturers). They lobby for complexity and then exploit loopholes, like the different standards for cars and light trucks or, as I fear, all these new flavors of SUV. Lack of transparency is the enabler of bad policy. Is there anything more transparent than a gas tax at the pump?

Keep it simple. Scrap CAFE, set a higher gas tax, and return the aggregate revenues from that gas tax through lower income taxes in a progressive fashion.

Posted by DeLong at August 30, 2005 03:14 PM