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August 29, 2005

Gas Tax vs. Cafe Standards

There's been a lot of CAFE bashing lately, and much of it, I fear, is a bit misguided.  Brad Plumer (who I don't mean to single out, he's just the most recent) joins in with a post blasting CAFE in favor of a gas tax, maybe with some means-tested rebates to ease up on the regressivity of it.  A few things:

• First, gas taxes are a very direct way of influencing fuel consumption, but it's not clear that, at attainable rates, they actually do influence fuel consumption.  Raising the tax by the small, incremental amounts that could (and by could, I mean in a hypothetical world where this was somehow a viable policy option) pass would likely do little to stem consumption.  That's because, as it turns out, gas hasn't even been near the top price folks are willing to pay.  Most simply bear the burden, preferring to pay more rather than disrupt their lifestyle.  The place gas taxes make a difference is, in the end, among the poor, but if we put in rebates like Brad is suggesting, it won't affect them all.  I'd like to have a gas tax because I'm all for the added revenue, but it's not going to do much against consumption.  If you can afford an Expedition, you can nearly always afford more at the pump.

• Gas taxes, unlike CAFE increases, are basically impossible to pass.  Particularly now.  It's one thing to sneak in a gas tax when fuel is cheap, but convincing Americans of it when they're demanding a drop in gas prices is not, I think, a sound recipe for political survival.  It just won't happen.

• On the other hand, 93% of Americans support an increase in CAFE standards.  That doesn't make it easy -- the auto industry is a powerful lobby.  But they're going to fight a gas tax too, so I'd rather our politicians be battling back with an overwhelmingly popular proposal rather than running into industry opposition while carrying a bill Americans will stone them for passing.

• The beauty of CAFE increases is that they're an action-neutral fix.  Gas taxes requires a high enough price that Americans start driving less in order to conserve.  So you need to jack up the price till filling up becomes so economically painful it actually changes the behavior of Americans.  Demand an increase in CAFE standards and, no matter what happens, the country will use less gas.  It's highly unlikely that everyone will decide their newer, more efficient car requires them to take a road trip.And it's not as if this is a serious hardship on the auto industry -- the technology is there, they've just been pushing it into more powerful cares rather than more efficient ones.  We can change that, and it's be good for the country if we did.

• Brad uses an analogy to make his point: the Smiths have a little, efficient wiener car they drive everywhere and the Browns have a wasteful SUV but they conserve fuel and bike to work.  Brad argues that we want to penalize the Smiths, not the Browns.  Why?  Why should we penalize anyone?  If we force a serious increase in CAFE standards, neither the Smiths nor the Browns feel the hurt, but both end up using less gas.  And if, later, peak oil comes quick enough that we need a gas tax, we can implement one.  But for now, why not achieve the goal -- lower total oil consumption -- through a non-punitive, broadly popular measure?  Why isn't this a no-brainer?

August 29, 2005 in Energy | Permalink


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» CAFE standards and gas taxes from The Unrepentant Individual
I’ve been watching the lefty blogs over the last few days, and there seems to be disagreement. They all, of course, agree that reduced oil consumption is a positive thing, and that it is the job of the government to solve it. [Read More]

Tracked on Aug 31, 2005 11:31:31 PM


Ezra, my dear, "neither the Smiths nor the Browns feel the hurt" with higher CAFE standards? And the more efficient engines get in there . . . by magic? Of course not. The political appeal of CAFE is that it appears to increase efficiency at no cost to consumers but, in fact, it's just a hidden tax on buyers of less-efficient-than-average vehicles. In Brad's hypothetical, CAFE rules have the Browns subsidizing the Smiths, which is ass-backwards. I find the notion that people don't change their driving habits in response to higher gas prices a bit bizarre -- if people were that price-insensitive then gasoline would be much, much, much more expensive b/c stations would just hack up prices.

Meanwhile, part of the problem with trying to do this purely through the fuel-economy lever is you run the risk that ppl will respond to ownership of more efficient vehicle ownership by adopting more car-dependent lifestyles. On top of that, CAFE does nothing to subsidize the most fuel efficient people of all -- the people who don't drive.

Political considerations aside, the thing to do is to impose a much, much, much higher gasoline tax. Think of a price. Then think of a way higher price. Three dollars a gallon, say. And then rebate the revenues on a flat per capita basis. People will change!

