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«Ben Steiner Professor Denise L. Mauzerall May 10, 2006 Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond Table of Contents Executive ...»

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Achieving Vehicle Fuel Efficiency: The CAFE Standards and


Abstract: As a series of political objectives converge and call for enhanced domestic automobile

fuel efficiency, it is time to reassess the United States Corporate Average Fuel Economy (CAFE)

standards and compare future options for limiting gasoline consumption. Unlike the situation in

1975 when CAFE standards were first imposed to limit America’s oil dependence, now the

greatest motive is to curb greenhouse gas emissions. Because climate change is necessarily a global issue, the developing world must work with the United States to enhance automobile fuel efficiency as part of a greater effort to promote sustainable development. This paper uses China to demonstrate the challenges faced by developing countries and also studies the particular opportunities China represents as the world’s fastest growing automobile market. The paper concludes with four main recommendations for the United States and China: rework minimum fuel efficiency standards, raise the gasoline tax, implement a feebate system and create a binding bilateral agreement between the United States and China to achieve these policies.

Ben Steiner Professor Denise L. Mauzerall May 10, 2006 Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond Table of Contents Executive Summary iii The Case for Increased Fuel Efficiency 1 Current State of United States Automobile Fuel Efficiency 3 CAFE Regulation and Other Policies 3 Problems with Current Regulation 6 Current State of Chinese Automobile Fuel Efficiency 10 Policy Recommendations 11 Rework Fuel Efficiency Standards 12 Raise Gas Tax 15 Implement Feebate System 18 Commit to Bilateral Agreement 19 Sources I ii Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond Executive Summary Automobile fuel efficiency is one of the few issues in the greater global warming debate where stricter regulations are politically feasible because of the convergence of other policy goals. In particular, the United States’ massive reliance on foreign oil and the coming crunch of global oil supplies have politicians concerned about energy security calling for increased automobile fuel efficiency. In addition, environmentalists have long sought more efficient vehicles and there is also a growing awareness among segments of the population of the threats caused by increased greenhouse gas emissions. Polls consistently show that the US population supports higher fuel efficiency rates by a two to one ratio and that there is growing support for an increase in the federal gas tax even as sales of gas-guzzling vehicles remain high. Further, fuel efficiency is one of the few areas in the climate change debate where the government has a history of regulation that can easily be relied upon as a basis for new standards. Finally, the transportation sector accounts for 23% of carbon dioxide emissions worldwide, so an increase in automobile fuel efficiency would significantly affect carbon concentration in the atmosphere.

The current fuel efficiency situation in the United States is largely defined by the Energy Policy and Conservation Act, which established Corporate Average Fuel Economy (CAFE) standards for 1978-1981 and 1985 with the goal of doubling total fleet fuel efficiency by 1985 at

27.5 mpg. Unwilling to impose a gas tax in addition to already high oil prices in the midst of the Arab Oil Embargo, the government chose instead to mandate minimum fleet fuel efficiency levels. The NHTSA which currently administers the CAFE standards, defines them as the “sales weighted average fuel economy, expressed in miles per gallon, of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating of 8,500 lbs or less, manufactured for sale in the United States, for any model year.” (NHTSA, 2006) Unfortunately, these standards have not been significantly raised since 1984 and are in need of reform.

On the other hand, China first passed fuel efficiency regulations in 2004 but the laws are already stricter than those on the books in the United States. The Chinese regulations set varying standards for automobiles in different weight classes that by 2008 will be as high as 43 mpg for

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the lightest vehicles. Unlike the CAFE standards, the Chinese regulations mandate that all vehicles as opposed to all fleets meet their weight class’ standard. Though these standards are obviously a step in the right direction, they are still lower than levels in the EU and Japan and should be reformed along with the American regulations. The Chinese automobile market is predicted to grow to be the world’s largest by 2020, making China’s current choices on automobile fuel efficiency standards among the most important in determining atmospheric carbon concentrations over the next century.

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efficiency in both the United States and China. First, fuel efficiency standards in both countries should be increased to 36 mpg by 2015 (around a 40% increase for both countries) as outlined in the 2002 McCain-Kerry fuel efficiency proposals. This should be a fleet wide standard with tradable credits so improvements can occur at least cost.

