Boost in CAFE MPG Standards to Increase Gas Consumption and Pollution

Yes, you read that right. Higher MPG levels in automobiles will result in more gas usage and more pollution not less.  Here is what the EPA announced:

The Environmental Protection Agency (EPA) has been hammering out an agreement with automakers and the state of California for a new Corporate Average Fuel Economy (CAFE) standard. On [July 29 2011] the EPA announced that a CAFE of 54.5 mpg will be required by 2025, nearly doubling current fuel economy standards. As fuel economy is directly tied to carbon dioxide emissions, the new rules will serve to reduce carbon dioxide in the atmosphere. The EPA points out that the new CAFE standard will help consumers save money, and at the same time cut foreign oil imports by half.

What is wrong with that?  What is wrong is the economics.  These standards assume that there are only so many trips to be made, and that the number of trips is unrelated to the cost of them.

To illustrate the economic fallacy, suppose that a similar agreement is hammered out with the manufacturers of jet airplanes, such that they would use only half the fuel that they do today.     Once the new jet planes are in use by all airlines, the average price of a plane ticket would experience a major drop.   What would happen to the number of flights and passengers?  Well, look at what happened when they deregulated the airline industry in 1978:

No one foresaw the industry’s spectacular growth. The number of air passengers increased from 207.5 million in 1974 to 721.1 million in 2010. Airline revenue per passenger mile dropped from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers went way up.

If the price of anything that the public wants goes down, the public will buy more of it. When cars get twice the gas mileage, people will drive more.  They will drop out of car pools. They will use cars more for their vacations. They will live further away from central cities, since the cost of driving is so much lower.

So, if people will drive much more, why will gasoline usage go down? It won’t.  Why will there be less air pollution?  There will be more – unless the new engines result in less pollution per gallon. Why will foreign oil imports be cut by half? They won’t. They will increase unless we do more drilling in the USA.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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