Posted by: Matthew Yglesias | Aug 29, 2005 5:45:27 PM

CAFE is the way to go, at least in the US. We have such a poor public transportation system that getting to and from work can be accomplished only by driving. Even car pooling is not often an option.

Yet higher mileage is just there for the taking. Perhaps there is a way to structure a combination. Your gas tax is based on the mileage rating of your vehicle. High mileage = low tax, low mileage = high tax. Seems this would drive the market to produce higher mileage vehicles by incenting their purchase.

Of course, you have to be able to adjust the tax at time of gasoline sale for your vehicle. Highest rate for filling a gas can (can be used anywhere) or the lowest mileage vehicles.

There would be logistics to iron out.

Auto industry would likely still oppose because it would curtail the BIG high price, high margin sales. But they may like it better than CAFE.

Posted by: George | Aug 29, 2005 5:49:09 PM

Ezra:And it's not as if this is a serious hardship on the auto industry -- the technology is there, they've just been pushing it into more powerful cares rather than more efficient ones.

I've been tempted lately to actually count the number of car ads on some of the 'men' cable stations, or get a percentage of total ad time. One after another. The content and aura is pure testosterone. Speed reversal turns, mountain climbing, river crossings, etc. Why?

Power and male sex drives are all over the ads. This sells big, powerful, fast cars, truck, and SUVs. All very expensive. And very profitable.

CAFE standards would require less weight, less power, and less 'zoom' to achieve higher gas milage. The car companies would sell less, be less profitable, and they'd appear wimpy to the guys who need their dick extensions to be manly.

So, CAFE makes ultimate sense as public policy in an era of declining oil supply, but no so good business sense if you run a car company like GM and Ford that are barely viable with crushing debt, retirement and health care burdens.

Everything seems contingent and political. National health care would help the auto companies, but they are caught in the mutual aid society that is the corporate wing of BushCo. All for one and one for all on government policy that impacts corporate profits.

So, while BushCo controls all the levers, neither higher gas taxes or higher CAFE standards (applicable to trucks and SUV's as well - currently not true - can be passed.

While we are dreaming, how about a graduated federal gas guzzler tax at time of purchase for any vehicle above some mpg standard that increases over time?

Posted by: JimPortlandOR | Aug 29, 2005 5:57:29 PM

Ezra -- See my update, especially the links to Samwick. Ultimately, it seems that neither measure will have a very significant effect, although I agree with Matt (obviously) on the weird distortions caused by CAFE standards.

Posted by: Brad Plumer | Aug 29, 2005 6:11:36 PM

Matt, sweetie-pie. You get a few things wrong here. Let's correct:

1) The oil companies, as you know, are experiencing record profits. That means a) folks aren't cutting back on consumption much (though we know that from other sources) and b) they could have raised prices earlier, profitably, but for various reasons didn't. So bizarre though it may be, it remains true that gas can go much higher before anyone but the poor cut back. You're simply wrong that "if people were that price-insensitive then gasoline would be much, much, much more expensive b/c stations would just hack up prices." People are proving that price insensitive right now. There are a variety of reasons oil companies may not want to do that (one being it'd make Americans serious about conservation), but fear of losses is obviously not one of them.

2) Your bit against CAFE is just incorrect. As you saw in the hybrid article you pointed me to recently (and as has been well-proven in non-hybrid vehicles since the 80's), the efficiency technologies that are used to increase mileage can also be used to increase power without significantly changing mileage. During the 70's and part of the 80's, we jacked up mileage without significantly increasing the cost of cars. After the 80's, American makers began moving those gains back to power in order to carve out a niche away from the Japanese economy cars. For a history of this, check out this CRS report. In the early 80's, cars averaged some 27 mpg. Now they average 21. You're telling me we can't go back 15 years in technology -- or even improve on it? -- without jacking up the cost? It would be neither hard nor costly to force automakers to put more emphasis on fuel efficiency than power. We've done it before, we know it works, we can do it again.

3) It's not as if there are only two cars on the market. If CAFE did, as you seem to think, make cars more expensive, there are more economical, less inefficient cars that can be bought. What we'd be doing here is incentivizing the purchase and production of efficient models and disincentivizing inefficient models. I cry no tears for that. No consumer need be harmed -- they can always purchase the more efficient vehicle.