Second, though politically difficult to achieve in both the United States and China, a higher gas tax would curtail unnecessary driving and reduce fuel consumption while raising automobile fuel efficiency. This paper recommends that both the United States and China impose gas taxes so that the average tax burden per gallon of gasoline is $1.20.

This is the most economically efficient option as it would incorporate the externality costs of gasoline consumption. Third, both nations should implement a feebate system that subsidizes highly fuel efficiency vehicles with taxes raised on low emissions ones, eliminating market failure by bring total gasoline lifecycle costs to the fore-market.

Finally, the United States and China should commit to a bilateral agreement which obligates both countries to implement these policies in unison and so solves the free rider problem that each individual country faces in its effort to curb automobile carbon emissions.

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The Case for Increased Fuel Efficiency The challenge of sustainable development is to “meet the needs of the present without compromising the ability of future generations to meet their own needs" (Brundtland Report, 1987). This is achieved by linking the processes of economic growth and social reform with the constraint of environmental protection, which form the three "interdependent and mutually reinforcing pillars" of the theory, to ensure that progress today does not come at the cost of environmental degradation tomorrow (World Summit, 2005). Unfortunately, the achievement of these three components is increasingly in opposition. As more of the world’s inhabitants are able to attain a quality of life previously available only in the developed world, the strain on international resources is growing. Fundamentally, the world is stuck between a commitment to support the development of the least advantaged countries and a practical need to ensure the protection of the environment and its natural resources for years to come.

Most central to the tenets of sustainable development is the idea that the earth cannot support economic growth worldwide as it has been practiced in the developed world since the industrial revolution. Instead, the population of the world will need to start making hard decisions about who should be able to grow, how and at what cost? These questions, in turn, relate back to greater issues of justice. Intergenerationally, how much should future disutility be weighed against current utility and how much can we rely on technological progress to eliminate the problems we are pushing off for a future generation to solve? Intra-societally, how should the benefits of development be allocated within a nation and inter-societally, how can we limit the use of environmentally damaging technologies in the developing world when the developed world used and is continuing to use those same technologies to generate growth? This paper aims to tackle a part of one of these problems: how does the world limit automobile greenhouse gas emissions while promoting increased automobile ownership in the developing world?

One of the gravest threats to sustainable development worldwide is the growing presence of greenhouse gases in the atmosphere. Since 1955 carbon emissions have more than tripled from slightly less than two billion tons emitted per year to greater than 7 billion tons annually. These rates are expected to double by 2055 in the absence of limiting action (Socolow, 2006). As a Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond result of these emissions, the concentration of CO2 in the atmosphere has risen from 310 parts per million (ppm) to 380 ppm in the last 50 years and will rise to 850 ppm based on current estimates by 2055 (Socolow, 2006). Global temperatures have already risen around one degree Celsius and could rise an additional 10 degrees within the next half-century because of this dramatic increase of carbon in the Earth’s atmosphere (Socolow, 2006).

The United States is the greatest culprit, releasing a quarter of the world’s CO2 emissions despite representing only 5% of its citizens. Ninety-eight percent of these CO2 emissions can be traced to the burning of fossil fuels. In the United States fossil fuels are used for transportation (32%), industrial processes (32%) and the commercial and residential sectors (36%) (Energy Information Administration, 1998). Internationally, transportation is responsible for 23% of greenhouse gas emissions, but this value is expected to rise as cars become economically viable for millions of citizens of developing countries (Socolow, 2006). Therefore, a reduction in automobile carbon emissions would significantly impact national and global greenhouse gas emissions and is certainly an important part of the management of global climate change.

There are a number of ways to limit automobile carbon emissions, the most effective being the introduction of cars which are driven with non-carbon containing or carbon neutral energy sources. But barring unpredicted scientific breakthroughs, the internal combustion engine with the possible addition of hybrid technology will likely remain the most widely used motor of individual transportation for the next two decades, necessitating continued reliance on fossil fuels (Socolow, 2006). This paper aims to find the right mix of policy incentives to make consumers and producers willing to drive and produce more fuel efficient automobiles as defined by reducing carbon dioxide emissions per vehicle-mile.

