That Elusive Fuel Economy

January 8, 2012

Back in the 1950s and 1960s, when I was growing up, people didn’t worry very much about their cars’ gas mileage, or the price of gasoline.  I can remember, in the years right after I got my driver’s license, often buying gas for less — sometimes considerably less — than $1 per gallon.   (Even then, this was considerably cheaper than gasoline in other locations, such as Europe.)  The formation of OPEC, and the Arab oil embargo of 1973-74, which almost doubled the effective price of crude oil, put an end to this carefree attitude.

Since then, we have seen various steps taken by the US government, attempting to encourage the production of vehicles with better gas mileage.  One of these is the CAFE [Corporate Average Fuel Economy] standard, first enacted by Congress in 1975, which sets minimum gas mileage requirements for vehicle manufacturers, based on a sales-weighted average of fuel economy figures for a manufacturer’s current model year offerings.  This has been raised from time to time, most recently during the current Obama administration.  The car companies have certainly made technical changes, such as the use of fuel injectors in place of carburetors, that do improve efficiency;  yet, the perception is that actual gas mileage has not gotten very much better.

The MIT News Service has a report on some new research, by Professor Christopher Knittel, an energy economist in the Sloan School of Management, that sheds some light on this puzzle.  (Prof. Knittel’s paper, “Automobiles on Steroids”, has just been published by the American Economic Review.  A copy of the paper, in PDF form, is available at Prof. Knittel’s web page.)  He finds that, over the period 1980 to 2006, average fuel economy of cars sold in the US increased by a bit more than 15%.   However, fuel efficiency was not the only thing that was changing.  As has been noted many times, and is clear to anyone who has been paying attention, car buyers’ vehicle choices have also changed: we now see, and the manufacturers sell, many more minivans, SUVs, and other large vehicles.

In 1980, light trucks represented about 20 percent of passenger vehicles sold in the United States. By 2004, light trucks — including SUVs — accounted for 51 percent of passenger-vehicle sales.

Prof. Knittel estimates that, over the same 1980-2006 period, the average curb weight of new vehicles has increased by 26%, and average horsepower has increased by 107%.  He calculates that, if vehicle characteristics had remained constant over the period, fuel economy would have increased by 60%.  In other words, car buyers have taken part of the efficiency gain in the form of larger, more powerful vehicles.

Thus if Americans today were driving cars of the same size and power that were typical in 1980, the country’s fleet of autos would have jumped from an average of about 23 miles per gallon (mpg) to roughly 37 mpg, well above the current average of around 27 mpg. Instead, Knittel says, “Most of that technological progress has gone into [compensating for] weight and horsepower.”

Prof. Knittel says that, if our policy objective is to reduce gasoline consumption, in order to reduce dependence on foreign oil supplies, and to reduce the production of greenhouse gases, using a gasoline tax is a better approach than trying to manipulate consumers’ preferences.

For his part, Knittel thinks it is understandable that consumers would opt for large, powerful vehicles, and that the most logical way to reduce emissions is through an increased gas tax that leads consumers to value fuel efficiency more highly.

“When it comes to climate change, leaving the market alone isn’t going to lead to the efficient outcome,” Knittel says. “The right starting point is a gas tax.”

I think this would be consistent with the recommendations from most economists.  It is often argued that regulation is a bad thing, because it is too costly.  This is, in a certain way, nonsensical.  The good reason to impose regulation is that externalities, either costs or benefits, prevent the market from reaching an efficient solution — pollution is (literally) a textbook example.  The reason for imposing regulation is to ensure that the person making the decision to pollute also bears the cost.  A fairer criticism of regulation is that it often, in practice, tends to prescribe how an objective should be achieved, rather than focusing solely on the objective.  Increasing the gasoline tax would provide consumers with a direct economic incentive to buy more efficient vehicles.  (I have written about this before, in the context of proposals for a mileage tax.)

Using a tax, rather than further regulation, should also appeal to proponents of personal freedom.  If you wish to, and can afford it, you can drive a 1990 Lamborghini Countach, which gets less than 9 mpg, but can pass anything on the road (except a filling station).  You’ll  just have to pay a bit more for your fun.

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