Buy a Hybrid, Save a Hummer - Hybrid Vehicles and CAFE

A New York Times article today brought up a very interesting subtlety to growing hybrid car sales that perfectly highlights the need for tighter fuel economy standards in the U.S.: given the structure of current federal CAFE fuel economy standards, each hybrid vehicle sale means a free pass to sell one more gas guzzler.

Congress set the first minimum corporate average fuel economy, known as CAFE, for all carmakers back in 1978. This new requirement meant that the total average fuel economy for all vehicles sold by that automaker had to exceed the minimum standard set by the law. Different standards were developed for cars and light trucks (paving the way for the existence of the SUV!). Today, the minimum average for cars is 27.5 miles a gallon and for S.U.V.'s and other light trucks, it's 21.6.

Because there is no minimum fuel economy standard for individual vehicles and CAFE works instead by setting standards for the average of all cars (and light trucks) sold by the automaker, the sales of gas guzzlers have to be offset by sales of efficient vehicles. Here's where the hybrids come in:

"YOU can guess what this means for hybrids. Each one becomes a free pass for its manufacturer to sell a few extra gas guzzlers. For now, this is less true for Toyota's cars, because they're above the mileage requirement. But Toyota's trucks and the American automakers are right near the limits. So every Toyota Highlander hybrid S.U.V. begets a hulking Lexus S.U.V., and every Ford Escape — the hybrid S.U.V. that Kermit the Frog hawked during the Super Bowl — makes room for a Lincoln Navigator, which gets all of 12 miles a gallon. Instead of simply saving gas when you buy a hybrid, you're giving somebody else the right to use it."

This situation perfectly highlights the need for serious policy measures to encourage fuel efficiency. Even with hybrid sales booming, given our current policy set-up to encourage fuel efficiency - i.e. CAFE - it will do little to decrease national fuel consumption assuming automakers take advantage of CAFE's set-up to simply sell more Hummers and Escalades (BTW, it now makes a lot more sense to me why GM and Ford have been focusing on hybrid SUVs and have been slow to release a hybrid sedan or compact).

What we clearly need is to seriously revamp CAFE or eliminate it altogether in favor of other policies.

A start would be to suplement the CAFE requirement with a true minimum standard for fuel economy for various weight classes or vehicle types. In fact, this is exactly what China has been doing (excerpt previous post here):

The new Five Year Plan involves the adoption of stricter vehicle fuel-efficiency standards. The standards are not as strict as the semi-voluntary standards that the auto industry has adopted in Europe but are higher than those in the United States (much to our embarrasment). According to an analysis by the US PIRG, "China’s new fuel economy standards require 32 different car and truck weight-based classes to achieve between 19 and 38 mpg by 2005, and between 21 and 43 mpg by 2008." Unlike the US standards which mandate that an average of automobiles produced in a particular weight class meet the targets, China's standards present a minimum fuel economy that all cars produced in that class must meet. According to the US PIRG, "In China, if the automobiles do not meet the prescribed standards, they simply cannot be sold."

Now doesn't a standard that sets a reasonable minimum fuel economy for each weight class make much more sense than CAFE which allows progress on the leading end of each weight class implicitly condones regression on the tail end of the weight class. I would of course favor a strict minimum as well that became progressively higher as time goes on to encourage continued innovation and improvements in fuel economy.

An alternative to reworking CAFE and mileage standards would simply be to levy a tax that discourages the use of gas-guzzlers. A hefty gas tax comes immediately to mind but again, we can look to China for other alternatives (again, this is an excerpt from my previous post):

In addition to the efficiency standards, China has impemented a new Vehicle Tax Policy which imposes a levee of 1 percent on smaller-engine vehicles, but up to 20 percent on larger-engine vehicles, to discourage their use.

(Contrast China's policy with the US which offers tax incentives to encourage business owners to buy the largest SUVs). The idea with either of these is to 'allow' people to buy whatever car they want but to make it financially worth their while to purchase more efficient vehicles. (And just to hedge off some typical 'gas tax is evil' arguments: the tax would be a significant source of revenue that could be used to lower other taxes like payroll and income taxes so as to mitigate the regressive nature of gas taxes; also, to avoid the disasterous increase in price for transporting goods, an exemption to the gas tax could be made for truckers, etc.)

I would personally suggest a combination of the two. If we are truly serious about reducing our oil consumption, targeting transportation with an aggressive combination of gradually increasing CAFE standards with a minimum mileage standard and a hefty gas tax to encourage conservation and efficiency would truly make a sizable dent in our oil consumption.

Ultimately, as the example of hybrids and their affect on CAFE regulations illustrates, we clearly need to do something new - the status quo just isn't cutting it.

[A hat tip to Jenny]