TCS Daily

Don't Know Much About History

By Sallie Baliunas - March 8, 2002 12:00 AM

One of my favorite indicators of an impending bullish stock market -- the breadth of the NYSE - has been strengthening for about a year. Breadth is the number of advances, as a positive sum, added to the number of declines, as a negative sum. Recently, the value of the NYSE breadth - the total of advances and declines -- has been growing more positive. This suggests that the bull market might be off and running, which is good news for future U.S. economic growth.

But one factor that would weigh against future economic growth is a rise in fuel efficiency standards for autos and light trucks.

Over two decades ago the "Energy Policy and Conservation Act of 1975" mandated Corporate Average Fuel Economy (CAFE) targets for cars and light trucks. The standard for fleet fuel economy for cars rose to 27.5 miles per gallon, where it has stayed since 1985.

The law sought to encourage greater fuel efficiency in order to reduce the amount of oil used in the U.S. At the time, the U.S. faced relatively high fuel costs owing to the oil embargo by the OPEC cartel and subsequent price increases. In modern dollars, the price of petroleum reached about $80 per barrel - compared to current prices of about $20 per barrel - and this high cost of oil ricocheted through the economy. Inflation shot skyward, with a devastating impact on the economy.

Just over 25 years later, environmental alarmists are now calling for lawmakers to raise the CAFE bar still higher. They are marshalling a variety of arguments, including some left over from the 1970s, such as the argument that higher CAFE standards were needed to reduce the amount of petroleum that the U.S. imported. And supporters of higher CAFE standards have added some new arguments, including the claim that higher CAFE standards will reduce dangerous "carbon pollution" - enviro-speak for carbon dioxide emissions from the combustion of coal, oil and natural gas -- and tailpipe pollutants like nitrogen oxides.

The Effects of Higher CAFE

But now the facts are in on the experiment with the fuel consumption mandate that started a quarter century ago - and its supporters have a lot of explaining to do. Simply put, higher fuel efficiency mandates for passenger cars and light trucks are no panacea. Worse, they have proved dangerous for drivers and the environment, and economically costly.

Consumer Price Index

For starters, higher fuel efficiency standards prompted an adjustment in the Consumer Price Index (CPI). The higher standards (along with other regulations) led to more costly cars, but higher car costs were discounted in the CPI. Why? The argument at the time was that the newer cars were better, and so consumers reaped net benefits - e.g., in terms of improved safety and lower gasoline prices - despite the lower affordability of the vehicles. However, the CPI adjustment resulted in undercompensation for those whose incomes are based on CPI figures such as Social Security recipients or union workers. As a result, people felt the effect of higher inflation rates but were told official numbers that, in some cases, were only half as much. Buying power eroded, while official inflation figures defined a less bleak picture.

Foreign Sources of Oil

The 1975 law taught us other lessons as well. One idea thoroughly discredited is the notion that higher CAFE standards will necessarily diminish our reliance on foreign sources of oil. After the 1975 law, the opposite occurred: The U.S. imports about twice as much oil now (over 11 million barrels per day) than in 1975 (just over 6 million barrels per day).

The reason for this development is not explicitly related to CAFE. Back in the 1970s, with oil near $80 per barrel, the demand for vehicles with increased mileage efficiency rose. But as the price of oil fell in the 1980s, consumers could afford to operate larger, less efficient vehicles, or drive more miles, or both. The lowered cost of petroleum increased demand for oil - and so both oil consumption and imports rose. It is the price of petroleum, not U.S. fuel efficiency mandates, that primarily determines U.S. oil consumption, including the amount of imported petroleum.

History demonstrates that people often take advantage of more affordable energy by extending its usage to further or new applications. That's why the oil saved by increased fuel efficiency mandates doesn't necessarily translate into overall petroleum savings. The "Jevons' Paradox" - named after the 19th century economist Stanley Jevons - describes how human ingenuity, desirous of reducing the brutality of the natural world, will think of more uses for energy as energy becomes more affordable - thus energy is not conserved. (Thanks to my colleague Howard Hayden at for showing me this.) This paradox tells us that increased fuel efficiency standards can lead people to drive more miles, yielding no net savings of petroleum.