Automobile fuel efficiency is a good place to begin the effort to limit greenhouse gas emissions because several different policy objectives independent of climate change push for decreased consumption of oil. In particular, politicians concerned about the national security implications of the massive importation of Middle Eastern oil, economists concerned about the importation’s effect on the current account deficit, and public health experts concerned about the effect of automobile exhaust on cancer rates and respiratory disease all recognize harms in the nation’s consumption of oil (Collina, 2005). For these reasons, the public has consistently Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond supported efforts to mandate higher fuel efficiency by a two to one ratio even as they purchase inefficient gas-guzzling vehicles (Public Citizen, 2002). Finally, fuel efficiency is one of the few areas in the climate change debate where the government has a history of regulation which it can rely upon to legitimize its call for fuel efficiency and utilize as a mechanism of change.

Current State of US Automobile Fuel Efficiency CAFE Regulation and Other Policies The Arab embargo of 1973-1975 and the consequent trebling of the price of crude oil first displayed America’s reliance on cheap foreign oil. A net oil producer for most of the twentieth century, America developed an appetite for large, over-powered and gas-guzzling vehicles. New car fuel efficiency had declined from a high of 14.8 miles per gallon (mpg) in 1967 to 12.9 mpg in 1974 as America’s domestic oil production was gradually replaced by Middle Eastern imports (Bamberger, 2005). When the Arab exporters turned off the tap to protest the West’s support of Israel in the Yom Kippur, American consumers faced skyrocketing gasoline prices, mile-long queues at gas stations and a new economic evil in stagflation.

America and its allies responded with a variety of largely permanent measures to reduce oil dependency. In 1974 Richard Nixon apointed William Simon the nation’s first “energy czar” and in 1977 a cabinet level Department of Energy was created. Efforts were split between finding new sources of dependable production, largely met through offshore drilling in the North Sea and enhanced recovery of old oil fields, and maximizing end-use efficiency. The federal government launched a sophisticated advertising campaign to promote more efficient energy use, led by the Advertising Council tagline “Don’t be Fuelish.” The National Highway Traffic Safety Administration (NHTSA) targeted automobile fuel efficiency by immediately reducing the maximum speed on the nation’s highways to 55 miles per hour, unintentionally reducing traffic fatalities 23% between 1973 and 1974 (Bamberger, 2005). Though this national speed limit was eventually repealed in 1995, a more important effort to mandate minimum fuel efficiency levels for the nation’s automobile fleet continues till today.

Achieving Vehicle Fuel Efficiency: The CAFE Standards and Beyond The Energy Policy and Conservation Act established Corporate Average Fuel Economy (CAFE) standards for 1978-1981 and 1985 with the goal of doubling total fleet fuel efficiency by 1985 at 27.5 mpg (NHTSA, 2006). Unwilling to impose a gasoline tax on top of already high oil prices, Congress chose instead to mandate minimum fleet fuel efficiency levels. The NHTSA which currently administers the CAFE standards, defines them as the “sales weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating (gvwr) of 8,500 lbs or less, manufactured for sale in the United States, for any model year” (NHTSA, 2006).

Minimum fuel efficiency standards for cars and light cars are set at different levels and so the definitions of these two types of automobiles are of critical importance. “A passenger car is any 4-wheel vehicle not designed for off-road use that is manufactured primarily for use in transporting 10 people or less. A light truck is any 4-wheel vehicle which is designed for off-road operation (has 4-wheel drive or is more than 6,000 lbs. gvwr and has physical features consistent

with those of a truck); or which is designed to perform at least one of the following tasks:

transport more than 10 people; provide temporary housing; provide open bed transport; permit greater cargo-carrying capacity than passenger-carrying volume; or with the use of tools can be converted to an open bed vehicle by removal of rear seats to form a flat continuous floor” (NHTSA, 2006). This definition clearly leaves great discretion at the hands of the manufacturer to define its vehicles as trucks or cars. Many sport utility vehicles (SUVs) produced today which never leave the suburbs are classified as light trucks, allowing their manufacturers far greater leeway to meet CAFE standards.

These standards have changed little since the 1985 goal date of the original legislation.

Currently each manufacturer’s fleet of cars must meet at least 27.5 mpg, while light trucks have to meet a standard of 20.7 mpg, rising to 22.2 by 2008. The mandated fuel efficiency level for cars has been stable since 1989 as decreed by Congress, after dipping slightly down to 26.5 mpg in the late 1980s when Reagan era economists pushed for greater free market control. On the other hand, light truck standards have been slowly creeping up since the original 1975 legislation at the discretion of the NHTSA which is ordered to place them at the “maximum feasible level” as defined by Congress to take into “consideration four factors: technological feasibility;

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