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.