The Difference Engine: Priced off the road?

THERE is one sure way to free a gas-guzzling country like America from having to rely on oil imported from places that are politically unstable and far from friendly, while at the same time reducing its carbon emissions and conserving energy for future generations. Politicians on both sides of the aisle know precisely what it is. But none dare breathe the dreaded words because they spell political suicide—all the more so in these days of dysfunctional government. So, instead of raising the tax on petrol to something close to European or Japanese levels, fuel-efficiency mandates are once again to be used to force carmakers to spend billions developing vehicles that consumers are unlikely to find appealing.

In a survey published last November by Consumer Reports, a consumer-advocacy group based in Yonkers, New York, nearly 80% of respondents would support the national goal of reducing oil consumption. But 94% said the high price of environmentally friendly cars would put them off buying one. And only 14% said they would support a gas-guzzler tax, or a vehicle tax based on miles driven. In other words, people like the idea of efficient cars, but they are not prepared to pay extra for them.

Part of the reason, say American exceptionalists, is that the country is simply different. It is certainly bigger than most other places with comparable living standards. Americans travel greater distances to work, attend school, go shopping or visit leisure centres. Meanwhile, public transport remains a painfully inadequate alternative. In short, cheap petrol is fundamental to the American way of life, as well as its citizens’ ability to earn a living. In the circumstances, higher taxes on fuel would hurt poorer people disproportionately, say defendants of the status quo.

That need not be so. The revenue so raised could always be returned to consumers as vouchers or tax credits. It is not beyond the wit of government to devise an equitable and revenue-neutral way of encouraging motorists to make their own personal choices about how much, or how little, they use their vehicles. What survey after survey has shown is that, with fuel prices being so low, a great deal of discretionary driving is done in America. The price mechanism remains the most efficient way to encourage people to decide for themselves how much of that discretionary driving is really necessary—a fact that became abundantly clear in May, when petrol prices spiked to over $4 a gallon, and retailing and entertainment suffered a double whammy.

The latest wheeze for avoiding serious discussion about weaning the country off imported oil and reducing its carbon footprint generally is the government’s call for a doubling of the Corporate Average Fuel Economy (CAFE) figure. Under the White House’s latest proposal, the fleet average fuel-economy figure that motor manufacturers would have to achieve (or pay a fine for every vehicle they sold that failed to meet the standard) would rise from today’s average for cars and light trucks of 27.3mpg (8.6 litres/100km) to 56.2mpg by 2025.

The motor industry is already under pressure to meet a CAFE figure of 35.5mpg by 2016. The new mandate would require carmakers to achieve a 5% improvement in fuel efficiency annually from 2017 onwards.

Over the past month, carmakers in Detroit have put their well-oiled lobbying machines into high gear. General Motors and Chrysler (both bailed out by taxpayers during the recent recession) and Ford (which managed without public investment) have been reluctant to reject the government’s latest mandate out of hand, fearing a reaction from the car-buying public as well as their supporters in Congress.

The carmakers admit that the 56.2mpg target is doable (counterparts in Europe are on track to achieve a fleet average of 60mpg by 2020) but warn that the costs will be far higher than the government admits. According to the White House, raising the CAFE figure to 56.2mpg by 2025 will add no more than $2,100 to $2,600 to car prices. That will be more than offset, say officials, by fuel savings of $5,500 to $7,000 over a vehicle’s life. 

Unfortunately, people who buy new cars in America rarely keep them for more than three years. With efficient vehicles suffering less-than-average depreciation, second-hand buyers are unlikely to capture enough of the savings either. Also, the official figures are more than a little optimistic. The independent Centre for Automotive Research in Ann Arbor, Michigan, estimates that the new fuel-economy standard will add between $3,740 and $9,790 to a vehicle’s cost. Given that new-car sales are rather elastic, the centre reckons the increase in price will reduce annual sales by 5.5m vehicles, eliminating 260,000 jobs in the process by 2025. So much for green technology creating employment, mutter carmakers.

These are the opening rounds in a regulatory battle that will doubtless rage behind the scenes all summer. The car companies are pressing for all manner of credits and exemptions—for instance, so many mpg being counted towards the CAFE target for using low-polluting refrigerants in air-conditioning systems, or for adding equipment that allows vehicles to run on biofuels, or the addition of solar panels and other gimmicks to reduce the work load on the engine.

But what the carmakers really want is more flexibility in how the new fuel-economy rules are introduced—with greater increases in miles per gallon coming later in the nine-year schedule rather than earlier. The hope, of course, is that some subsequent administration will relax the measures before they become too onerous—as the California Air Resources Board did when it effectively downgraded its tough “zero-emission vehicle” standard of 1990 to a less stringent “low-emission vehicle” requirement in 2004. The final CAFE figure for 2025 is expected to be announced in September, with adoption planned for next summer.

The problem with fuel-economy mandates like the CAFE measures introduced in the 1970s is that they affect only new vehicles, taking a decade or more to work their way through the fleet of cars and trucks on the road. They also suffer from a rebound effect: the gain in efficiency is offset by drivers using their new vehicles more extensively, thanks to lower operating costs. The result is that overall fuel consumption and exhaust emissions per head of population inch down incredibly slowly.

Another issue with setting high CAFE requirements is that they encourage manufacturers to game the system more than ever. For instance, given efficiency improvements like turbo-charging, inter-cooling and cylinder deactivation, petrol engines will become costlier to build—about $2,200 more than current models, says the National Research Council (NRC) in Washington, DC. Even so, they will remain the preferred source of power in cars and light trucks for at least the next ten to 15 years.

However, even with all their new-fangled technology, petrol-powered cars and trucks will not be able to meet the proposed CAFE figures alone. Motor manufacturers will therefore have to build more advanced diesel vehicles (typically $5,900 more than today’s petrol equivalents) and hybrids (roughly $6,000 more) than customers would normally be expected to buy—given their extra cost and customer preferences. To shift the surplus vehicles, carmakers will have to discount prices and absorb any losses themselves (as Toyota did with its Prius) or look to the government for help. In other words, use tax credits to encourage people to buy hybrids and other vehicles that burn alternative fuels.

The one thing policy-makers have learned from the past decade of trying to reduce fuel consumption and carbon emissions is that tax credits for hybrids and the like are hugely expensive and not particularly effective. They also have unintended consequences that can make matters worse. For instance, every Prius sold by Toyota over the past decade has allowed its dealers to sell two thirstier big cars or sports-utility vehicles—and still meet its CAFE requirement. The net effect of having generous tax credits for hybrids has been at best stagnation, if not actual decline, in the efficiency of petrol engines.

The Energy Information Administration expects the number of vehicle-miles travelled in America to grow by 30% over the next 20 years as a result of increases in population and household incomes. As the NRC pointed out in its landmark study last year, if the country seriously wishes to reduce its oil imports and carbon emissions, “consumers cannot continue to drive more and more each year”. That is a fact that cannot be avoided or disguised. Given the sprawling nature of urban America and the paucity of public transport, the only solution is higher fuel prices. In short, a gas-guzzler tax.