As Congress heads for a show-down over fuel economy standards this week, they should consider the suite of tools at their disposal to influence corporate and household decisions about oil consumption and greenhouse gas emissions. Old familiar mandates that demand specific behaviors and have been successful include:

  • Fuel economy standards (aimed at manufacturers) and speed limits (aimed at drivers).
  • Consumer incentives and disincentives: tax credits for hybrids and taxes for gas guzzlers

These sweet and bitter pills are designed to give consumers a personal financial interest in fuel economy and greenhouse gas emissions reductions beyond what the market alone can provide.

Then there are the carrot and stick approaches:

  • Investment tax credits or retiree healthcare subsidies in exchange for investments in advanced technology providing manufacturers a similar incentive to invest more than they otherwise would.

A well-designed policy ought to include a full complement of instruments to maximize the potential of each. Mandates and incentives. Consumer-targeted and manufacturer-targeted. No single approach is likely to be the entire solution for two important reasons. First, the problems being addressed, oil dependence and global warming, are large and complex, and must be addressed from multiple directions. Second, the effectiveness of any single policy instrument eventually diminishes over time and further progress needs to come from something else. Best to start with multiple instruments than to discover we don’t have them later.

The differing views of the appropriate CAFE standard seemed to be irreconcilable as recently as 2006, but it now appears that a sustained focus on CAFE in recent months will soon result in legislation. It must include a mandated goal to ensure real oil savings, but should include additional tools to be truly productive.