Increase the CAFE Standards?

The Senate just voted to increase CAFE standards in a new energy bill. I guess doing this is better than nothing for reducing oil use, but there is a much better option available: a tax on gasoline.

Raising the CAFE standards creates some problems. Raising the standards is expensive, the standards are full of loopholes, and the penalty for violating the standards is virtually nothing for big automakers (Andrew Kleit, “CAFE Changes, by the Numbers,” Regulation 2002: 32-5.). On the plus side, the new CAFE standards would no longer create differing standards for cars and “light trucks” (i.e. SUVS).

A better “free market” solution would be to simply estimate the external cost of consuming a gallon of gasoline and tax gasoline by that amount so that gasoline can be purchased and sold efficiently. For example, gasoline should not be priced at merely the total cost of production plus a small tax. It should be priced at the entire cost of production, plus the cost of pollution, congestion, geopolitical instability, and any other costs that its consumption creates.

If gasoline’s price is equal to its true cost, then we can mitigate the market failure situation we are in where people over consume gasoline. That is not efficient. Furthermore, we would not need to engage in any heavy-handed CAFE regulation that will cost a lot more to society than a gas tax in the long run due to administrative fees, lost consumer surplus through lost consumer choice, lost producer surplus due to following arbitrary mileage standards and other such factors.

If people have to pay for the costs they impose on everyone else from driving, fuel economy of vehicles will come up naturally, as miles driven by individuals will fall, and in general gasoline consumption will drop.

I’ve got more to say about this energy bill later.