Short- And Long-Range Impacts Of Increases In The Corporate Average Fuel Economy Standard

Short- And Long-Range Impacts Of Increases In The Corporate Average Fuel Economy Standard

February 06, 2002

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A short-run 1.0 mile per gallon (MPG) increase in the Corporate Average Fuel Economy (CAFE) Standard above existing, binding levels would impose welfare losses on society of $33.9 billion per year while reducing gasoline consumption by 5.8 billion gallons per year. This amounts to a hidden tax of $5.85 per gallon conserved. An increase of 23 cents per gallon in the gasoline tax would save the same amount of fuel and impose costs on society of $670 million per year. Therefore, a short-run CAFE increase is 50 times more expensive to society than an increase in the gasoline tax. The marginal welfare costs of further short-term increases in the CAFE standard equal $4.10 per gallon of fuel conserved and substantially exceeds plausible estimates of the marginal societal benefits from the avoided externalities associated with reduced gasoline consumption.

A long-run 3.0 MPG increase in the CAFE standard would impose social welfare losses of $3 billion per year and save 5.1 billion gallons of gasoline per year. This amounts to a hidden tax of $0.58 per gallon conserved. An 11 cent per gallon increase in the gasoline tax would save the same amount of fuel at a welfare cost of $275 million per year. The 3.0 MPG increase is thus 11 times more expensive than the gas tax increase. The marginal welfare costs of long-term increases in the CAFE standard amount to $1.06 per gallon and exceed by a factor of four plausible estimates of the marginal societal benefits from avoided externalities associated with the reduction in gasoline consumption. Increasing the CAFE standard in either the short-or long-term is neither cost-effective nor cost-beneficial.