Everybody Agrees that CAFE Standards Are Inefficient

Often in the policy debates on government regulations, you will have free-market people decrying inefficient impediments to business, while the other side will tout the (alleged) benefits to the environment or whatever the social goal happens to be. Yet a new MIT study—from a group that is very sympathetic to carbon regulatory policies—documents how inefficient vehicle fuel efficiency (CAFE) standards are. Even if one buys into the premise that the government should be forcing businesses and consumers to alter their behavior in the name of fighting climate change (or “oil dependency”), it is still an unavoidable conclusion that CAFE standards are absurd. There are far cheaper ways to achieve their alleged objective.

The MIT study is titled, “Should a vehicle fuel economy standard be combined with an economy-wide greenhouse gas emissions constraint? Implications for energy and climate policy in the United States.” It is part of the MIT Joint Program on the Science and Policy of Global Change, which is not exactly a bastion of rabid right-wingers. Even so, check out their paper’s abstract:

The United States has adopted fuel economy standards that require increases in the on-road efficiency of new passenger vehicles, with the goal of reducing petroleum use and (more recently) greenhouse gas (GHG) emissions. Understanding the cost and effectiveness of fuel economy standards, alone and in combination with economy-wide policies that constrain GHG emissions, is essential to inform coordinated design of future climate and energy policy. We use a computable general equilibrium model…to investigate the effect of combining a fuel economy standard with an economy-wide GHG emissions constraint in the United States. First, a fuel economy standard is shown to be at least six to fourteen times less cost effective than a price instrument (fuel tax) when targeting an identical reduction in cumulative gasoline use. Second, when combined with a cap-and-trade (CAT) policy, a binding fuel economy standard increases the cost of meeting the GHG emissions constraint by forcing expensive reductions in passenger vehicle gasoline use, displacing more cost-effective abatement opportunities. …This analysis underscores the potentially large costs of a fuel economy standard relative to alternative policies aimed at reducing petroleum use and GHG emissions. It further emphasizes the need to consider sensitivity to vehicle technology and alternative fuel availability and costs as well as economy-wide responses when forecasting the energy, environmental, and economic outcomes of policy combinations. [Bold added.]

Stripped of the jargon, the paper uses an MIT model, with all the bells and whistles, to conclude that vehicle fuel efficiency standards are an arbitrary, blunt instrument that harm consumers far more than is necessary to achieve a given environmental objective.

Now to be sure, the MIT authors aren’t recommending laissez-faire. They think they’ve got a different policy mix of nudges and sharp elbows from the federal government, to make the energy sector juuuuuust right.

Even so, it’s useful to point out that in the real world, the government implements incredibly inefficient and costly regulations, even according to the proponents of top-down regulation. Put in different words, CAFE regulations are so awful on a cost/benefit test, that not even the fans of anti-carbon policies are willing to defend them.