Written By: Maya Flynn
The primary question that economists discuss in terms of government intervention to market failure, is how much should be done to change the system? In some cases the government uses too strong of regulations or not enough that prevents the market to reach the socially optimal point accounting for social costs. A recent example of this can be seen in the opposing viewpoints of the Obama and Trump administrations on the CAFE regulations.
CAFE represents corporate average fuel economy, in other words the average gas mileage a certain company's cars have derived from each separate car that they have sold. These regulations were put in place in 1975 in response to the Arab oil embargo to attempt to lower gas usage and importations. As time went on, the embargo was kept in place due to environmental concerns and the incentive for better technology.
Companies that don’t meet the CAFE requirements are faced with penalty fines, while companies whose cars use less gas get carbon credits. The system allows for carbon credits to be used to negate fines. This gives opportunities for fuel efficent companies to advance because carbon credits, which can be sold to other companies, negate the penalty fines. Companies such as Tesla earn many carbon credits and sell them to companies that would otherwise have to pay fines. This helps the market overall, because instead of losing the penalty money to the government the money is going towards fuel efficent companies that are doing research and developing better technology. The video below explains more in depth about the CAFE system:https://www.youtube.com/watch?list=PLtFPPxstiHw-BowHSOJRcSpyDwpZi9Z5s&v=oW-QH98MId8
Without this system, there would not only lack an incentive for better fuel economy, but additionally a lack of money to put towards new technology. As shown in the graph, since the programs started the fuel efficiency has increased drastically and is projected to continue for 2020.
During the Obama administration a plan was put in place to advance the requirements and make strides to increase fuel economy. The goal was to reach 54.5 mpg by 2025. After the plan was put in place, individual car manufacturers had to figure out separately how they would reach the requirements or pay for the penalties. This is a time consuming and costly process including changing entire production lines, and replacing and redesigning parts of the engine and vehicle. The idea was that spending this money would be worth it in the long run and also, would be supplemented by carbon credits.
This was all disrupted when the Trump administration took over, because they proposed a rollback, which would cancel the requirements for 2025 and also make impossible for individual states to create their own requirements. The state of California which currently has strong state based requirements announced that they would sue the government if this was put in place. The Trump plan has since been modified and hasn’t been passed yet. With the midterm elections leaning democratic, it is unlikely that any changes weakening Obama’s requirements will pass.
The remaining arguments lie in the set up of the program, because it encourages companies to sell smaller cars which are also often imported. This is a problem because smaller cars are more dangerous when involved in accidents, with a much higher risk for injury or fatality. While the CAFE has been effective, the question remains if the program is the best possible way to account for the social cost of oil emissions and balance the market.
Works Cited
Abuelsamid, Sam. “New Vehicles Keep Getting Heavier - Or Are They?” Forbes, Forbes Magazine, 3 Jan. 2019, www.forbes.com/sites/samabuelsamid/2019/01/03/new-vehicles-keep-getting-heavier-or-are-they/#2c0c29bf4518.Carty, Sharon Silke. “54.5 Mpg Target Is off the Table, U.S. Regulators Say.” Automotive News, 18 July 2016, www.autonews.com/article/20160718/OEM/160719863/54-5-mpg-target-is-off-the-table-u-s-regulators-say.
Davenport, Coral. “Trump Administration Unveils Its Plan to Relax Car Pollution Rules.” The New York Times, The New York Times, 2 Aug. 2018, www.nytimes.com/2018/08/02/climate/trump-auto-emissions-california.html.
Geuss, Megan. “Eleven Researchers Publish Sharp Critique of EPA Fuel Economy Logic.” Ars Technica, Ars Technica, 9 Dec. 2018, arstechnica.com/tech-policy/2018/12/science-trump-admin-report-justifying-fuel-economy-rollback-is-flawed/.
Hyatt, Kyle. “2019 Chevy Silverado Gets Worse Gas Mileage than the Truck It Replaces.” CNET, CNET, 9 Dec. 2018, www.cnet.com/roadshow/news/2019-chevy-silverado-1500-fuel-economy/.
