There are two issues with CAFE standards that policymakers should pay attention to. One is that the standards appear to have contributed to making it more difficult for American automakers to compete in the U.S. new car market. Foreign companies serving American consumers have significantly lower compliance costs compared to their American rivals. This affords them a competitive advantage. U.S. policy should not play favorites in this way; instead, it should remain neutral as much as possible.
The second problem with CAFE standards is that they are simply not very effective, but are, instead, very costly for no good reason. Due to their design — dictating an average fuel efficiency standard for new cars — nearly all the benefits from the standards are offset by additional costs created through unintended negative externalities, such as the rebound effect. The academic literature on this question is clear: CAFE standards are expensive and likely not worth the cost.
Instead, the economic research points to fuel taxes as the optimal way to achieve some of the goals of the CAFE standards. They could improve overall fuel efficiency and reduce gasoline consumption at a significantly lower cost to both consumers and automakers. The only real debate still alive in the research is how much less costly a fuel tax would be.
Mark Jacobsen estimates that in the first year of the program, CAFE standards are 28 times more costly than a gasoline tax, because fuel economy improvements have not yet dispersed through the used car fleet. But even after 10 years of a standards-based regime, the costs of fuel efficiency improvements are still three to six times higher than would be the case with a fuel tax.
Other studies find similar results. Robert Crandall estimates that CAFE standards cost seven to 10 times more than a fuel tax would to reduce gasoline consumption and cost 8.5 times more than a carbon tax to reduce carbon emissions. Crandall also cites a study from Charles Rivers Associates that finds that taxing crude oil instead of gasoline “would result in reducing gasoline consumption at two-thirds of the cost of doing the same thing through CAFE standards,” while only costing consumers 3-11% of the price of CAFE standards. Andrew Kleit estimates that CAFE standards are 14 times more costly than a gasoline tax. The Congressional Budget Office estimates that CAFE standards are equivalent to a 46 cent increase in the gasoline tax, but a tax increase of this magnitude would cost consumers between 3-19% less than CAFE standards.
Thus, there is a rather wide range of estimates that compare CAFE standards to a fuel tax. For our purposes, we’ll use the lowest estimate from Crandall, who suggests that fuel taxes have one-seventh the cost of the standards. As mentioned earlier, a one-mpg increase in CAFE standards is estimated to cost consumers between $6.5 billion and $11.2 billion in the first year after the increase and between $7.8 billion and $24 billion five to 10 years after. Based on these estimates, consumers could — by responding to a tax increase — improve the average fuel efficiency by one mpg and still save between $5.6 billion and $10.8 billion if CAFE standards are repealed and replaced by a fuel tax. In later years, these annual savings would amount to something between $6.7 billion and $23 billion.
The reasons why a fuel tax is less costly than CAFE standards are straightforward. A fuel tax immediately affects nearly all drivers and vehicles, while CAFE standards only immediately affect new-vehicle buyers. Another reason is that there is no negative rebound effect from fuel taxes. Recall that CAFE standards, by reducing the cost of driving a mile, result in more driving. This increases the costs of other negative externalities associated with driving, such as accidents, traffic congestion and pollution, which work to offset the benefits of the CAFE program. In contrast, a fuel tax increases the cost of driving, reducing the incentive to drive. Given this, it is not associated with any of the costs related to an increase in driving. Finally, a fuel tax allows the market to find the lowest-cost way to reduce gasoline consumption, and there are a number of ways to increase national fuel efficiency and reduce fuel consumption. Options might include carpooling, using public transportation, moving closer to work, or buying a more fuel-efficient vehicle. CAFE standards constrain these possibilities to a small subset of choices that only involve producing new fuel-efficient vehicles.
A fuel tax has another benefit as well: the extra costs that consumers must pay can be used for road infrastructure improvements. With CAFE standards, consumers’ added costs are not used for any public purpose; they are instead captured by automakers who use them to recoup their compliance costs. Revenue from a fuel tax, on the other hand, could go into the Federal Highway Trust Fund and be used to repair roads and bridges. Revenue collected by Federal Highway Trust Fund from fuel taxes totaled $35.6 billion in 2018. With the cost of CAFE standards estimated to be as high as $20 billion per year, replacing CAFE standards with a gasoline tax would represent a large increase in revenue to the trust fund.
If Congress insists on keeping CAFE standards, it should reform the program. First, CAFE standards and compliance should be based on realistic mileage data, instead of the EPA’s 2-cycle 55/45 test that inflates mpg by about 26%. The current goal of increasing CAFE standards to 54 mpg by 2025 might make for a good headline, but the actual fuel efficiency of that standard would only be 41 mpg. To improve fuel efficiency, you first need to measure it properly.
Second, the distinction between an automaker’s domestic and foreign production should be abolished when it comes to the standards. The National Research Council found no evidence that requiring two separate calculations had any effect on domestic employment in the auto industry. This requirement serves instead to increase compliance costs and distort production decisions, and it should be eliminated.[*]
Third, Congress or the EPA should abolish footprint-based CAFE standards and replace them with a single standard that applies to both passenger cars and light trucks. By having both passenger cars and light trucks meet the same standard, automakers would have an incentive to reduce the size and weight of both types of vehicles. This reduces the incentive for consumers to purchase a light truck over a car, which results in fewer light trucks on the road and thus fewer truck-car accidents. Mark Jacobsen estimates that shifting to a unified CAFE standard would reduce the number of fatalities associated with a one mpg increase in the CAFE standard from 150 each year to nearly zero.
[*] For instance, Ford produced the Crown Victoria with enough Canadian and foreign content to get it counted as an “import,” thus dispersing its cost of CAFE standards against a more fuel-efficient foreign fleet. See “6 Clever Ways the Car Industry Has Gamed the CAFE Fuel Economy Standards,” Popular Mechanics, June 30, 2011, https://perma.cc/268M-RF6G.