Raising Fuel Economy Standards

ARTICLE ANALYSIS: "Economics of Oil: How Fuel Efficiency May Backfire," by Jonathan

Marshall, San Francisco Chronicle, 22 July 1991, A1, A4.

The article concerns proposals to raise the Corporate Average Fuel Economy Standards (CAFE) for new automobiles sold in the United States. The CAFE standard, which now stands at 27.5 miles per gallon, permits automobile manufacturers to produce automobiles which are far less fuel efficient than the standard, as long as the weighted average of all of the automobiles they produce is 27.5 miles per gallon or more.

Proponents of raising the CAFE standard claim that such action will (1) conserve energy, (2) reduce the nation's dependency on imported petroleum, and (3) enhance environmental protection. The thrust of the article involves claims by some economists that raising the CAFE standards not only would not attain the goals claimed by proponents of the proposal, but might well result in increased energy used. These counterclaims are based on contentions that:

1. As new automobiles account for only sevenpercent of all automobiles on the road, annual savings derived from raising the CAFE standard would be inconsequential.

2. Raising the CAFE standard will cause the price of new automobiles to increase, which, in turn, will cause fewer new automobiles to be sold. Thus, with fewer new automobiles being sold, the net effect of an increased CAFE standard will be even lower.

3. Increased fuel economy derived th

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vantage with respect to Japan and the European Community. The second claim of the opponents of raising the CAFE standard is that such action will cause the price of new automobiles to increase, which, in turn, will cause fewer new automobiles to be sold. Thus, with fewer new automobiles being sold, the net effect of an increased CAFE standard will be even lower. This contention is based on the concept of the price elasticity of demand. In this instance, the contention is that the amount of the price increase on new automobiles which will be required to meet an increased CAFE standard will be sufficient to cause many consumers to postpone the purchase of new automobiles. Once again, this claim is undoubtedly true. All that the truth of the claim implies, however, is that the ultimate benefits of an increase in the CAFE standard will not be realized in the shortterm. The benefits of an increase in the CAFE standard will, however, be realized over the longterm. If this line of reasoning had been accepted when the CAFE standard was introduced in the mid1970s, new automobiles sold in the United States would likely still be attaining an average fuel efficiency of 12.5 miles per gallon, rather than the current 27.5 miles per

Category: Economics - R