EPA’s New Rating System Encourages Poor Decisions

COMMENTARY Energy Economics

EPA’s New Rating System Encourages Poor Decisions

Sep 1st, 2010 1 min read
David W. Kreutzer, Ph.D.

Senior Research Fellow, Labor Markets and Trade

David Kreutzer researches and writes about labor markets and trade.

The EPA recently proposed a new grading requirement for new car stickers. The A–D grading system would rank cars according to their fuel efficiency and carbon dioxide emissions to help consumers make better choices. In the new grading scheme, the Ford Focus gets a B and the Toyota Prius gets an A–. What does this tell consumers? As it turns out, not much.

Already on the new car sticker are two more useful bits of information. The first is the EPA’s estimate of annual fuel cost. For the Focus it is $1,435 per year, and for the Prius it is $804 per year. The second bit of information is the price of the car. Though critical to virtually every consumer, the EPA gives no weight at all to the purchase cost in its grading system. If it did, the grades would be different.

According to Edmunds.com the expected price, net of discounts, in Washington, D.C., is $14,731 for a Focus SE and $22,451 for the base model Prius. Financing these cars for five years at 5 percent gives a monthly payment of $278 for the Focus and $424 for the Prius. The difference in cost works out to about $1,750 more per year for the Prius. Since the Prius saves only $631 in gasoline per year, the Prius costs the consumer $1,121 more per year.

But, some would complain, this does not take into account the external cost of the carbon dioxide emissions as they warm the world. Without getting into the global warming debate, we note that those who are worried about carbon dioxide emissions and who make estimates of the costs get values of between about $5 and $30 per ton. Since the EPA estimates that driving a Focus emits 2.9 tons per year more than driving a Prius, the additional carbon dioxide has a cost of $14.50 to $90.00 per year. Even with this bit of environmental bookkeeping, the Prius is still over a $1,000 per year more costly.

According to the EPA, its new scheme is necessary because the information on fuel use is too difficult for consumers to understand. That seems a very dubious proposition. But suppose the EPA has a target audience too dimwitted to determine whether or not $1,435 is more than $804. It is unlikely this group would be better able to compare prices or to calculate differences in monthly payments. If the EPA is trying to help these consumers, the grading system flunks spectacularly, as it can give a higher grade to worse deal.

If, on the other hand, the EPA grading scheme is intended to funnel consumers to the preferred choices of environmental wonks, it makes perfect sense.

This piece originally appeared in The Daily Signal