Peter Passell
Editor, The Milken Institute Review; Senior Fellow
California and Capital Markets and Europe and Finance and Global Economy and Labor and Public Policy and U.S. Economy
Peter Passell is editor of The Milken Institute Review, the Institute's economic quarterly. A senior fellow, Passell joined the Institute after eight years as economics columnist for the news department of The New York Times. He previously served on the Times' editorial board and was an assistant professor at Columbia...
read bio
A cheer or two for MPG standards
By: Peter Passell
August 01, 2011
Last week President Obama ordered a doubling of the corporate average fuel economy (CAFE) standard for cars and light trucks by 2025. Naturally, the carmakers bitterly denounced the standards as unattainable/overly costly/biased in favor of foreign competitors (check one).

Wait... that was Detroit's response to the LAST umpteen turns of the CAFE screw. But this time around, man bit dog: The chief executives of Ford, GM and Chrysler actually endorsed the change. Is this good news or bad news?

Maybe a bit of both. Start with the most troubling reason the car companies made no fuss: They all owe the Obama Administration big-time for their financial bailouts, and now see themselves as partners in an alliance against hard-line Tea Party types who oppose all government subsidies. In 1981, the last time the Big Three cozied this close to the White House, Ronald Reagan rewarded them with "voluntary" trade restraints, limiting the Japanese to about 15 percent of the American auto market. That proved to be dandy for everybody - except consumers.

But how about the substance of the new mandate?

Fuel economy standards are a "second-best" way to reduce the use of gasoline and diesel fuel because higher fuel efficiency makes it cheaper to drive an extra mile and thereby creates an incentive to drive more. That's why most economists (including me) would much prefer to raise gas taxes to a level that reflects the external costs of fuel consumption in terms of global warming and energy security, and then let the market decide what sort of cars folks buy.
Indeed, without a measure of those external costs and a reliable way to predict drivers' response to higher prices, we really don't know whether the 54.5 MPG mandate for 2025 will lead to too little savings in fuel, or too much.

But higher gas taxes have never had much of a constituency, and are just not worth the keystrokes to write about in the current political climate. By the same token, the climate-change-denial lobby has convinced Republicans (and coal-state Democrats) to take market-friendly approaches to reducing energy consumption off the table. So the question boils down to whether the President's new CAFE mandate is better than nothing. Count me in, albeit reluctantly.

For one thing, the cost of increasing fuel efficiency with existing technologies is probably lower than most analysts think. Soren Anderson (Michigan State) and James Salee (Chicago) figure that it now costs about $18 to increase efficiency by one mile per gallon. And while that number may rise as fuel efficiency approaches the practical limits imposed by these technologies, the total cost of meeting the 54.5 MPH mandate will probably be nowhere near the $2,500 per vehicle cost estimated by the Administration.

For another, the very existence of a firm 54.5 MPH goal for 2025 should accelerate the pace of fuel saving innovation. To date, the incentive to develop new technology has been undermined by uncertainty about both the stringency of future government mileage mandates and future demand for fuel-efficient vehicles. The 2025 mandate won't shield the industry from the chaos created by the gas-price rollercoaster. But it will force automakers to invest in technologies that allow them to meet the target with vehicles that are both roomy and peppy.

Last, but far from least, the mandate constitutes a symbolic down payment on a real climate change policy. If we can't even do this much, why should India, China, Brazil, et al do anything?

Making energy policy these days is, alas, like making sausage. It's just not the right job for perfectionists.