GM’s Weak Arguments Against Increased Fuel Economy

What wonders of disingenuousness the auto industry is capable of! Right now,

the Big Three are worried about proposals to mandate that they increase the

fuel economy of the vehicles they sell, and so they’re wheeling

out economists to say that the proposals don’t make sense. But one would

think they could do better than this.

The economists (Robert Crandall and Hal Singer) start off badly by asserting

that "no one disputes that more stringent CAFE standards would increase

the cost of making a car". CAFE stands for corporate average fuel economy,

and is the mechanism by which the US government regulates automobile mileage.

And I, for one, am far from convinced that higher CAFE standards would increase

the costs of making a car. In fact, insofar as they encouraged auto makers to

make smaller cars and fewer SUVs, higher CAFE standards might even decrease

the costs of making a car. Remember that cheaper cars, as a rule, are actually

more fuel-efficient, not less.

So color me unconvinced that "carmakers would have to employ very expensive

technologies" if this legislation goes through. Every time the US government

wants to regulate Detroit we hear the same thing, and every time the regulation

happens, the costs magically fail to materialize. Besides, regulations in the

US are far less stringent than they are in Europe and Asia. Since the US car

companies compete in those markets already, why can’t they just import their

own technologies from abroad?

Then comes my favorite part of the whole piece:

If there was fuel-saving technology out there that cost $1,000 but generated

$2,500 in the discounted present value of fuel savings over the life of the

vehicle, carmakers would surely voluntarily embrace that technology. The carmaker

could split the net benefits (equal to the difference between the discounted

fuel savings and the cost of the technology) with the car buyer such that

both parties to the transaction would be better off.

No need for regulation there. With large numbers of vehicle producers and

well-informed consumers, the market is so efficient, in fact, that it ensures

that all such transactions will occur, generating the socially optimal level

of fuel economy.

Tell that to Amory Lovins. The US economy is chock-full of areas where an up-front

cost would save money in net present value terms, but isn’t implemented. And

automobiles are one of those areas. The example here implies that consumers

are willing to spend $1,000 more on a new car, if the NPV of their fuel savings

was more than that. Ha! I’m sorry, but I simply don’t believe that, and I defy

Messrs Crandall and Singer to provide any empirical evidence that it’s the case.

If this were true, then no one would pay a premium for a Hummer: they’d all

require a discount, because of the vast NPV of future fuel costs.

Of course, Crandall and Singer are advisers to General Motors, which has made

a great deal of money from selling the Hummer over the years, and would hate

to see such a cash cow regulated out of existence. This is surely the real reason

why Detroit opposes higher CAFE standards: overseas rivals, especially from

Japan, are better at making fuel-efficient cars, while Detroit specializes these

days in thirsty trucks and SUVs. Which only leaves the question:

Why is Toyota opposing CAFE as well?

(Via Mankiw)

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