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June 06, 2007

Curious quote from the recalcitrant


Posted to Author: Vranes, K. | Energy Policy

It's nothing new: rather than make better cars Detroit would lobby. So it's no surprise that the big-3 chiefs are running to DC together to beg that they not be held to even the most milquetoast efficiency regulations. What is curious, though, is GM's CEO's choice of words:

"It looks like within the climate that's being experienced now, it's very likely there will be increases in CAFE," Rick Wagoner, General Motors Corp. chairman and chief executive, said Tuesday in Wilmington, Del. "I think our concern is, let's make sure that we also fix the real problems while we're doing that."

Of course he meant "political climate" not "Earth's climate," which makes his quote ironic. But what I'm really curious about is what he sees as "the real problems" that Congress should be addressing instead of getting America far more energy efficient than it is, both for climate and energy supply reasons. It never ceases to impress me that Detroit can scream and cry about how being forced to improve the efficiency of their product will lead to a loss of jobs, without being challenged in the slightest. As if fewer cars will be sold because the cars are made slightly more efficient? Somebody explain....


Posted on June 6, 2007 11:47 AM

Comments

How are they going to force me to buy one of their car like things? The first sixteen years I was driving I had seven of their car like things. The Ford I bought new rusted through from the inside in two years.

These last twenty three years I have owned four cars, all Nissans. Excellent service and durability from all of them. I'll probably keep the current Nissan another two years. That will make the scorecard four cars I like over twenty five years vs. seven cars that were crap over sixteen years.

Them and the snowball they rode in on.

Posted by: Mark at June 6, 2007 01:48 PM


A lesson in economics 101:

CAFE results in fewer sales because:

1) It makes new cars more expensive to produce
2) That makes them more expensive for consumers to buy
3) So consumers buy fewer new cars

In other words, demand curves slope downward. It doesn't get more basic than that.

Besides, CAFE is a really inefficient method of reducing energy consumption and/or CO2 emissions.

Yes, it will make people consume less energy for every mile they drive. So if we assume the amount they drive doesn't change, CAFE will reduce energy consumption.

That's a bad assumption, however. More fuel efficient cars cause driving to become less costly. That means people will drive more (remember, demand curves slope downward), at least partly offsetting the efficiency gains. In other words, people will consume less per mile, but they will drive more miles. And do we really want a public policy that encourages more driving?

If we really want to reduce energy consumption, we should tax it. Then leave it to individuals to decide what's the best way of coping with higher energy costs. For some, it might mean buying a more fuel efficient car. For others, it might mean moving closer to work or using public transportation. Letting people choose there own solution to reducing energy consumption is going to be a lot more effective than a one size fit's all solution like CAFE, and it wouldn't have all the unintended consequences to boot.

Posted by: Adam at June 6, 2007 03:44 PM


Oh that is just too choice of words: ""It looks like within the climate that's being experienced now, it's very likely there will be increases in CAFE..."

Was that a Freudian slip or a CEO not sticking to his talking points? I can just see his PR guy now: "That was a good interview sir, however, as I have mentioned before we really need to stay away from the word 'climate.'"

Too funny (at least in my mind!).

Nice post.

- Kevin@desmogblog.com

Posted by: KGrandia at June 6, 2007 11:40 PM


"Real problems" are those things that can be blamed by Wagoner on other people and the madness of the free market.

Posted by: winston at June 6, 2007 11:47 PM


Adam -- oh, no doubt that's the -basic- economics, but when does the basic economics ever accurately describe real world outcomes? Specifically for this case, can the auto industry claim a loss of jobs after they were required to install or meet

- the 5 mph bumper
- the first round of CAFE
- seat belts
- airbags
- catalytic converters

In every case they fought the proposed regs tooth and nail and claimed a loss of jobs and sales would ensue. The real economics as I see them here is that Detroit doesn't want to make cars lighter and less powerful to match Japan because the -only- selling point that Detroit has over Japan is the extra power.

Agreed on the rest. You're describing Jevons Paradox on the more efficiency encourages more driving. A consumption tax is the way to go if you want to reduce consumption. Not sure why federal-level consumption taxes haven't replace income taxes yet.

Posted by: kevin v at June 7, 2007 12:31 PM


The auto industry has always said that every proposed regulation will destroy the auto industry. The regulations were enacted and had little effect on the companies. If anyone has been alarmist its been the auto executives.


Posted by: Joseph O'Sullivan at June 7, 2007 04:43 PM


Kevin wrote: "Adam -- oh, no doubt that's the -basic- economics, but when does the basic economics ever accurately describe real world outcomes?"

Most of the time, it comes pretty close.

There is little reason to doubt that all the mandates you mention had some negative effect on new car sales. All of them forced new car buyers to purchase a costly feature they were not willing to pay for voluntarily. If consumers really did value these things more than they cost, there would be no need for the government to mandate them.

