Overlooked Tool to Fight Climate Change: A Tweak in Fuel Standards

Many times we need small steps forward.  Here's a good example.

Overlooked Tool to Fight Climate Change: A Tweak in Fuel Standards

by Michael Greenstone

One of the best new opportunities to reduce greenhouse gas emissions might be to tweak a bureaucratic regulation we’ve had around for close to four decades.

Changing vehicle fuel efficiency standards — if done properly — could not only reduce emissions from cars and trucks, but also set the nation on a path that textbook economics suggests is the most efficient: by placing a nearly economywide price on carbon pollution.

The United States has to figure out how to meet the lower emissions targets that nations committed themselves to under the climate change accord reached in Paris in December. In the United States, the centerpiece of climate policy is the Clean Power Plan put forth by the Environmental Protection Agency. It sets limits on carbon pollution from power plants. If this plan survives a court challenge, the nation will take a major step toward reducing greenhouse gas emissions.

But even this won’t be enough to reach the levels promised in Paris. So where can other cuts — ideally, not too expensive and not requiring new laws — come from?

Using corporate average fuel economy (CAFE) standards might seem counterintuitive. They are widely regarded as costly and inefficient because they rely on mandates for achieving emissions reductions, rather than letting market forces find the least expensive ones. But a big advantage is that CAFE standards have been required by law since the 1970s and so do not require new legislation.

CAFE standards were last updated in 2011 and are now up for review by the E.P.A. These standards have grown more stringent over time but are still lax compared with those of other nations. America’s vehicles get, on average, 21.6 miles per gallon; in Britain, where fuel taxes are also much higher, vehicles average 35.6.

Besides their relative laxity, CAFE standards have loopholes — for example, based on vehicle size — that limit their effectiveness at increasing fuel efficiency and reducing emissions. Such loopholes are made worse by the decline in gasoline prices that is leading to greater purchases of trucks and S.U.V.s, instead of more efficient cars. The result is that some observers say that we need to think “outside the box” during this CAFE review period.

One way to think about fuel economy is to take into account not just how many miles a car gets per gallon of gas, but how many miles it is likely to be driven over all. Credit Chris Pizzello/Associated Press

One way that we could think about fuel economy, but currently don’t, is to take into account not just how many miles a car gets per gallon of gas, but how many miles it is likely to be driven over all. Automakers have plenty of data on the average number of miles driven by each kind of car over time. Not all cars are driven the same amount.

A typical Chevrolet Malibu (a midsize car), after seven years on the road, will have 110,000 miles on its odometer. An average Buick LaCrosse (a full-size luxury sedan) will have only 78,000 in the same period (See iSeeCars.com data). Although their fuel economy is similar, the average Malibu will produce significantly more emissions than the average LaCrosse over its lifetime.

With some simple math, it is possible to calculate the typical lifetime gasoline consumption of each model of car. Then using the rule that each gallon of gas leads to 20 pounds of carbon dioxide (CO₂) when burned, it is straightforward to determine the expected lifetime CO₂ emissions from any group of cars.

This calculation could be the basis for replacing the current form of CAFE with a cap-and-trade market for CO₂. Specifically, the government could set a CO₂ limit for all cars sold in a given year and issue permits denominated in lifetime CO₂ emission. Manufacturers could then trade these permits for the cars they produce annually. For example, automakers that specialize in fuel efficient cars could sell permits to companies that concentrate on S.U.V.s.

Cap-and-trade programs have been shown time and again to reduce regulatory compliance costs. To further reduce the costs for manufacturers, they could receive some of the permits at no charge.

Of course, more details would need to be worked out. But over all, such a cap-and-trade system would reduce the costs of lowering CO₂ emissions (and gasoline consumption) and spur further research and development into more efficient cars. Finally, this is not a big leap legally because trading already takes place under CAFE standards — but of fuel economy.

The benefits of reforming CAFE are potentially even greater than just reducing the costs of compliance in the transportation sector. Subject to careful vetting of legal issues, one could link a CAFE cap-and-trade system with the cap-and-trade programs that California and some East Coast states are already using to reduce CO₂ and that others are considering adopting to comply with the Clean Power Plan.

Full integration of the transportation and power sectors in a cap-and-trade program would cover 71 percent of total United States emissions and greatly reduce the costs of cutting CO₂ across both sectors. Indeed, economists of all political leanings (and even some industry leaders) have been urging the adoption of a widespread CO₂ cap-and-trade system.

All of these changes could be set in motion by a simple change in the formula for how we set fuel economy standards. No legislation, no votes from Congress and no presidential signings required. The result: financial savings and reduced CO₂ emissions.