4) This way high gas tax...you're going to sell it to the American public...how? And which senators are going to vote for it? As it happens, I'd like to slap a $4,000 fee on all fuel inefficient cars in order to bring long term environmental costs into the sticker price, but that's not going to happen. Even so, I think it's a more likely policy than a massive gas increase.

5) For more innovative ways of raising CAFE standards, read Winning the Oil Endgame, you can download it free from the Rocky Mountain Institute's website and it'll give you an idea of how easy raising this stuff is. Studies show that much of the increase during the 80's had nothing to do with smaller cars and everything to do with technological advances that CAFE hastened into production. As Lovins well shows, there's a whole new generation of materials and advances waiting for the next round.

Brad: so far as I can tell, Samwick doesn't address what's been the real (well, real non-Reagan) killer for CAFE -- the rise of SUV's and their classification as light trucks, which totally misused the original reasons for the dual-fleet system. Any CAFE increase has to take them seriously and it should, so far as I can tell, make a much bigger dent than Goldberg predicted. More to the point, the National Academy of Sciences did a study on CAFE in 2001 and found a considerably more effective rule than Samwick/Goldberg did. Their results are here, and the exec summary is well worth the read.

Posted by: Ezra | Aug 29, 2005 6:49:04 PM

Thanks for the link -- I'll check it out.

Posted by: Brad Plumer | Aug 29, 2005 6:56:15 PM

If you have access to a library get a copy of 1) Andrew Tobias's book "My Vast Fortune" 2) or a 1996 Worth magazine cover article called "Ralph Nader is a Big Fat Idiot", and read the article/chapter on auto insurance. Tobias's basic idea was to institute "Pay at the pump no fault auto insurance". That is, you'd switch from the current auto insurance system to a no fault system, except in cases of extreme criminal negligence. And you'd pay for your auto insurance by increased fees at driver registration and a gas tax. At the time (1996), Tobias figured that an extra $114 dollars at registration and a 25 cents a gallon gas tax would be enough to cover everyone in the state of California. That is, drivers would pay their increased registration fees and increased gas taxes, and then no household in California would have to buy auto insurance. They'd be covered (as long as they paid their registration) automatically.

Well, the proposal was killed by an unholy alliance of the oil companies ( who brought along with them the Chamber of Commerce) and the trial lawyers (who brought along with them Ralph Nader.) Plus, it was probably too complicated, and people don't sufficiently hate paying auto insurance, that it was simply too difficult to pass.

Anyway, I suggested a politically feasible gas tax once to Tobias ( basically I suggested a gas tax increase combined with a payroll tax cut) and his reply: "People who drive a lot would be furious at people who get the tax break and don't drive a lot. Millions would perceive it as unfair and keep it from passing."

All of these little policies probably can't pass in isolation. You have to package them all together and make the case that taken as a whole, the package will be beneficial for the long-term survival of our economy/environment/country.

I'd like a gas/BTU tax, but I don't have a problem with CAFE standards. I'm not sure how much good they'd do, or how much they'd cost, however.

Also, I don't remember seeing what Mojo/the Prospect/TNR/The Nation/Washington Monthly/the Progressive (so . . .many . . .magazines) think of nuclear power as an environmentally friendly source of energy. They must have written something, but I don't remember seeing it.

Posted by: roublen vesseau | Aug 29, 2005 7:04:24 PM

roublen -- Having written a short bit on nuclear power for Mother Jones a long while back, I guess the answer there is: "Looks promising, but there are a lot of serious questions that haven't been thought through." I don't know what the official magazine stance is, though -- probably negative.

Posted by: Brad Plumer | Aug 29, 2005 7:17:00 PM

Not directly on-topic:
That is, drivers would pay their increased registration fees and increased gas taxes, and then no household in California would have to buy auto insurance.

Presently, there is a great incentive to drive safely provided by increased insurance premia on drivers with speeding tickets, much larger than the cost of a ticket. This system would drastically weaken that incentive, no? Is the solution to make speeding tickets really expensive, too?

(Incidentally, read here about a $200K speeding ticket!)

Posted by: Allen K. | Aug 29, 2005 7:35:42 PM

well, the proposal had many more whistles and bells than I laid out, but drivers would pay somewhat more at registration depending on the number of points they had accumulated. Plus, one advantage of pay at the pump is that the 15-20% of uninsured drivers would at least be paying gas taxes into the system (I suppose they could still flake on registration).