Now, I don't care how sophisticated your economic model; forcing car buyers to buy a feature they are not voluntarily willing to pay for is going to lower demand for cars, which in turn will reduce sales.

Reduced sales aren't going to necessarily translate into lost jobs, though. They might, instead, lead to lower wages or, more likely, fewer wage increases than otherwise would happen. Given that the auto labor cartel (a.k.a. the UWA) is usually willing to reduce the level of rents its individual members collect in order to prevent job losses, it's more likely that the mandates you mention had a wage effect rather than a job effect.

That doesn't mean the mandates were a bad idea. Sometimes it's necessary to mandate that consumers buy things they do not want in order to protect others from negative externalities. But don't kid yourself; such measures always carry a cost, which inevitably will negatively impact the labor market. Don't forget that they negatively impact individual consumers as well, making new cars less affordable.

Also, don't forget the unintended consequences. An interesting study would be to examine how many people, as a result of the airbag mandate, decided not to buy a new car and went on driving a more dangerous used car. How many people were killed as a result? It would be a very interesting research question for a labor economist.

Posted by: Adam at June 7, 2007 06:28 PM


There are plenty of studies out there showing that consumers do not value fuel efficiency rationally (i.e. they expect very short payback periods), so it's a bit odd to be trotting out the economics 101 line IMO.

Also it's important to remember that Jevons Paradox doesn't invalidate the CAFE approach it just lessens the benefits a little; vehicle miles traveled (VMT) is governed by a whole suite of factors other than just the fuel efficiency of the vehicle -- people aren't going to start driving 30% more simply because their cars are 30% more fuel efficient.

Kevin, I'm also curious why consumption taxes haven't had more traction across the political spectrum. Maybe because they are a basic tenet of environmental (aka left-wing commie) economics :). Tax bad things and incent good things. pollution, global warming, oil dependence, terrorism funding = bad, ergo tax energy consumption. making money and jobs = good, ergo don't tax income and payroll...

I've mentioned before and I'd be curious to hear your thoughts on this, but how relevant to the current situation is it that car manufacturers are in swing states?

Posted by: Marlowe Johnson [TypeKey Profile Page] at June 8, 2007 05:49 PM


If you need a car you buy a car: Generally there is little alternative. If you need to save money on fuel you buy an efficient car. If you have enough money you buy a gas guzzler because you want to show off. Total car sales have never decreased - only the fashions change. If the big 3 want to sell more they need to fix their real problems which are rather more fundamental. Economics 101 indeed - try economics 1001, aka the real world.

Kevin you forgot lead-free fuel in your list of things they opposed - didn't have an iota of difference to fuel prices or car sales. They have always opposed everything on principle.

Posted by: JamesG at June 11, 2007 11:32 AM


Marlowe wrote:

"There are plenty of studies out there showing that consumers do not value fuel efficiency rationally (i.e. they expect very short payback periods), so it's a bit odd to be trotting out the economics 101 line IMO."

It doesn't matter that they are not fully rational in this regard. All that matters is that their propensity to drive is an increasing function of the cost of driving. As far as I am aware, there's plenty of evidence that this is the case.

"Also it's important to remember that Jevons Paradox doesn't invalidate the CAFE approach it just lessens the benefits a little; vehicle miles traveled (VMT) is governed by a whole suite of factors other than just the fuel efficiency of the vehicle -- people aren't going to start driving 30% more simply because their cars are 30% more fuel efficient."

That's true. I'm not saying that CAFE doesn't decrease fuel consumption at all. It does. My point is that it's a very inefficient way of doing it, and that it has a lot of unintended consequences, such as creating incentives to drive more, put off buying a new car and continue driving a more dangerous gas-guzzling old car, etc. A far better approach, with fewer bad side effects, is to tax fuel consumption.

"Kevin, I'm also curious why consumption taxes haven't had more traction across the political spectrum. Maybe because they are a basic tenet of environmental (aka left-wing commie) economics :)."

There's nothing left-wing about consumption taxes. Lots of conservative tax reformers want to switch to some form of consumption tax.

IMHO, the main reason it doesn't get traction is because it will make the tax code a lot less progressive. The rich consume a lot smaller proportion of their income than the middle class, so a switch to consumption taxes will shift the tax burden. I am all for that, since I don't think the tax code should be used for income redistribution, and I'm also in the highest tax bracket, but it makes it a non-starter politically.

Posted by: Adam at June 11, 2007 02:27 PM


There are two car markets in the US, dimetrically opposed to each other. One consists of affluent (or hoping-to-be-affluent) people in expensive coastal urban areas, who are willing to pay slightly more to buy a Toyota, Honda or BMW, for a whole host of reasons.

The other consists of not-so-affluent folks in less expensive places inland (as well as the coastal urban underclass) who firstly don't want to pay import prices and secondly favor, style wise, American cars.

