Revisiting Cafe: Market Incentives to Greater Automobile Efficiency
By J. Yost Conner, Jr.
INTRODUCTION
The nation observed the one hundredth anniversary of the American automobile industry in 1996. After its invention, the automobile's popularity grew so quickly that in just thirty years the automobile industry had become the largest in the United States. By the 1950s, one-sixth of American jobs were connected to automobile production. As the “baby boom” generation matured in the 1960s and early 1970s, American automobile manufacturers were producing “chromium-plated gunboats” which consumed inordinate quantities of gasoline. Because American oil consumption is closely related to its love of the automobile, the energy environment of the 1970s and beyond would change the path of automobile development.
Reacting to scarcity and foreign oil dependency concerns following the Arab oil embargo of 1973-74, the federal government enacted energy-related laws intended to promote conservation. One of the most sweeping of these was the Energy Policy and Conservation Act (EPCA), which Congress passed and President Ford signed in 1975. The central goal of the EPCA was to improve automobile efficiency by imposing upon automobile manufacturers a “corporate average fuel economy” (CAFE) standard which their automobiles sold in the United States must meet to avoid civil penalties. Proponents of the EPCA believed that forceful government intervention promised a solution to America's newest energy challenge.
Though laudable, this approach flew in the face of concurrent energy policy. At the same time the government was initiating CAFE standards for automobile manufacturers, it was suppressing the cost of oil in America through a complex system of price controls. In addition, the CAFE program ignored the principles of a market system. The success of the CAFE program, therefore, is questionable. To be sure, the fuel efficiency of automobiles sold in the United States has improved markedly since the embargo, but close analysis suggests that much of this improvement would have occurred as a response to consumer demand even without the CAFE program. Furthermore, enforcement of the strictures of the CAFE program has limited manufacturers' design choices, hampered the automobile industry's ability to respond to ensuing energy cycles and concomitant consumer demand, and contributed to a fleet of older, less efficient vehicles on the country's roadways.
While proposals before the 104th Congress offered modest alterations to the CAFE program, they did not attempt dramatic change. Despite critics' efforts to highlight the shortcomings of the CAFE program, Congress has refused to abandon it and is unlikely to do so in the foreseeable future. Neither has Congress made the program stricter in more than a decade. Nevertheless, with petroleum production projected to peak in the first decade of the next century and with reliable alternatives to gasoline-powered automobiles not yet widely available, it is reasonable to continue some form of fuel efficiency policy. By modifying the CAFE program to include market-based incentives for efficiency as an input to the purchase decision, Congress can reform the program without forsaking its goals, combining reasonable efficiency with market flexibility.
There are two plausible vehicles for this change: tax incentives and marketable credits. While either solution would transfer the financial impacts of achieving or failing to achieve a minimum fuel efficiency standard from manufacturers to the automobile-purchasing public, marketable credits are the better approach because they more successfully provide direct incentives and disincentives within the context of a relatively simple and straightforward system. Both approaches suggest additional fundamental changes to the structure of the CAFE program. First, the idea that every major manufacturer should be individually responsible for achieving minimum standards should be rejected. It is possible to achieve a national minimum efficiency while allowing individual manufacturers to specialize in different types of vehicles which must compete against the products of other manufacturers. Second, with the recent boom in sales of minivans, sport utility vehicles (SUVs), and light-duty trucks, it is important that these vehicles compete on an equal basis with other vehicles, rather than being segregated into their own lower-rated fleet as they are now. By making these fundamental changes in the CAFE program, the federal government can make substantial progress in promoting market forces in the automobile industry while at the same time maintaining reasonable national efficiency goals.
The nation observed the one hundredth anniversary of the American automobile industry in 1996. After its invention, the automobile's popularity grew so quickly that in just thirty years the automobile industry had become the largest in the United States. By the 1950s, one-sixth of American jobs were connected to automobile production. As the “baby boom” generation matured in the 1960s and early 1970s, American automobile manufacturers were producing “chromium-plated gunboats” which consumed inordinate quantities of gasoline. Because American oil consumption is closely related to its love of the automobile, the energy environment of the 1970s and beyond would change the path of automobile development.
Reacting to scarcity and foreign oil dependency concerns following the Arab oil embargo of 1973-74, the federal government enacted energy-related laws intended to promote conservation. One of the most sweeping of these was the Energy Policy and Conservation Act (EPCA), which Congress passed and President Ford signed in 1975. The central goal of the EPCA was to improve automobile efficiency by imposing upon automobile manufacturers a “corporate average fuel economy” (CAFE) standard which their automobiles sold in the United States must meet to avoid civil penalties. Proponents of the EPCA believed that forceful government intervention promised a solution to America's newest energy challenge.
Though laudable, this approach flew in the face of concurrent energy policy. At the same time the government was initiating CAFE standards for automobile manufacturers, it was suppressing the cost of oil in America through a complex system of price controls. In addition, the CAFE program ignored the principles of a market system. The success of the CAFE program, therefore, is questionable. To be sure, the fuel efficiency of automobiles sold in the United States has improved markedly since the embargo, but close analysis suggests that much of this improvement would have occurred as a response to consumer demand even without the CAFE program. Furthermore, enforcement of the strictures of the CAFE program has limited manufacturers' design choices, hampered the automobile industry's ability to respond to ensuing energy cycles and concomitant consumer demand, and contributed to a fleet of older, less efficient vehicles on the country's roadways.
While proposals before the 104th Congress offered modest alterations to the CAFE program, they did not attempt dramatic change. Despite critics' efforts to highlight the shortcomings of the CAFE program, Congress has refused to abandon it and is unlikely to do so in the foreseeable future. Neither has Congress made the program stricter in more than a decade. Nevertheless, with petroleum production projected to peak in the first decade of the next century and with reliable alternatives to gasoline-powered automobiles not yet widely available, it is reasonable to continue some form of fuel efficiency policy. By modifying the CAFE program to include market-based incentives for efficiency as an input to the purchase decision, Congress can reform the program without forsaking its goals, combining reasonable efficiency with market flexibility.
There are two plausible vehicles for this change: tax incentives and marketable credits. While either solution would transfer the financial impacts of achieving or failing to achieve a minimum fuel efficiency standard from manufacturers to the automobile-purchasing public, marketable credits are the better approach because they more successfully provide direct incentives and disincentives within the context of a relatively simple and straightforward system. Both approaches suggest additional fundamental changes to the structure of the CAFE program. First, the idea that every major manufacturer should be individually responsible for achieving minimum standards should be rejected. It is possible to achieve a national minimum efficiency while allowing individual manufacturers to specialize in different types of vehicles which must compete against the products of other manufacturers. Second, with the recent boom in sales of minivans, sport utility vehicles (SUVs), and light-duty trucks, it is important that these vehicles compete on an equal basis with other vehicles, rather than being segregated into their own lower-rated fleet as they are now. By making these fundamental changes in the CAFE program, the federal government can make substantial progress in promoting market forces in the automobile industry while at the same time maintaining reasonable national efficiency goals.