It's true that no-fault insurance would, for good or ill, somewhat reduce the risk of being in an accident, though I'm not inclined to think people will seriously change their driving habits because of a change in insurance regimes.

If you're really interested in this stuff there's a loong out of print book called Auto Insurance Alert! Why the system stinks, how to fix it, what to do meantime which goes into all this in mind-numbing detail. Here is Tobias's book blurb:

"Well, I had this idea for "pay at the pump" no-fault auto insurance. Not original with me, but I had a very fun time fleshing it out to make it fair (bad drivers would pay more), efficient (it would have been SO efficient!) and private (it would have been very much a free-enterprise system).

Although this little manifesto is out of print, the story of the crusade (ongoing, incidentally, should you wish to join) is told, some would say ad nauseum, in MY VAST FORTUNE.


FWIW, I'm not Tobias's sock puppet.

Posted by: roublen | Aug 29, 2005 7:59:26 PM

Oh Brad, I read the article. In addition to all the things you talked about, I was wondering how much uranium/radioactive fuel there is in the world, where is it located, etc. If we switched to nuclear power in a big way, would we be soon talking about "peak uranium"? I'm utterly clueless about the technology, BTW. Just wondering.

Posted by: roublen | Aug 29, 2005 8:04:29 PM

I find the notion that people don't change their driving habits in response to higher gas prices a bit bizarre.....

Ezra has not made his case. He just throws it out there that no one is modifying their behavior. I don't think that is true. Try this link showing changing behavior already at the current prices.

Posted by: Fred Jones | Aug 29, 2005 8:11:30 PM

Oh, it's not that people don't change their habits (Fred's link is wrong, that's car buying, what you're looking for is this), it's that they don't change them very much. About 20% say they're driving less, though it's generally safe to assume that it's fewer than that, but there's nevertheless some impact. Unfortunately, most folks can only drive less at the margins. You work 20 miles away, you're not biking. You live in LA, you're probably not taking the bus. You live in Montana, the grocery store may well be more than a stroll. You going to stop dropping your kids off at school? You going to to tell Johnny he can't play soccer because driving him too games costs too much? Not unless you're poor.

Cutting back on driving is tough -- it disrupts lifestyles quite significantly. Many times, the poor can't do it at all. They often live farther from workplaces than the rich as they have less economic flexibility when choosing living situations. At best, you hurt them with a gas tax and they drive a bit less on the margins, saving a negligible amount of fuel. At worst, you simply hurt them. And, in any case, you're not going to be saving much fuel without an absolutely enormous increase. Which you won't get through Congress. So the point, in the end, is somewhat moot. The question becomes whether you're willing to put up with CAFE's inequities or simply institute some sort of feebate program. In addition to being a bad idea, a gas tax, with 44% of Americans angry at gas prices, is simply unfeasible.

Posted by: Ezra | Aug 29, 2005 8:26:47 PM

Fred, it has been shown, though not conclusively, that the demand for gasoline is pretty inelastic (at least in the short term, at least at prices not too far from where we're at now).

That certainly doesn't mean that people won't or don't change their behaviors... just that they don't seem to change them very much on a short time scale. For purposes of longer-term planning things probably pan out differently. Clearly, some people here in SoCal contemplating gas at >$3/gallon will probably not decide to go with the Escalade when they buy in October.

Posted by: TJ | Aug 29, 2005 8:28:18 PM

A study by the mackinac center for public policy (these are free-market folks)puts the short run price elasticity for gasoline at ~0.2 (they're supressing the minus sign, looks like).

Posted by: TJ | Aug 29, 2005 8:32:59 PM

Think of a price. Then think of a way higher price. Three dollars a gallon, say.

I assume you mean a tax of $3/gal, not a price set at that amount? The price is close to there now.

The basic point, though, is right on. Most people might not change their gasoline ( or broader oil) consumption in response to higher prices but most don't have to. A three to five per cent drop in oil consumption would have enormous impact on prices.

The automakers' CAFE workaround maneuver of reclassifying SUVs is not some sort of one-off problem. The core problem of price controls, quality controls, unfunded mandates etc are these workarounds. Clever people find away around them, a tax- if it's not too excessive- doesn't suffer similarly.

