Are the New Auto Fuel Economy Standards For Real?

Politicians are predisposed to like a technology standard, like the Corporate Average Fuel Economy (CAFE) standards for automobile miles-per-gallon, as a way of holding down petroleum use. After all, it sounds a lot better to voters than enacting a gasoline tax or a carbon tax! Pass a law that better-mileage cars will be phased in over the next decade or two, and politicians can boast of their great achievement –sidestepping the fact that promised aren\’t achievements and rules are made to be changed.

Thus, when I heard about the plans for a dramatic increase in CAFE standards, I was skeptical. In the most recent issue of my own Journal of Economic Perspectives, Christopher R. Knittel discusses various aspects of  \”Reducing Petroleum Consumption from Transportation.\” As Knittel writes: \”A new CAFE standard in place for 2011 seeks to increase average fuel economy to roughly 34.1 miles per gallon by 2016. The Environmental Protection Agency and Department of Transportation are currently in the rule-making process for model years 2017 and beyond, with President Obama and 13 automakers agreeing to a standard of 54.5 MPG by 2025.\” Knittel provides evidence to back up my skepticism about the past use of CAFE standards, but he also argues that those future standards–unbelieveable as they may at first appear–are technologically achievable.

Back in 1975, against a backdrop of a dramatic rise in oil prices and concern over dependence on imported oil, the U.S. enacted the Corporate Average Fuel Economy (CAFE) law, requiring that over the average of their cars sold by each company, the average had to start at 18 miles-per-gallon, and then rise to 27 mpg by 1985. Higher gasoline prices provided a strong inducement for people to buy these more fuel-efficient cars, but when gasoline prices dropped in the mid-1980s, the CAFE standards stagnated. Here\’s a figure from Knittel showing how CAFE standards flattened out after 1985–and also showing the planned increase to take place.

The lack of any increase in the CAFE standards was only part of the story. Knittel explains: \”[T]wo features of the original CAFE standards reduced their effect. First, sport-utility vehicles were treated as light trucks, and thus could meet a lower miles-per-gallon standard than cars. Perhaps not coincidentally, in 1979 light trucks comprised less than 10 percent of the new vehicle fleet, but this share rose steadily
and peaked in 2004 at 60 percent. Second, vehicles with a gross vehicle weight of over 8,500 pounds, which includes many large pickup trucks and sports-utility vehicles, were exempt from CAFE standards.\”

Taking these factors together, actual fuel economy for the U.S. fleet of cars hasn\’t been rising much, although it has edged up in the last few years with higher gasoline prices. My own interpretation is that the CAFE standards effectively became nonbinding–that is, they weren\’t pushing anyone to buy a different car than they otherwise would have purchased, and they weren\’t adding to fuel economy. Here\’s the data:

So, is it technologically possible meet the future increase in miles-per-gallon standards? Knittel argues \”yes.\” He points out: \”By world standards, these [currently existing] miles-per-gallon standards are not aggressive. After accounting for differences in the testing procedures, the World Bank estimated that the European Union standard was roughly 17 MPG more stringent in 2010 than the U.S. standard …\”

Moreover, Knittel has carried out a series of studies looking at technological progress in cars, and the tradeoffs between weight, engine power, and fuel efficiency. He finds: \”On average, a vehicle with a given weight and engine power level has a fuel economy that is 1.75 percent higher than a vehicle with the same weight and horsepower level from the previous year. …In the medium run, automakers can adjust vehicle attributes by trading off weight and horsepower for increased fuel economy. In Knittel (2011), I find that reducing weight by 1 percent increases fuel economy by roughly 0.4 percent, while reducing horsepower and torque by 1 percent increases fuel economy by roughly 0.3 percent.\”

By Knittel\’s calculation, getting from the new-car average fuel economy standard of 29 mpg in 2010 to 34.1 mpg in 2016 is do-able. If technological progress continues to improve mileage by 1.75% per year, and ways are found to reduce weight and engine power by about 6%, the standard for 2016 is achieveable.

But what about that planned standard of 54.5 mpg by 2025? Knittel explains that the number is somewhat inflated: \”Taken literally, it would require fundamental changes to rates of technological progress and/or the size and power of vehicles. The 2025 number is a bit misleading. In the law, the 54.5 miles-per-gallon standard is based on a calculation from the Environmental Protection Agency based on carbon dioxide tailpipe emissions. It also includes credits for many technologies including plug-in hybrids, electric and hydrogen vehicles, improved air conditioning effifi ciency, and others. On an apples-to-apples basis, Roland (2011) cites some industry followers that claim that the actual new fleet fuel economy standard in 2025 is more like 40 miles per gallon. Achieving 40 miles per gallon by 2025 is certainly possible. At a rate of technological progress of 1.75 percent per year, 40 miles per gallon requires additional reductions in weight and engine power of less than 7 percent.\”

But although the planned mileage standards do appear–to my surprise–technologically feasible, it remains to be seen whether they are politically feasible, and also whether they are even a sensible public policy idea.

On the political side, the U.S. political system found a way for most of the last three decades to have fuel economy standards on the books as a matter of law and public relations–but to have standards with very little bite. Let\’s see whether the fuel economy standards planned for the future actually cause some real changes in the U.S. auto fleet, or whether they are quickly riddled with exceptions.

