Eliminate CAFE Standards
Solve the Gas Crisis

Libertarians promote the idea that the "marketplace" will solve all problems so one of their pet ideas is to eliminate the CAFE (automotive fuel requirements) standards. Then the the cost of fuel will cause more efficient vehicles to be selected by consumers and the problems of fuel scarcity will solve themselves.

I offer an alternative approach which incorporates mileage goals and discuss some of the fallacies with their position below.

First lets dismiss the basic tenet of Libertarianism up front. The market needs rules and those who supply the rules are the government. They do this because the people have delegated this task to the government. As in all human activity there are rules: sports, religion, marriage and even the Libertarian's sacred "private property". There is no reason why rules should not apply to business behavior as well. How is private property to be defined or protected without recourse to rules as promulgated by government and enforced by the police?

Next lets look at the implementation of CAFE standards. In response to pressure by the auto industry the imposition of mileage standards was gutted when it was first established. By allowing the fuel efficiency of the vehicles to be averaged over all sales the auto makers could avoid having to develop and market a complete line of high mileage vehicles. They could continue to market gas guzzlers as long as a certain percentage of people bought smaller cars. In addition they managed to get the rules for "light trucks" set so that many of the vehicles being sold to individuals were segregated into another category. So the argument that CAFE is not working properly is correct, it was never designed to. It is just that the chickens have come home to roost sooner than people expected. Oops!

Definitions

Set new standards for all "passenger vehicles" to a level that the best performing cars now reach. Let's say for the sake of argument 35MPG. The definition of passenger vehicle is any vehicle which is designed primarily to transport people and has a modest capacity for carrying materials. This includes regular sedans, vans and mini-vans, station wagons, etc. As long as it has two seats or more and you see it in the Mall parking lot it is a passenger vehicle. This means a Hummer, for example, is a passenger vehicle as is any SUV.

A light truck Set new standards for "light trucks" to a reasonable level which reflect their greater weight. Say 25MPG when empty. (I leave the feasibility numbers to the automotive experts). A light truck is something which has a carrying capacity of under a certain weight and/or a certain volume. This means pickups and larger vans without rear seats, etc.

The third category would be on road commercial vehicles such as delivery trucks like those used by UPS or Fed Ex, and larger semis. The fuel issues for these would need to be set based upon many criteria including size and type of usage. This sector does not account for the bulk of fuel consumed and companies already have an incentive to buy efficient vehicles so this is a less important issue.

Proposals

A passenger car mileage shortfall tax: For all category one vehicles there would be a purchase tax which would be computed on the basis of the difference between the rated mileage and the standard. So an SUV with 20MPG performance would pay a tax at the 15MPG under rate, while a Hummer with 10MPG would pay at the 25MPG rate. This tax would be calculated to be based upon the extra use of fuel over the average life the vehicle. The proceeds from this tax would be allocated to a fund used for research and development into alternative sources of energy and/or transportation. It would be expected that a vehicle like a Hummer might pay as much as $10,000-20,000 in tax. This is similar to the "gas guzzler" tax that was levied previously, but would apply to many more automobiles. The "free market" gets to operate. Those who want to drive less efficient cars just have to pay for the damage they are doing to the planet. And thus, the forces of the market will prevail.

An unqualified usage tax for light trucks: Only those who are "in business" would be able to buy a light truck. To be in business you would have to show proof. This means that single owner business operating out of their truck would qualify as well as companies owning fleets. Proof can be supplied in several forms. For example, if one can depreciate a vehicle for tax purpose then the purchase is "qualified". Similarly, if one can meet the criteria for having a commercial license plate. For those operating an off-the-books business out of their vehicle, the proposal is not designed to help you avoid paying your taxes, whether a use, business or income tax, sorry. For those not "in business" there would be an "unqualified use" purchase tax.

So if you want to drive around in a pickup truck in suburbia because you think it is cool, or you think you might need to buy a sheet of plywood some day, you are free to do so, but you have to pay for the damage you are doing to the planet. Once again the tax amount would be proportional to the difference between the MPG of the truck and the passenger vehicle standard, not the truck standard. This is because the buyer is making a choice to substitute a light truck for a passenger usage.

A light truck mileage shortfall tax: For qualified buyers there would be a light truck mileage shortfall tax depending upon the difference between the performance of the truck and the truck standard. It is possible there might need to be several standards for different truck types, but this is a detail.

Benefits

This plan meets several objectives. It does not force anyone, the manufacturers or the consumers to buy a specific type of vehicle. It makes the libertarians happy because the "marketplace" will determine the balance of vehicles sold. It allows for individual choice. It raises money for future research and development. It (eventually) lowers the total consumption of fuel. It can be implemented immediately without waiting for any technological breakthroughs. It puts the burden of excessive consumption on the individual, not spread on all of society. As the vehicle fleet becomes more efficient demand will drop and prices will either drop or rise more slowly. Thus, those who chose now to buy more efficiently will not have to pay a penalty in fuel prices caused by those who use more than the target.

Who will object?

Those who want to buy a big vehicle, but don't want to bear the true costs. For 50 years families got to the little league in a passenger vehicle, buying an SUV or a van is a choice, not a necessity. Just like buying a pickup truck so you have enough horsepower to haul your boat occasionally.

Automakers who will see a shift to more efficient (and presumably smaller and cheaper) vehicles. The biggest profit margins are in the biggest vehicles. That's why GM and Ford make SUV's in the face of all logic. They want to maximize their profit. This is a mistake, there are lots of other ways to improve profit per vehicle, for example, entertainment system, navigation systems, luxury fittings, etc. Lots of other industries have figured this out. That's why we have $1000 lady's purses and $10/foot electrical wire for hooking up loudspeakers. Quality, features and brand can be as lucrative as size when done correctly.

Small business owners whose capital costs will increase when buying trucks. This sector has the least valid reason to complain. If the light truck categories are set up properly there will be some tax free choices for all usages. Any taxes to be paid will just be part of doing business and can be built into the pricing structure of the business. So it is recoverable to the extent that any other cost is.

Do I expect this to happen? Probably not, but I haven't seen any better ideas being floated around. Raising CAFE standards has been a non-starter for years, the automobile industry has too much power to allow it to pass. In addition the short-sighted plans of the big three mean that they are already technologically behind the imports on efficiency, so mandating a level that they cannot reach will never work. A tax, on the other hand, especially to the consumer, does not put them at a technological disadvantage. If the public wants to continue buying domestic SUV's instead of imported hybrids nothing needs to change in their business plans. Even the oil companies should not be against the plan, they are way past the era where they needed to encourage consumption. They now have trouble meeting demand, so keeping demand reasonable while prices rise will allow them to make controlled investments in new energy sources while reaping the benefits of the increased profitability caused by high prices. By the time demand starts to moderate they may have adapted their businesses to a new model as well.



Moral: Even a free market needs rules

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Copyright © 2005 Robert D Feinman
Feel free to use the ideas, but the words are mine.