Mandates help motorists, economy in long run

The U.S. government regulates greenhouse gas emissions through two primary mechanisms: corporate average fuel economy standards, known as CAFE standards, and greenhouse gas standards.

The CAFE standards are set to rise for light-duty vehicles in order to achieve a 54.5 mile per gallon industry average by 2025, with corresponding limits on greenhouse gas emissions.

There is no evidence that the standards, as implemented so far, have negatively affected the U.S. economy or the auto industry.

Yet the administration of President Donald Trump has signaled plans to weaken the program.

In March, for example, Trump announced he would require the Environmental Protection Agency to reopen the midterm review of the 2022-2025 standards and referred to the standards as “industry-killing regulations.”

And while the midterm review is in progress, the fate of the standards is not yet clear. Many speculate that the administration will pull the standards, freeze them or slow them down.

Weakening or dismantling the U.S. fuel economy standards would be a poor decision. These standards benefit both consumers and the U.S. economy.

One of the primary arguments against fuel economy standards is that they raise the purchase price of a vehicle and thereby hurt the consumer.

Indeed, stricter fuel economy standards will cost the consumer more. Over the long run, however, they will allow consumers to benefit from gas savings. The payback period to recover the extra upfront cost, of course, depends on the price of gasoline.

Another argument against fuel economy standards is that the price of gasoline has in recent years dropped significantly below earlier projections and therefore consumers cannot recover as much in gasoline savings.

This is also true but does not mean the purchase of a fuel-efficient vehicle is economically infeasible. At a price premium of about $1,500 - a premium well above what we have observed as a consequence of fuel economy standards - and a price of gasoline around $2.75 per gallon, a consumer who purchases a fuel-efficient vehicle can break even in about three years.

Not only can consumers break even within a relatively short amount of time, but so can the economy.

In a recent report, my colleagues and I conducted a macroeconomic analysis of the impact of the 2017-2025 fuel economy standards on the economy and offered recommendations for analysts, regulators and legislators.

We found that, due to the price premium that consumers will face as a result of the standards, as well as a reduced demand for domestically produced and refined gasoline, the short-term effect on the economy is negative.

The long-term effects, however, are overwhelmingly positive. The savings in gasoline expenditures and the innovation investment in the auto industry more than offset the negative impacts.

Estimates of employment, for example, switch from job losses to job gains as early as 2023, when using assumptions provided by the federal agencies that oversee these programs.

Federal standards may also benefit the economy through innovation and competitiveness.

The U.S. is not the only country with vehicle standards; we are joined by at least eight other countries or governing bodies, some with standards more stringent than ours.

Countries are taking other measures as well to encourage technological innovation.

The United Kingdom, for example, recently set a ban on gasoline vehicles by the year 2040; and more countries are likely to follow suit.

If U.S. auto manufacturers want to compete in the global marketplace, they will need to be able to sell vehicles that meet other countries’ standards.

The U.S. can choose to be at the forefront of vehicle innovation, and reap the long-term rewards, or take a back-seat and watch as others take on the challenge.

Sanya Carley is an associate professor in the Indiana University School of Public and Environmental Affairs. Her research includes evaluation of energy policy, economic development and emerging technologies.