Obama administration officials touted the tougher car mileage standards announced yesterday as “truly historic”. A historic missed opportunity is more like it. A popular president with a green agenda and with his party in control of Congress could have taken the direct approach to reducing America's carbon footprint by raising the lowest gasoline taxes in the developed world. Detroit, which traditionally lobbied against fuel taxes, is suddenly in no position to argue. Instead, Barack Obama is tightening the flawed corporate average fuel economy standards imposed in 1975.
CAFE forces manufacturers to meet targets for their entire fleet or pay fines but does not reduce miles driven. More expensive gasoline would influence which cars are bought and the use of existing ones. The Congressional Budget Office estimated that a 46-cent-a-gallon tax increase would achieve a 10 per cent reduction in demand. A separate study at Stanford University calculates that direct taxes can achieve an equivalent reduction to CAFE at one-sixth the cost. And CAFE standards have had unintended consequences. By making “light trucks” a separate category, it encouraged a boom in the large vehicles that became Detroit's cash cow, at least until recently.
For an administration ready to spend billions on a “cash for clunkers” programme, its policies are inconsistent. Higher CAFE standards could add $1,300 to the cost of a vehicle, incentivising consumers to keep older, inefficient ones. By contrast, raising pump prices would have an immediate impact on miles driven and make gas guzzlers unattractive. But Washington is run by politicians, not economists. A subsidy for buying new cars is viewed by voters as a gift, even though they ultimately foot the bill. Tinkering with CAFE rather than taxes, creates the illusion among voters that costs are borne by someone else whereas the effect of an increase in pump prices is felt directly. Strong CAFE is not preferable to bitter medicine.