Monday, July 04, 2011

Will a Vehicle Fleet Average Fuel Economy of 56 MPG Offer a "Free Lunch"?

In the year 2025, there will be plenty of vehicles driving around the United States.  If their average fuel economy is 56.2 MPG and if the "rebound effect" isn't a serious factor, then total greenhouse gas emissions from U.S transportation will decline and this would be very good.  Rather than relying on rising gasoline taxes and fear of Peak Oil to bring about this increase in fuel economy, the Obama Administration seeks to achieve this fleet composition shift through much tighter CAFE Standards. 

The NY Times reports that car makers admit that they know how to make these cars but even with gas priced at $4 per gallon they do not believe that drivers want to drive these cars.  

An interesting issue arises.  Do you respect consumer sovereignty or not?  For  profit firms will cater to the demands of their potential customers.  It is true that if the price of gas were $10 per gallon, these households would be more likely to want smaller, more fuel efficient vehicles.

A sharp increase in CAFE standards will deny many purchasers of large fuel inefficient vehicles from being able to buy vehicles they want.  This will lead to GHG reductions but it will cost these households well being and it will lead to higher prices of used large vehicles as buyers seek out older vehicles that have the size that they can no longer buy on the new car market.

Consider this quote below;  some politicians view private vehicles as perfect substitutes (a mile of driving a Mercedes = a mile of driving a Toyota Tercel) --- under this view --- smaller more fuel efficient vehicles offer a "free lunch" because they have lower GHG and higher MPG and thus save households $ in terms of long run operating expenses.

"Green Technology: Do these economic issues supersede our environmental goals?

Sen. Fran Pavely: No. The record shows that strong environmental laws like AB 32 and AB 1493, two of my favorites, actually provide a stimulus to the economy. I remember Governor Schwarzenegger’s statement back on World Environment Day in June 2005. He said it isn’t a choice between the environment and the economy. You can have a strong economy and a healthy environment. That’s still true.

There’s a perfect example of this with AB 1493, the Clean Car Law. The regulations may result in a slight increase in the cost of vehicles, but consumers will recoup the money within two to three years because of reduced operating costs. This will also reduce our dependence on foreign oil and we’ll have cleaner, lower-emissions vehicles as well. Anyone who keeps a car longer than a few years will make money on the deal. We’re finding the same thing with energy efficiency. The public gets it."source