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Helping Consumers and Taxpayers? Gov't to Buy GM and Tweak CAFE Standards

Anthony Randazzo
May 19, 2009, 3:42pm

There are two big stories coming out today in auto industry news. The first is breaking news that the government is planning to buy the good assets of GM and send the rest into bankruptcy. We've written so much on Out of Control about how this kind of idea will backfire that I won't discuss it right now, but we will cover it when more details emerge.

More interesting is the second news story: the White House announcement that President Obama is pushing the auto manufacturers to higher fuel efficiency levels that will raise the average cost of a vehicle significantly. CNN reports:

"...the challenge will be getting consumers to play along, especially if gas prices remain relatively low. The Obama administration estimates these rules will add about $600 to the cost of a car. That's on top of an estimated $700 added by changes to fuel economy rules that have already been enacted. All this may keep consumers from buying a new car, some say. Also with fuel prices still low, consumers may want larger vehicles, but these will never be as efficient as small cars. Without soaring gas prices pushing drivers to conserve, it will be difficult for makers of larger vehicles to meet the administration's efficiency goals."

Even though cap and trade, carbon taxes, and other environmental proposals are still agenda items in Congress, here we have climate change politics edging itself into the fray. In purely economic terms, having the White House issue rules that "will require passenger cars and light trucks to get an overall average of 35.5 miles per gallon by 2016," thus raising car prices from increased technology costs, certainly isn't going to "help" in an recession. Of course these prices are going to be felt many years down the road, but they won't help the economy then either.

In environmental terms, the question should be: are the known benefits of reduced carbon emissions through this standard a worth while trade off for increasing the cost of car $1,300 or more? And furthermore, will this hurt the upper class or lower class more? Just like the federal cigaret tax Obama signed off on this year, these kinds of cost increases on the margins hit the poor the hardest. 

Another question I have is why increase what was already an overbearing standard? In 2007, Congress passed and President Bush signed legislation aimed at increasing Corporate Average Fuel Economy (CAFE) standards to at least 35 miles per gallon (mpg) by 2020, up from 27.5 for cars today and 23.1 for trucks. Now we're going to move up the date four years?

Some may argue that the increased cost will be balanced out by gas savings. But there are two problems with that, first is that there is additional talk of raising fuel prices intensionally to get people to buy more fuel efficient cars. The second problem is the numbers. My colleague Ron Bailey at Reason Magazine tallied up the figures for the Bush CAFE standards:

"...a car driven 12,500 miles per year at 27.5 mpg would use 454 gallons of gas annually. Raising the mileage to 35 mpg reduces that figure to 357 gallons per year. So the new California standards would save drivers an average of 100 gallons per year. At $1.50 per gallon that comes to $150 per year; at $4 per gallon it comes to $400."

Reportedly, auto manufacturers are on board with the White House's plan, but only because they will get financial help to reach the goal (and possibly because the government itself is controlling two of the companies).By and large, if consumers want cars with 35 or 50 mpg, then that's what we'll get, as the industry takes the necessary steps to invest in a product people want. But if they want trucks and big horsepower, companies should be be punished for making those kinds of vehicles. It's better for people to eat health, but we haven't outlawed McDonald's (yet, and transfats would probably beg to differ with me). I want a car with good gas milage.

I want to breath clean air. And I want the right to choose how much I'm willing to spend from my paycheck to achieve these desires, while balancing them with other societal and personal goods.


Anthony Randazzo is Director of Economic Research


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