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CAFE STILL TASTIER THAN GAS TAXES? Thumb on the scale in new RFF comparison of fuel taxes and efficiency standards?
BY Gar Lipow, Grist Magazine 25 OCT 2010 4:18 PM
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A new review of the literature by Resources for the Future suggests that gas taxes motivate drivers to use less gasoline far more cheaply(http://rff.org/documents/RFF-DP-10-45.pdf) than auto efficiency standards, such as CAFE. There are a number of reasons to be suspicious of this conclusion.
In order to argue high CAFE costs compared to a comparatively modest gas tax, the study dismisses the NHTSA(http://tinyurl.com/29mutnz) estimate of far less than $900 added to the cost of an average passenger car as an "engineering" based approach, preferring econometric modeling. There is nothing wrong with modeling in its place; but in the environmental field, economists have a long and consistent record of overestimating the cost of complying with regulations (http://www.epi.org/page/-/old/briefingpapers/bp69.pdf). At least in this field, if the economists and engineers disagree, the engineers are the ones to bet on. Also the talking point that "NHTSA (2010) results beg the question of why automakers have not already incorporated seemingly profitable technologies" seems weak when applied to an industry that just had to be bailed out with massive government bridge loans.
A second argument contains at least some sense. Greenhouse gas pollution is only one of many social costs of driving, including other forms of air pollution, parking, and road maintenance. Because gas taxes, unlike efficiency standards, discourage driving, they provide co-benefits in reducing these costs.
One point the study itself makes is that this does not apply if these other costs are dealt with separately. If we end other driving subsidies, charging the real cost of parking, road use and so forth, even by the models covered in the RFF literature review a regulatory approach is the most efficient one.
However, the study also makes a claim I find difficult to believe. It claims that in the absence of regulations or charges accounting for such non-greenhouse gas related charges, a gas tax alone cost less per gallon of gasoline saved than either a pure regulatory approach, or even a regulatory approach combined with a gas tax. It further claims this is true, no matter how high the social costs assigned to the externalities such regulations reduced. That is, it claims that no matter how high a value we assign to reducing greenhouse gases, and automobile air pollution and other externalities efficiency standards tackle a pure gas tax will produce superior results to any introduction of regulations into the mix. To the extent that regulation produces benefits, raising the gas tax enough to produce the same results will end up with better benefit/cost ratio.
Now I'm not going to argue this is completely impossible. U.S. parking subsidies alone are worth $4,400 per automobile per year, and that is only one of many ways automobile owners don't pay the full cost of their vehicles. So maybe the various social costs efficiency standards don't capture really do overwhelm the limited types of benefits efficiency standards provide, at least in the absence of regulations reversing these other subsidies. But at the same time, I get very suspicious of a model that gives the same results regardless of input. Technically it may not suffer from non-falsifiablity, but it comes too close for comfort. This is an awfully specific result to validly be derivable independently of empirical data.
Attention conservation notice: the two objections that follow are not major. They do not drive a stake through the RFF literature review. However, they are examples of poor reasoning and double standards that cast doubt as to whether the conclusions reached by the RFF preceded or followed the analysis.
1) The study uses a -.4 long term elasticity rate for gasoline demand response to price increases , which is a perfectly reasonable long term number. And the study also notes that costs of efficiency standards are much higher in the short run that the long run, again reasonable. However, what the study does not note is that demand response to gasoline prices is ALSO much worse in the short run than the long run, 15% - 20% being the usual range. Spending paragraphs on the difference between short and long term costs of regulations, while failing to note that the same applies to Pigovian taxation is a pretty strong double standard.
2) The study notes (quite fairly) a rebound affect of about 10% for U.S. gas efficiency standards. That is, 10% of savings due to CAFE are lost to increased miles more efficient cars are driven. In discussing gasoline savings alone that should be considered. However, the study also looks at over-all economic efficiency. If that kind of narrow economic efficiency is to be considered, than the economic value of those extra miles needs to be included. If the economic value of that extra freedom to travel is to be excluded, then that same standard should be applied to other economic benefits considered.
Again, the above two objections are not fatal. Unlike the major objections I mentioned, even when properly considered they do not change the outcome of the study. But they lead me to wonder what flaws more intensive examination of the study would reveal.
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