By 2016, tough new U.S. standards will boost average fuel efficiency to 35.5 miles per gallon for cars and light trucks, while imposing the first-ever limits on climate-altering emissions. But what exactly will that mean for motorists, the environment and the nation's struggling auto industry? Finance professor Don Fullerton, a former deputy assistant secretary of the U.S. Treasury Department who studies energy and environmental policy issues at the U. of I. Institute of Government and Public Affairs, discusses the potential impact in an interview with News Bureau Business & Law Editor Jan Dennis.
Are the Obama administration's new automobile emissions and mileage standards attainable?
The new rules do require automakers to create and develop technology that is not yet available, but the auto industry already has made significant improvements in response to similar legislation in the past that required greater future Corporate Average Fuel Economy (CAFE). Everybody seems to believe that the rate of improvement can be continued, and auto executives have agreed to this proposal, so we have to presume these new standards are attainable.
What kind of savings can motorists expect, with mileage standards increasing from 25 miles per gallon today to 35.5 miles per gallon in 2016? And would gasoline prices likely rise or fall if the new standards reduce demand?
To use round numbers, let's assume you pay $2.50 per gallon and drive 10,000 miles per year. At the current 25 miles per gallon, your gas costs are 10 cents per mile, and $1,000 per year. At 35 miles per gallon, all else equal, your cost would be 7.14 cents per mile, or $714 per year. If so, you'd save $286 per year.
But all else is not likely to remain equal. With the lower cost per mile, you might decide to drive more miles. And the price of gas is likely to change. Lower demand for gasoline might have a small impact, but other events are likely to swamp that effect on gas prices at the pump. Economists generally expect gas prices to rise, as oil is used up, but many worldwide events will make the price fluctuate up and down along the way.
How will a U.S. car and light truck fleet that is almost 40 percent cleaner affect the environment?
It won't make the environment 40 percent cleaner, that's for sure! For one thing, all transportation combined is only 30 percent of total U.S. emissions. So 40 percent cleaner transportation is only 12 percent less total emissions. Other policies will need to deal with emissions from electricity generation and from industry. For another thing, if your gas mileage improves by 40 percent, that reduces your cost per mile by 40 percent. If consumers react to prices at all, they are likely to drive more miles. This "rebound effect" reduces substantially the benefits of improved fuel efficiency. If people drive 40 percent more, to take advantage of a 40 percent reduction in costs, then emissions don't change at all.
This "rebound effect" is what's wrong with CAFE standards. Those regulations do not work well to reduce gas consumption because the lower cost per mile induces people to drive more. It works in the wrong direction. But the U.S. Congress does this to avoid enacting a simple gas tax. I'm sure a gas tax is not popular with constituents, but it is clearly the best way to reduce gas consumption. It would induce consumers to buy more fuel-efficient cars, even without CAFE mandates, and it would also induce consumers to drive less. Both of those effects work in the right direction.
Are the new standards good news or bad news for the already struggling U.S. auto industry?
Well, if they're bankrupt already, can they be worse than bankrupt? I don't know. But the auto industry has been dragging its heels, fighting any kind of environmental regulation for decades, and it has not prevented their current problems, so it's not clear that further heel dragging will help. They might as well jump on board the new bandwagon, work on the newest technology, and try to catch up with the new worldwide auto market.
Actually, the new rules may help the auto industry. It's possible that each U.S. automaker did not want to invest in such technology and incur more cost than their competitors. But the new rules require all to make these investments, so nobody loses position relative to each other, and they might all gain in worldwide markets.
Are the stiffer emissions and mileage requirements a death knell for big trucks and SUVs?
They probably won't "die," but those trucks and SUVs are the ones with the worst gas mileage. When gas prices last summer rose sharply to $4 per gallon, purchases of those vehicles dropped off sharply. Only the fall back to $2 per gallon restored some purchases. But President Obama's new rules don't raise the price of gasoline back up again; they merely require manufacturers to increase fuel efficiency - even in those trucks. So people can continue buying trucks with greater fuel efficiency.
Frankly, I think we lost a terrific opportunity back in the summer of 2008. When the gas price started falling back from the high of $4 per gallon, consumers thought that $3 per gallon was cheap. The U.S. could have instituted a new tax of a dollar per gallon, as the price fell by more than a dollar, and consumers would not even have noticed. Such a gas tax would do a lot more than CAFE standards to reduce the use of gasoline, reduce greenhouse gas emissions, and reduce our dependence on foreign oil.