Putre, Laura. “Rough Roads: Will Political Uncertainty Slow Automotive Innovation?” IndustryWeek, 12 Dec. 2018, www.industryweek.com/leadership/rough-roads-will-political-uncertainty-slow-automotive-innovation.
“Read ‘Cost, Effectiveness, and Deployment of Fuel Economy Technologies for Light-Duty Vehicles’ at NAP.edu.” National Academies Press: OpenBook, www.nap.edu/read/21744/chapter/10.
This instance of the CAFE system truly illustrates how America is not a true capitalist economy. Laissez-faire, or a hands-off approach, is most definitely not in effect here. The CAFE system utilizes carbon credits which seem similar to tradable emissions permits as they can be sold between companies to limit the fines they have to pay for if their cars use to much gas. This system is probably much more efficient than environmental standards, as dead weight loss is minimized, since companies who can most easily sell their permits, will (i.e. Tesla). In this way, a cap and trade program is in effect as Tesla and other companies who sell their permits earn revenue from selling their permits. It's up to the company to decide if the opportunity cost of the permit is better spent in the form of utilizing or selling the permit.
ReplyDeleteI never knew about this system being in place, but I do think that it is a very good thing in efforts to help the environment. I think that it would be interesting to see the prices of fines for the companies because obviously many company cars on the road are not the most fuel efficient, so clearly companies are willing to be charged rather than buying better cars. The goal of 54 miles per gallon that the Obama administration wanted would be crazy. I could not imagine having a car that was that fuel efficient. I think it’s interesting that the Trump administration wanted to rollback the plans, because obviously they are a good thing. Also, allowing states to create their own guidelines could be both a good thing and a bad thing for the economy as some companies may change the state they are located in to avoid guidelines.
ReplyDeleteCAFE regulations benefit consumers greatly whether they realize it or not. More fuel efficient cars will save consumers more money in long term car expenses. This also increases competition among car companies to produce better cars and gain consumer demand, which once again benefits consumers because they will receive better quality and more cost efficient cars.
ReplyDeleteI never thought about this before. I think that we need incentives to help the environment otherwise nobody would and destruction of the commons would occur. We eventually will need to switch to energy run cars anyways because fossil fuels are a limited resource. Creating incentives to start now will help prevent future environmental issues. Also gives incentive to design more cars that run off of energy instead of gas.
ReplyDeleteIt's an interesting point that with CAFE regulations in place, more cars are imported and many of them are more dangerous due to their smaller size. This is a negative externality as a result of the "transaction" between the government and car companies, and therefore must be taken into account when comparing Obama's and Trump's plans. Furthermore, I think it is important to recognize the success of these cap and trade programs, as they allow those who can more cheaply be fuel efficient to do so, while slightly penalizing those who cannot do so at a low cost; I believe that this policy should be maintained as it is one of the most effective ways to reduce the impacts of a negative externality and allows mutually beneficial transactions to occur. I do not believe that further regulation would be nearly as beneficial as this cap and trade policy as it does less to stimulate economy of the car industry.
ReplyDeleteThis is a really interesting topic, and it also ties into the debate about how oil emissions affect our environment. One question I would ask is what is the social cost of oil emissions? Sometimes the tough part with government taxes used to match the social cost of pollution can be how the government actually uses the money that is taxed. Does the tax money go towards preventing and cleaning up polluted areas? Or something else? I believe that regulation is fine and that reducing oil emissions is great but there does have to be a happy medium between government intervention and letting the car industry do what they want. We wouldn't want less stimulation to the car industry because then you never know, already expensive car prices could rise and companies would struggle to pay multitudes of fines from regulation.
ReplyDeleteIt is a bit of a stroke of genius to have CAFE regulations measured by the cars a firm sells instead of the cars a firm produces. In the latter case a company can escape the regulation by simply producing a few more fuel efficient cars to bring up the average mpg without selling them (which would be a waste of resources) if they feel that is less expensive then the fine. On the other hand having the requirement directly tied to sold inventory gives companies more incentive to sell high efficiency vehicles as that's the only way to bring up their average mpg.
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