Numerical Targets and Policy

When considering the basis for federal leadership on reducing fuel consumption by private passenger cars and light trucks, it’s important to distinguish between setting numerical targets and establishing policies to achieve a target.

Driving cars and light trucks give Americans many benefits. Two important benefits are access to larger markets with more choices and personal mobility. Driving has costs as well. Many of them are borne by the driver (gasoline, oil, maintenance, etc.), but some of are imposed on the rest of us. The driver’s own costs of driving are easy to observe, but the external costs imposed on others are not.

External Costs

Economists identify four or five categories of external costs of driving, and have developed estimates of some of them.
• Greenhouse gas emissions costs
• Congestion costs
• Costs of crashes
• Costs of localized pollution
• Costs of oil dependency

These external costs are not mere economic abstractions; they are real costs that some one bears. When there are more cars on the road, for example, there is a higher likelihood that crashes will occur. The costs of the crashes fall on the drivers and occupants of the cars directly involved in the crashes, as well as on the drivers and occupants of cars that are delayed in getting to their destination because of the crash. Reasonably accurate estimates of congestion, crashes, and localized pollution exist. However, greenhouse gas emissions costs and costs of oil dependency involve significantly more uncertainty.

Mandates and Incentives

With accurate estimates or with best guesses, it is up to the national policy makers to decide how much weight should be given to each of the cost items. There are two alternative approaches that Congress can take to influence the behavior of automakers and consumers: mandates or incentives.

Mandates attempt to define specific actions or attributes that are to be either proscribed or prescribed in the mandate. Corporate Average Fuel Economy (CAFE) standards prescribe the average fuel economy that each automaker must attain or face penalties. Tax deductions for purchasing hybrids are incentives. A consumer can choose whether or not to accept the tax credit.

Numbers Are Not Perfect

Numerical targets are attractive to policy makers because numerical targets seem to provide a simple, direct connection between goals and behavior. However, the experience with CAFE over the last 32 years should make one doubt that numerical targets could ever be simple or direct. The problem with nearly all mandates is that the process of defining actions or products is never perfect, never complete. Gaps are inevitable, and any gap that can be exploited will be exploited. And there is nothing sinister in exploiting gaps (“Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.” Judge Learned Hand, writing for the 2nd Circuit Court of Appeals in Helvering v. Gregory, 69 F.2d 809 (1934).) What applies to taxes also applies to CAFE.

Better: Numbers and Policy

A numerical target of miles per gallon, if it is directly linked to national goals—such as decreased oil consumption or global warming emissions—is an effective benchmark to measure progress against. A mandated numerical level of miles per gallon (CAFE) is one tool available to policy makers to achieve the target. But given the tendency to exploit gaps, a numerical mandate should not be the only tool Congress employs. A package of incentives and mandates may be the best approach to closing the gaps and ensuring that what Congress wants to happen, happens.


  • Jerry

    Conceptually the idea to have CAFE makes sense. The manipulation of them by the people involved is so laughable its almost criminal. My biggest issue is the classification of some cars (which are really station wagons) as trucks to “reduce the average”, also saying that a flex fuel vehicle gets special credit even though a tiny percentages actually use the fuel.

    The incentivees make sense because they let people buy quality vehicles such as Toyotas, but then congress simply limits the incentive so the Toyotas no longer get the best credit.

    Keep the incentives for consumers. It will force GM and Ford to get these cars to the market faster. The old rules let them get away and get into more trouble with a failed strategy.

    I am curious about he change to the CAFE going to a class by class basis. It would seem to me that gives no incentive to make better cars as long as they are withhin their MPG range for class.

    What are your thoughts?

  • Walter McManus

    Everyone is talking about “attribute” based standards. Light trucks are going to have a “footprint” based CAFE standard starting MY 2008. One good thing about basing CAFE on attributes is that it removes CAFE’s bias against full-line manufacturers. One bad thing is that it locks in the current mix of vehicles. I’m sure readers can think of more good and bad things.

  • Van

    As outlined above the indirect costs imposed on the community by fuel consumption argues in favor of establishing governmental policy to conserve fuel. We have security issues, caused by dependence of foreign oil, and environmental issues caused by releasing carbon tied up in fossil fuel into the atmosphere.

    But a policy such as CAFE completely misses the mark, and seems only to serve as a diversion to avoid actually taking effective action.

    Imposing across the board taxes only results in cost shifting and not conservation. But the real solution is right before us.

    How do we conserve electricity? By establishing a price structure such that the more you use above baseline, the more you pay per unit of consumption. How do we conserve water? By establishing a price structure such that the more yuou use above baseline, the more you pay per unit of consumption.

    So the solution is to establish a price structure for transportation fuel, such that the more you use above baseline, the more you pay per gallon.

    How could this policy be implimented. States would issue gas cards such as a driver’s license that could be swiped in the card reader at the pump or inside by the attendant. When the gas card is swiped, a display of the consumption for the last 30 days would be displayed. If the consumption was less than 60 gallons (baseline usage example) the market price would be charged. When the consumption exceeds 60 gallons in the last 30 days, a 25% surcharge per gallon is added to the cost of the purchase. Thus if the market price was $2.00 per gallon, you would pay $2.50 for all the gallons authorized by that card that exceed 60 gallons in the last 30 days.

    This policy would result in users becoming aware of how much fuel they burn, and become an incentive to car pool, drive better mileage vehicles, and avoid needless trips.

    The money raised could be used to fund incentives for purchasing high mileage vehicles such as hybrids.

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