Posted by: QuietStorm | Aug 29, 2005 8:34:41 PM

"Unfortunately, most folks can only drive less at the margins."

Well, that's is not good because my guess there are limits on energy efficiency that will be reached before we reach peak oil.

May I suggest re-urbanization? May I suggest a relationship between long-term interest rates(mortgages) and gasoline/energy consumption?

My political guess is that CAFE std increases are more politically plausible than gasoline tax increases. Tho any effective energy policy is gonna hurt like hell, and be politically difficult.

Posted by: bob mcmanus | Aug 29, 2005 8:55:05 PM

roublen -- at current usage rates, if I recall, the uranium supply would only last another 50-70 years. Though we could always start building more efficient reactors, or fire up fast-breeder reactors, but there are security costs associated with those.

Posted by: Brad Plumer | Aug 29, 2005 8:57:57 PM

Matt: I find the notion that people don't change their driving habits in response to higher gas prices a bit bizarre -- if people were that price-insensitive then gasoline would be much, much, much more expensive b/c stations would just hack up prices.
Come on. That's incredibly weak. The reason gas prices are where they are is because people would change their buying habits and not their driving habits in response to higher prices. Gas prices are kept low because of competition among the gas stations. fI think Ezra's point was pretty clear. When gas prices go up, people just mostly become more careful about finding the best price instead of drastically changing their driving habits. After all, it's not like you can just instantly pack up and move to shorten your commute.

Posted by: Jacques | Aug 29, 2005 9:27:35 PM

In NJ a few years ago, gas was about $1.00 a gallon and the state fund for highways was almost out of money. Even in that idea setting, a 3 or 4 cent gas tax couldn't be passed.

Posted by: Judy | Aug 29, 2005 9:30:10 PM

Let's see....on one hand, Ezra agrees that high gas prices change the consumers' buying habits and on the other hand he lauds a change in CAFE standards as the answer. How does that make any sense if high prices are already influencing buying habits?

Posted by: Fred Jones | Aug 29, 2005 9:39:47 PM

You have terrible, terrible reading comprehension, don't you Fred?

Posted by: Ezra | Aug 29, 2005 10:46:44 PM

Fuel economy is heavily dependent on how fast you accelerate. People can get excellent gas mileage, if they are willing to forfeit excess power and acceleration. Just changing driving habits actually has a fairly large impact, even in a gas guzzling SUV.

Technical wizardry does not cut against this basic fact of fuel economy physics. Hybrids, for example, introduced for their potential for great gas mileage, have been increasingly designed to deliver great acceleration and mediocre mileage.

If the objective is to affect gas consumption, the effective policy will always be to raise the price of gas.

Arguing that people will not accept the means, is to argue that people will not accept the objective. Accept that and live in peace.

Posted by: Bruce Wilder | Aug 29, 2005 11:47:08 PM

I'm with you, Ezra--CAFE (with correction of some of the most damaging loopholes and absurdities--PT Cruiser is a truck?!) is the way to go.

Brad DeLong featured the Andrew Samwick argument in favor of gas taxes a few days ago. http://delong.typepad.com/sdj/2005/08/andrew_samwick_.html

The economists appear to be forced by their training to say that the best way to reduce consumption of a good is to raise its price, so they overwhelmingly favor increases in gasoline taxes over increases in CAFE standards.

I believe that an understanding of the role automobile transportation plays in the lives of American, together with an awareness of the efficiency technologies and strategies already available to automakers, makes CAFE the better approach by far.

One negative of the CAFE approach is that U.S. factory employees of Ford, GM, and Daimler Chrysler likely would bear a greater burden than the rest of the U.S. population--a sad result of overeliance by the big three on vehicle size and power to compete.

Posted by: Ottnott | Aug 30, 2005 12:09:16 AM

how might eliminating subsidies for big oil companies affect gas prices here in the US? this would not impart tax increases on consumers, it would mean retracting the trough a little bit for long-established technologies.

if we finagled that, we could funnel the subsidies back into r & d for cleaner power like fuel cells or encourage healthier incentives (for example, tax breaks that lead to economies of scale for the production of hybrids.)

Posted by: mk, LA CA | Aug 30, 2005 12:25:31 AM

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