Deadly Fuel Economy Standards

On Tuesday, the Obama administration finalized a new rule increasing the fuel economy standard for auto makers to 54.5 miles per gallon. The current standard for model years 2011-2016 is 35.5 mpg. President Obama said, “These fuel standards represent the single most important step we’ve ever taken to reduce our dependence on foreign oil,” while EPA administrator Lisa Jackson said that the new rule was “as though we eliminated all of our [carbon dioxide] emissions for one year.”

One of the most important ideas in economics is the concept of trade-offs. If something is scarce, that means that acquiring more of it requires giving up something else. To obtain a car that gets better gas mileage, something else has to be sacrificed. One of the easiest ways to improve gas mileage is to make a car lighter–which, all other things remaining unchanged, will make a car less crashworthy. Of course, other alterations can be made to the car. Engines can be made smaller, or have costly add-ons like turbochargers or devices that shut off cylinders when they’re not needed. Performance may decline, and the price tag may rise. Cars can be made into hybrids, which are more expensive. Or they can be made all-electric, which entails compromises on range, recharging time, and cost that most people have not been willing to make.

Increasing the corporate average fuel economy (CAFE) standard is therefore likely to result in cars that save drivers money in gas, but also are less safe, less capable of hauling people and stuff, and more expensive. Ryan Balis pointed out years ago, in a brief survey of numerous studies on the matter, that CAFE regulations result in additional deaths on highways, as people inevitably drive smaller, lighter cars. To put this another way, in order to reduce the amount of gasoline used per mile, the regulation forces a higher number of deaths per mile.

Generally, drivers like to save gasoline–but that’s not the only thing they want. They want performance, cargo capacity, legroom, safety, style, and reliability. And they want to save money for other things that enhance their lives. Regulation forces the buyer to make different trade-offs than what the buyer otherwise would have made, as though the EPA regulator knows better than the car buyer what’s best.

Obama’s mention of the “reduced dependence on foreign oil” is an appeal to something that both left and right have thought important. And this rationale can be traced back to the first CAFE regulation in 1975. Yet there are many countries that have very high living standards with no domestic supplies of oil, or very little, such as Switzerland, Ireland, Sweden, Finland, and Hong Kong. The great thing about world trade is that one country can produce what it’s relatively good at producing, and trade for something another country has. In any event, less than half of the oil consumed in the US is imported, and most of what is imported comes from Western Hemisphere nations like Canada (29% of imports), Venezuela (11% of imports), and Mexico (8% of imports).

Preventing people from making trade-offs based on their own priorities is not generally likely to make them better off–particularly when the rationale is based on misconceptions about “dependence” on trading partners.