Obama and Higher Fuel Efficiency Standards

Includes: F, GM
by: Diane Lim Rogers

It’s a good thing for our nation’s economy…. Not as good as a carbon tax, because the CAFE standards use coersion rather than incentives and don’t raise badly-needed revenue, but it’s still a good thing–and even for the auto industry itself. The story:

NEW YORK (CNNMoney.com) — President Obama set his green plan into action Monday, potentially reversing several Bush-era decisions on global warming and fuel efficiency.

In his first major environmental acts as president, Obama directed his Environmental Protection Agency to review a California application to regulate greenhouse gases and told his Department of Transportation to begin implementing fuel efficiency standards passed last year but not implemented by the Bush administration.

He also pushed for passage of the $825 billion economic stimulus package in the House and Senate. Those bills include money for investments in renewable energy, conservation and a better electric grid.

“No single issue is as fundamental to our future as energy,” Obama said at a White House news conference. “It is time for this moment of peril to be turned into one of progress.”…

Under the Clean Air act, California has long sought to tighten its air quality standards.

To achieve those standards, California would likely require cars to emit fewer greenhouse gases. Currently the federal government does not regulate carbon dioxide emissions - the main culprit in greenhouse gases.

The Bush administration recently denied California’s request saying that new federal fuel standards made stricter rules there unnecessary.

Obama said his administration will review that decision. Any change in policy would likely take months to implement.

“Let me be clear: Our goal is not to further burden an already struggling industry; it is to help America’s automakers prepare for the future,” said the president…

Regardless of what California does, Obama also moved to implement higher fuel efficiency standards passed in 2007.

Those increases - the first in more than 30 years - called for raising the average fuel economy from 27.5 miles a gallon for cars and 22 miles a gallon for trucks to 35 miles a gallon for the whole fleet by 2020.

Obama said the increased standards would save 2 million barrels of oil a day.

That’s about 10% of the country’s total oil consumption, and roughly the same amount the country currently imports from the Persian Gulf.

“This rule will be a downpayment on a broader and sustained effort to reduce our dependence on foreign oil,” said the president.

The new standards, originally supported by Bush, were put on hold during his last days in office, in response to the woes facing the auto industry.

The industry has long opposed raising fuel economy standards. It has argued that the new rules are expensive and unnecessary since is already makes fuel efficient cars…

I don’t think we should worry too much about what these higher fuel efficiency standards will do to the auto industry. (Perhaps my auto industry friends and relatives will want to argue with me on this; I’m not sure. But by the way, I don’t think the new rules could be both “expensive” and “unnecessary” (nonbinding?)…)

I believe the federal push for greater fuel efficiency will help to steer the automakers’ production more in the direction of where they need to go to be viable businesses (on their own) in the longer term. (The automakers are given until 2020 to get up to 35 mpg.) In the short term, the federal loans are the best immediate effort to keep them alive. What we don’t want is to have our government rescue the industry while enabling “business as usual.” The combination of the short-term rescue with longer-term “steering” is just one example of how we’ll have to conduct economic policy over the next couple years–assistance, but with (smart) strings attached. This is what “fiscally-responsible deficit spending” looks like.

But a carbon tax policy (or higher gasoline taxes) would still do better. For a comparison, see this recent CBO issue brief, and an earlier one.