Tuesday, September 19, 2006

Fuel Economy and Its Discontents

by Tom Bozzo

A "few" words by way of follow-up on Ken's post on the flex-fuel vehicle boondoggle.

First of all, Ken is right that you'd have a damn hard time finding a domestic policy initiative more perverse than the promotion of flex-fuel vehicles. (*) It is not as if the less stringent "truck" fuel economy standards and exemption of "trucks" from the gas guzzler tax weren't already doing quite a bit to prop up the Big Three's fuel-inefficient cash cows.

On Friday night, not surprisingly, Governor Doyle took what amounted to the double pledge in the gubernatorial debate — extolling Wisconsin's future as a producer of ethanol and of GM's full-size SUVs (built at the Janesville assembly plant) in the same breath. (**) Now, there's no doubt that keeping the Janesville plant open is important for the economy of far south-central Wisconsin. But if policymakers think we can muddle our way through an era of high petroleum prices by burning ethanol with even greater abandon than we've been burning gas, we're doomed. The long-term future of Janesville also arguably would be better-assured if it produced vehicles that were more marketable in an era of high fuel prices.

Ken also suggests that I might regret much of this lengthy post from a year ago on proposed changes to the Corporate Average Fuel Economy (CAFE) standards for trucks. I actually think the post still is pretty good.

My position on CAFE is more favorable than you'll see from many economists, including some who have met regulations that they actually can tolerate. As a practical matter, it's the only game in town — even though it's been all but impossible to tighten the car CAFE standards despite high fuel prices and a broad consensus that (if not how) the U.S. additction to oil should be kicked.

But I do join what I'd think would be a sizeable majority of economists who think — assuming away the politics, of course — that fuel efficiency would be best promoted with fuel taxation. And the experience of the last couple years has made a solid case that it doesn't take infinite fuel prices to get Americans to reconsider their love of oversized vehicles with the aerodynamics of bricks (which self-interested marketers have tendentiously suggested represent innate preferences). After all, just $1 tacked on to the price of a gallon of gas has sent large SUV sales into free-fall and resuscitated economy cars as a hot market segment, all while no action to speak of was taken on the political front.

As for the politics of fuel taxes, someone could make the case that the $1 is better paid to ourselves than paid to make oil company investors and at best middlingly friendly petroleum-exporting states richer. Of course, that would take actual leadership. Devising workable plans to rebate much of the proceeds of a tax to consumers while reserving some funds for long-underfunded transportation alternatives would be a good use of reality-based technocrats' abilities.

Among CAFE's bigger problems — and the subject of the earlier post — has been the separate, less-stringent truck standard combined with regulations that encourage the classification (or reclassification) of vehicles whose function is the same as the car-based station wagons of my youth as trucks. Hence, something like the Subaru Legacy wagon is a car, while a Subaru Legacy wagon modified with additional ride height and marketed as the Subaru Outback can play a more-efficient-than-standard truck — even while giving up a couple miles per gallon to its car sibling with the same engine.

The truck CAFE changes proposed by the Bush administration purported to address the car-truck classification game by setting several standards based on vehicle size, and eliminating the ability to average the fuel economy of trucks in different size classes. This adds considerable complexity to the CAFE rules, which itself is curious given the usual Republican religion of regulatory streamlining, and should arouse suspicion.

As I said, that suspicion has three main grounds. One is that most of the improvement in standards is in the smaller size categories: those would be made identical of much closer to the car standards. This move, I'd suggested, should be regarded as a poke in the eye to foreign manufacturers' relatively efficient smaller SUVs and crossovers more than anything. Those already meet, or nearly meet, the tighter standards, and the main change would be that they couldn't be averaged with bigger trucks in their makers' model lines. Since the averaging of relatively efficient and less efficient vehicles is CAFE's quid pro quo (***), getting rid of the feature doesn't

Second, the proposed rules would allow manufacturers to meet one criterion for classifying a vehicle as a truck — that it have a flat cargo floor — with folding but not necessarily removable seats. Since most hatchbacked cars already have folding back seats to expand their cargo areas, this would make it easier for manufacturers to play the car-truck classification game with no gain to the cause of fuel economy. My earlier take still stands:
Indeed, wagons have been getting flatter-folding seats if only for the market-driven utility value of the flat cargo floor. You'd have to think that if the folding seat provision survived the rulemaking process without a clarification limiting its applicability to station wagons, only a sucker of a car maker wouldn't take appropriate steps to ensure that its mid-sized wagons met the light-truck definition. Permitting widespread cross-over of wagons into the light truck CAFE category would do a lot to subvert the cause of fuel economy.

Third, fuel economy standards for large trucks would actually be relaxed outright versus current regulations. Considering what $3 gas does to the marketability of large trucks, there's a distinct "with friends like these..." character to the proposal. Combined with the E85 boondoggle, this is a double-whammy: encouraging big flex-fuel trucks to guzzle more ethanol than they otherwise would. Perhaps Archer Daniels Midland and big corporate beneficiaries of agriculture subsidies would be the main beneficiaries of the new standards.

To conclude from the above discussion that CAFE should be chucked would, of course, be wrong. What it really says is that you'll get what you'd expect from agencies run under principles where good government occurs by accident.


(*) "Synthetic" fuel subsidies (spraying oil on coal to make a "synthetic") are right up there. Also, some elements of Medicare Part D are worse in magnitude if not necessarily intensity of perversity (i.e., having at least such plausible deniability as was needed to twist the arms of a few skeptical Republicans that they represented something saleable as "market-based reforms"). Needless to say, it doesn't hold a candle to current U.S. antiterrorism and especially promotion-of-peace-and-stability-in-the-Middle-East policies.

(**) Republican challenger Mark Green was much sillier in ripping off a United Parcel Service trademark: state government should "move at the speed of business." Oh, to have been in the audience with a format that would permit asking, "Congressman Green, what the hell does that mean?" (****) Green's performance also had a manic edge that I found disturbing.

(***) I.e., manufacturers who sell desirable economy cars can also sell bigger cars with less risk of penalties.

(****) Obviously, there are numerous situations where the public interest is that government most emphatically not move at the "speed of business." The appropriate "speed of government" may, moreover, be faster than that of business in some of those instances.
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