CAFE and Increased Air Pollution

Another touted promise for raising fuel efficiency standards is that tailpipe pollutants such as carbon monoxide, oxides of nitrogen, and volatile organic compounds (VOCs) will be reduced. But this is not necessarily so, because the emission standard for those pollutants is set to grams of pollutant emitted per mile driven - not per gallon of gasoline burned. For example, the Lamborghini Murcielago (11 mpg) emits less tailpipe pollutants than some popular high-fuel efficiency (40+ mpg) cars per mile driven. The Lamborghini uses more gasoline to go the same distance, but its anti-pollution equipment works hard to keep emissions per mile below the regulatory limit. So, because CAFE tends to lead to in an increase in total miles driven, air pollution may worsen, unless anti-pollution technology improves to offset the increased pollution.

Carbon Dioxide Emissions

The idea that higher fuel efficiency will help combat carbon dioxide emissions -- and therefore global warming -- fails for two reasons.

First, the best science finds no evidence that recent, major increases in human-made greenhouse gases in the air have caused any meaningful global warming. Instruments on satellites and balloons show that over the last four decades - the furthest back the records extend -- there is no significant human-made global warming of the layer of air just above the surface - the bellwether layer to determine any warming effect. The records show this despite the fact that during this period the air's carbon dioxide content rose substantially. According to MIT and NASA researchers, the reason may be that the clouds and water vapor in the climate system, which are the largest components of the greenhouse effect, readily adjust to shed the extra energy to space that the air's added carbon dioxide tends to hold.

But suppose for a moment that, contrary to what the current scientific evidence says, emissions of carbon dioxide contribute to a significant warming effect. Would higher CAFE standards help limit that warming effect? Not really. Raising the CAFE levels from 27.5 miles per gallon to 40 miles per gallon would reduce global emission of human-made greenhouse gases from light cars and trucks by less than 0.5%. Accepting climate simulations at face value (despite the fact that models exaggerate the global warming that should have occurred in the last 20 - 40 years), that higher CAFE target would only reduce the putative global warming over the next fifty years by only a few thousandths of one degree C - a fantastically negligible amount.

Moreover, because CAFE usually causes a rebound effect leading consumers to drive more miles -- and thus, use more gallons of fuel -- carbon dioxide emission would likely rise with increasing fuel efficiency. The latest National Academy study points out that even if CAFE increases were to reduce fuel use in driving, those reductions might be more than offset by increased fuel use in producing new vehicles that meet a higher fuel efficiency mandate.

The Costs of Higher CAFE

Higher vehicle fuel efficiency standards will most certainly come with non-negligible costs. For example, vehicles designed to be compliant with higher CAFE standards will become more expensive. In 1992, the National Academy of Sciences found that such vehicles are more costly by at least $2000 per vehicle. That cost falls disproportionately on the working poor and those on fixed income. Tradespeople like carpenters, electricians and landscapers, who rely on their vehicles to haul equipment, would have significantly higher business expenses.

Worst of all is the fact of statistical deaths as a result of mandated fuel efficiency standards. The recent National Academy report concludes that CAFE likely "contributed an additional 1,300 to 2,600 fatalities in 1993" alone, owing to decreased vehicle weight, or size, or both, in order to meet the mandated fuel efficiency standards. The previous 1992 National Academy of Sciences studies, a 1989 study by Robert Crandall of the Brookings Institution and John Graham of Harvard, and the 1991 National Highway Traffic Safety Administration study also found approximately 2,000 additional highway deaths per year from the fuel efficiency mandates.

Senator John Kerry, D-Mass., recently declared "the National Academy of Sciences confirmed that we can significantly improve fuel efficiency... without harming safety." Rather than the empty cheerleading for fuel efficiency standards that have been proven to produce de facto increased road carnage from downweighted or downsized (or both) vehicles, legislators should insist on Sen. Kerry's philosophy that fuel efficiency increases yield no further statistical deaths. Furthermore, technology advances should be encouraged to eliminate the increase in road deaths that have occurred over the last two decades because of the insistence on fuel efficiency standards that have not worked as originally promoted

If higher CAFE standards were able to accomplish what its advocates claim, then they might be worth considering. But the claims advanced by CAFE proponents don't stack up against the historical record - and they certainly do not warrant the demonstrable costs involved. In terms of our economy and environment, in terms of our safety, even in terms of our national security, higher CAFE standards were a mistaken idea a quarter century ago. It remains a mistaken idea today.

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