But at a deeper level, it\’s not even clear that fuel economy standards are a good policy idea. Knittel explains: \”At a basic level, it focuses on the wrong thing—fuel economy instead of total fuel consumption. CAFE only targets new vehicles and leads to subsidies for some vehicles. Finally, CAFE pushes consumers into more-fuel-efficient vehicles without changing the price of fuel, leading to more miles traveled. The empirical size of this last effect, known as “rebound,” is a matter of ongoing research,
but to the extent that rebound occurs, it necessarily leads to greater congestion, accidents, and criteria pollutant emissions relative to the status quo.\” A considerable body of economic research suggests that if your policy goal is to reduce petroleum consumption, a gasoline tax or a carbon tax accomplishes the goal at a far lower social cost than fuel economy standards–although for politicians the explicitness of that cost seems to make it a nonstarter.

For more discussion of this topic, I recommend \”Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives,\” by Soren T. Anderson, Ian W. H. Parry, James M. Sallee, and Carolyn Fischer, in the Winter 2011 issue of the Review of Environmental Economics and Policy.  The publisher has made article freely available here.

The Federal Tanning Tax?

I had been blissfully unaware, until I saw an article about the federal tanning tax a few days ago in USA Today, that such a tax was part of President Obama\’s health care reform. The  Treasury Inspector General for Tax Administration tells the story in a report published on September 22, 2011: \”Affordable Care Act: The Number of Taxpayers Filing Tanning Excise Tax Returns Is Lower Than Expected.\”

The TIGTA report sets the stage: \”On March 23, 2010, the Patient Protection and Affordable Care Act (Affordable Care Act) was signed into law. Along with amendments in the Health Care and Education Reconciliation Act of 2010, which was signed on March 30, 2010, this legislation contains revenue provisions anticipated to generate $438 billion in the form of new taxes, fees, and penalties. One of these new taxes is an excise tax on indoor tanning services (referred to hereafter as the tanning tax).\”

Apparently this was a 10% excise tax on tanning services, to be paid by the customer, collected by the business, and the forwarded along to the U.S. government quarterly. \”According to IRS documents, in April 2010 the Indoor Tanning Association estimated that 25,000 businesses were providing indoor tanning services, including approximately 15,000 stand-alone tanning salons and approximately 10,000 other businesses that offer tanning services, such as spas, health clubs, and beauty salons.\” \”The Congressional Joint Committee on Taxation estimated this tax would raise less than $50 million in the last 3 months of Fiscal Year 2010 and raise $200 million for Fiscal Year 2011.\”

But the tax hasn\’t raised nearly that much. Instead of 25,000 businesses filing, only about 10,000 have been filing. Not surprisingly, the tax is likely to raise less than $100 million in 2011, less than half of what was predicted.

 I have never entered a tanning booth and hope never to do so. I can readily believe that if overused, they aren\’t great for your skin. But when the federal government starts trying to collect a small amounts of money from many small businesses, it\’s like an elephant standing on a ice rink trying to pick up peanuts. Sure, you get some peanuts. But the contortions and the effort seem hardly worth it. As you consider what the IRS has been going through to collect this tax, and the costs on businesses of record-keeping and dealing with the tax, remember that the $200 million that Congress hoped to raise with this tax represents about 1/20 of 1% of the $438 billion in total revenue-raisers in the health care reform bill. And consider the efforts needed to do this, laid out in dry detail in the TIGTA report:

Of course, the first step is to define which tanning services are covered and which are not: \”This new excise tax applies to indoor tanning services paid for on or after July 1, 2010, and is 10 percent of the amount paid for the tanning services. Indoor tanning services are defined as services using ultraviolet lamps to induce skin tanning. There are other services provided by tanning salons that are excluded from the tanning tax. It does not apply to ‘spray’ tans or topical creams or lotions. In addition, it does not apply to phototherapy services performed by licensed medical professionals, during which individuals are exposed to light for the treatment of certain medical conditions. Tanning services are not taxable when provided by qualified physical fitness facilities (such as a workout facility or gym). The fitness facility must meet various tests to be exempt.\”

This line of business had not owed federal excises before. \”[A]n IRS document describing compliance challenges states, “The tax is new and unusual for this industry, which has never experienced the imposition of a Federal excise tax on tanning services, and thus the overwhelming majority have never filed an excise tax return.\”

Thus, of course the IRS needed an an outreach program to let tanning booth owners know about the bill. This involved \”Hosting live webinars and uploading videos on the YouTube web site,\”  \”Outreach to industry associations,\” \”Contacting State licensing bureau,\” \”Issuing electronic bulletins to tax professionals,\” and \”Giving seminars at the Nationwide Tax Forums.\”  For the IRS page with its Frequently Asked Questions about the tax, see here.

 The new tax required reprogramming IRS computer systems. \”There was a relatively short time period to prepare for receipt and processing of returns reporting the tanning tax. Accordingly, the IRS had to immediately update the computer systems used for processing tax returns. The IRS receives both paper and electronically transmitted returns. … In general, the systems had to be updated to include a new abstract code for the tanning tax, which is a unique number assigned to each of the excise taxes.\”

And of course, now that only about half of those expected to pay are doing so, the IRS is needing to send thousands of follow-up letters, and then to follow up on those letters.

At the end of the day, the tanning tax probably collects more in revenue than the costs to the government and business of putting the tax into place and collecting it. But surely, the IRS resources could be better allocated (more audits on potentially large targets?). Indeed, given how little revenue the tanning tax corrects, it\’s probably misguided to think of it primarily as \”tax\” policy. It\’s some anonymous Congressman or staffer who doesn\’t like tanning booths sticking a tiny provision that almost no one hears about into an enormous bill. It\’s the sort of piddly annoying oddball regulation that gives the rest of government regulation a bad name.