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Fuel Economy Standards: Is the Most Important Energy Policy of Obama’s Administration at Risk?

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Yesterday, President Obama announced the most important energy policy of his administration, finalizing fuel economy standards through model year (MY) 2025 that should roughly double the efficiency of new vehicles as compared to when he took office. This highly popular move is very important to America’s energy security and economic stability.

This announcement is the latest in a series of recent policies designed to increase fuel economy. Back in 2007, President Bush signed the Energy Independence and Security Act, which mandated vehicles get 35 miles per gallon (mpg) by MY2020 – or about 27 mpgwhen taking into account real-world conditions. Baker Institute analysis showed that this policy would reduce consumption by 4.3 million barrels a day (b/d) in 2030 relative to a case without a stricter standard. Such a figure is huge, equal to more than 40 percent of current gasoline use.

Since entering office, President Obama first basically accelerated the existing standards so they would be met four years earlier, using his power to regulate greenhouse gases under the Clean Air Act. The actions yesterday extended new standards through MY2025, when vehicles will be required to get 54.5 mpg – or 39.4 mpg in on-road conditions – assuming all the standards are met with efficiency improvements. These actions will result in additional gasoline savings, bringing the total savings from all the light-duty fuel economy standards to 6 million b/d or more by 2030, according to Baker Institute estimates.

Despite the huge benefits, Republican nominee Mitt Romney suggests he would weaken the standards, leaving our economy and citizens substantially more vulnerable.

As reported by the Detroit News,

Romney said he’d seek “a better way of encouraging fuel economy” than corporate average fuel efficiency (CAFE) mileage requirements “as the sole or primary vehicle,” he said. “The best approach is to try and build vehicles that people want, rather than having the government telling the companies what they must make,” he said.

“I would work with the manufacturers to find ways to encourage fuel economy on the part of the consumer.”

While it’s unclear how far Romney would go in abandoning fuel economy standards, these statements represent a rare attack on fuel economy standards, a policy that Pew Research Center in March found that 78% of Americans support, including two-thirds of Romney’s fellow Republicans. President Gerald Ford, a Republican, also signed the initial fuel economy standard legislation.

Romney’s logic ignores history in other ways as well. As the memory of the fuel crises of the 1970s wore off and oil prices stayed at consistently low levels, consumers began demanding huge gas-guzzling vehicles in the late 1990s and early 2000s. America’s gasoline consumption and oil imports steadily rose, but the party ended when gasoline first reached $3/gallon and later $4/gallon. If gasoline prices keep falling as America’s oil production keeps rising, consumers could easily start demanding bigger vehicles once again.

But policymakers shouldn’t get lulled back into complacency as well. Oil prices are cyclical. Low prices lead to greater use and lower investment in production and alternatives, setting the stage for future higher prices. The Middle East and many other major oil producers are still geopolitically volatile, and a political crisis that cuts off supply can lead to dramatically higher prices at the pump. With lax fuel economy standards, many consumers could be driving inefficient vehicles and feel the squeeze the next time prices jump, not to mention the economy could go into recession.

Arguably, if Romney’s main policy is to work “to find ways to encourage fuel economy on the part of the consumer,” his most important oil reduction policy could be to have good window stickers showing vehicle fuel economy, a completely inadequate approach. If elected, Romney should listen to the majority of Republicans and support strong fuel economy standards. The best energy policies seek both sources of supply – which Romney has already proposed to do in his energy white paper – and reduced demand.

Image:Action Sports Photography / Shutterstock.com

James Coan's picture

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Michael Keller's picture
Michael Keller on Aug 31, 2012 7:43 pm GMT

"Yesterday, President Obama announced the most important energy policy of his administration ..." just plain stupid and yet another example of a rogue regime completely decoupled from the actual universe in which we live. Only a brainless liberal would believe the laws of nature can be circumvented by government fiat.

Why not 100 mpg? or better yet, 1000 mpg! Put everybody on motorized or human powered skate boards!

Technology and the market place will work their magic if the oxygen wasting bureaucrats in the government will just go away and be replaced by common sense. On the bright side, that is going to happen in 2013.

James Coan's picture
James Coan on Sep 2, 2012 1:24 am GMT

I appreciate comments like these that focus on the content of the post.

 

I agree that fuel economy standards would be incredibly unpopular if they led to vehicles that forced consumers to spend “30% [more] to get better mileage that will make the vehicle smaller, less safe, and 1/2 the horsepower.” However, there is no indication the standards will have such a dramatically negative impact, particularly with that horsepower number. The EPA/NHTSA final rulemaking concludes reports that vehicles should cost $1,870-$2,120 more in 2025 than those today with no change in performance (see the Fact Sheet). I suspect you are skeptical of that finding, so I can refer you to the most critical paper I’m familiar with, the Center for Automotive Research’s “The U.S. Automotive Market and Industry in 2025,” which is says that vehicles would be about 30% more expensive, as you believe, but without any change in horsepower. Finally, it seems really doubtful to me that 13 major automakers could have endorsed the standards if they were likely to lead to such dramatic changes in cost, size and performance as you suggest.

 

Predicting the impact on vehicles is central to your later comments on recessions and jobs. Depending on the assumptions about vehicles, there easily could be more jobs – if fuel savings outweigh the new cost of vehicles (EPA/NHTSA estimates this to be about $4,000 over the lifetime of the vehicle, at a 7% discount rate), that additional money can go elsewhere in the economy. The industry today is able to have excellent North American profits even though average fuel economy of new vehicles has been steadily increasing and sales are still depressed from their pre-recession levels of around 16 million/year.

 

The IBD editorial incorrectly states the standards are more aggressive than they actually are. For instance, it’s true that the vehicle window sticker for the smart car says 36 mpg. However, the mileage from the perspective of CAFE standards is significantly higher at around 49 mpg (see equation here). The standards in the 1970s, which were signed by Republican President Ford, not Carter, demanded much faster improvements of about 6.2%/year than those currently proposed, leading to significant vehicle and horsepower downsizing.   

 

As for your point about those who need to tow equipment, vehicles with larger wheelbases are required to meet weaker standards, and the fuel economy increase for light trucks (2.5-2.7%/year initially) is less than it is for cars (3.8-3.9%/year), both of which should minimize the impact. Additionally, since it seems at the end that you just support more modest fuel economy standards, I want to make sure you are aware that there is a built-in “mid-term evaluation” after model year 2021 – in fact, the standards from 2022-2025 are not even legally binding at this point – which could limit or halt further increases if some of the devastating consequences you suggest actually pan out.

 

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