March 14, 2016 | Commentary on Economic Freedom, Regulation

Fuel Economy Standards Hurt the Middle Class

Presidential candidates from both parties have vowed to help the middle class in a variety of ways. Unfortunately, many of their ideas, such as higher tariffs and corporate welfare, would do more harm than good.

Here's one idea that would actually help: Stop forcing automakers to resort to ever more extreme and expensive techniques to increase gas mileage. The regulatory push of the last several years has added at least $3,800 to the price of a new car.

The problem: corporate average fuel economy, or CAFE, standards. Originally created in the 1970s, the standards have become much more costly over the last decade thanks to the heavy hand of Congress and the Obama administration.

When the recent regulatory changes were implemented, three teams of economists and engineers predicted what would happen to the consumer cost of a new car. They took into account the savings from lower gas consumption and carefully modeled how consumers would trade off fuel economy, capacity and other vehicle attributes.

Of the three estimates, the lowest estimated an additional consumer cost of $3,800 per car. The claims the administration made at the time that the new regulations would be cheap to implement (about $1,000 per vehicle) and would save consumers thousands of dollars on gas have proven overly optimistic.

One of the economists who studied the standards, Mark Jacobsen, specifically looked at how the new standards would impact both affluent and struggling households. For a household in the top quarter of the income distribution, the new standards would be costly enough: 0.4 percent of their annual income. But for a household in the bottom quarter, the new standards would cost them a full 1 percent of their annual income as the new-car costs would be passed along to the used-car market. The pocketbook impact makes CAFE standards one of the costliest regulations in the U.S.

In a recently released paper, we compared the various predictions to the actual prices of new vehicles. Car prices, adjusted for quality, had actually been falling from the 1990s until 2008. After the dust settled from the Great Recession, car prices in the U.S. began to rise steadily. Now, those prices are $6,200 above their previous trend.

Combined with reasonable estimates of gas savings, that matches up well with the scholars' predictions of the cost of the regulation. It also confirms that the administration's predictions were wrong: the regulation is indeed very costly, and it hurts American families for whom a new car - even a new used car - is a major expense.

Defenders of the CAFE standards will object that removing them would result in higher fuel usage and thus higher carbon emissions. But even the Obama administration estimated that the recent increase in CAFE standards will have little impact on climate: less than two-hundredths of a degree Celsius by the year 2100. Even using the Environmental Protection Agency's measure for the costs of global warming, we found that the CAFE standards fail a cost-benefit test by at least a 10-to-1 margin.

CAFE standards are not like pollution controls, which impose strict limits on the emissions of proven pollutants. Instead, the standards calculate a complicated average fuel economy for every automaker. Vehicles with a large footprint are allowed to have lower fuel economy than small cars. That gives automakers an incentive to change vehicle design in inefficient ways.

Another well-known flaw in the standards is the "rebound effect." When cars use less gas, people drive more. This is especially true in the long run, as people adjust where they live and work. If CAFE standards are cutting into your budget, one solution is to rent a cheaper house further out in the suburbs and accept a longer commute. Cheaper gas also means more congestion.

Congress should abolish CAFE standards and return road and gas tax policies to the states. Local gas taxes are the appropriate way to fund infrastructure maintenance and investment, and they naturally encourage consumers to buy fuel-efficient vehicles.

If Congress is unwilling to act to make life easier for the middle class, the president - now or in 2017 - has the authority to stop further planned increases in the CAFE standards. For candidates who say they want to help struggling families make ends meet, freezing and working to repeal CAFE standards would make a serious difference in family budgets without doing measurable harm to the environment.

 - Salim Furth, Ph.D., is a research fellow in macroeconomics at The Heritage Foundation's Center for Data Analysis, where David W. Kreutzer, Ph.D., is a research fellow for energy economics and climate change.

About the Author

Salim Furth, Ph.D. Research Fellow, Macroeconomics
Center for Data Analysis

Related Issues: Economic Freedom, Regulation

This piece was originally distributed by the Tribune News Service