CAFE forces the Big 3 to - in essence - make their cars more like the imports. Since the existing import makers already have a corner on the coastal urban affluent market, the Big 3 will never crack that market. Inland less affluent and urban underclass will buy fewer of their cars, and it's a lose-lose proposition.

Posted by: Steve Sadlov at June 13, 2007 12:34 PM


Adam,

Can you point to any literature that suggests that car sales have gone down because of CaFE?

You seem to want it both ways. Either CAFE increases the cost of driving (more expensive car), so people drive less or CAFE decreases the cost of driving (more efficient vehicle) so people drive more. Which is it?

I agree with most of what you say wrt to consumption taxes and they would certainly be regressive if they were crudely implemented (i.e. without offsetting measures for low income).

I get the sense that you're against any kind of income redistribution and on that point I'll have to disagree, but let's leave it that so as not to stray to far off topic :).

By the way, a good primer on fuel efficiency can be found here : http://www.pollutionprobe.org/Reports/vehiclefuel.pdf

Posted by: Marlowe Johnson [TypeKey Profile Page] at June 13, 2007 01:39 PM


All the discussion of demand curves for driving neglect a lot of recent research on the elasticity of driving demand. Real-world observations find that driving demand is very inelastic, so, for instance, when gasoline prices spike well over $3.00 per gallon driving diminishes very little.

The measured demand elasticity suggests that stricter CAFE standards would significantly reduce consumption of gasoline because the shift in the equilibrium point on the demand curve would be much smaller than the improvements to fuel efficiency.

See, e.g., Jonathan Hughes, Christopher R. Knittel, and Dan Sperling, "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand" (February 14, 2007). Center for the Study of Energy Markets. Paper CSEMWP-159., http://repositories.cdlib.org/ucei/csem/CSEMWP-159/

Posted by: Jonathan Gilligan [TypeKey Profile Page] at June 14, 2007 02:55 PM


Clarification: I want to clarify the argument of my previous comment: Demand curves slope down but what matters is whether the slope of the demand curve is greater or less than the slope of the CAFE standard. If CAFE improves fuel efficiency by 30% and the demand curve causes people to drive 5% farther, then gasoline consumption still drops by about 26% (0.70 * 1.05 = 0.74). That's the point of the Sperling paper I cite above.

Posted by: Jonathan Gilligan [TypeKey Profile Page] at June 14, 2007 03:05 PM


One more thing: Marlowe asks why we don't have more consumption taxes and Adam also wants to reduce consumption by taxing it.

In both cases, at least as applied to gasoline, we find problems because to two properties of the demand curve. First, as Sperling and colleagues measure, you'd have to put very large taxes on gasoline to have more than a trivial effect on driving.

Second, there is extensive research showing that people apply very different discount rates to large and small expenditures. They discount small expenditures, such as gasoline purchases, with a steep rate but large expenditures, such as a new car, are discounted very little.

This means that when a rational consumer would spend more up front to buy a more efficient refrigerator or auto whose improved energy efficiency would save money in the long run at market interest rates, the consumer would reject the purchase because saving $2000 gradually over then next five years might not seem worth spending a lump sum of $1000 today (see, e.g., George Loewenstein and Jon Elster, Eds., "Choice Over Time" (Russell Sage, 1992)). See also the economics literature on hyperbolic discounting.

Thus, a Pigovian tax that exactly equals the value of an externality would not optimally reduce consumption because of irrationalities in consumers' time preferences.

Posted by: Jonathan Gilligan [TypeKey Profile Page] at June 14, 2007 03:20 PM


Jonathan,

Thanks for the link to the Sperling paper. I've been following his work on the California LCFS, but hadn't come across the gasoline demand paper...

In my initial post, I mentioned that VKT is driven primarily by factors other than vehicle fuel efficiency, which is what you seem to be suggesting as well. Similarly on the issue of consumer's irrational payback expectations wrt investments in fuel efficient vehicles (I think David Green has a good paper on this).

To clarify my position, I'm all for consumption taxes in principle provided they are implemented in a way that isn't unduly regressive. In other words I support a higher gasoline tax. Evidence (i.e. Europe) shows that this drives consumers to purchase more fuel efficient vehicles which means that they consume less gasoline. I agree that this doesn't necessarily make them drive less, as VKT is pretty inelastic as you mentioned, since the bulk of people's driving is for non-discretionary purposes (i.e. driving to work).

Posted by: Marlowe Johnson [TypeKey Profile Page] at June 14, 2007 07:45 PM


Marlowe,

Thanks for the clarification. We seem largely to agree on much of whats under discussion here.

Would you happen to have a citation handy for the David Green paper on consumer preferences that you refer to?

Posted by: Jonathan Gilligan [TypeKey Profile Page] at June 15, 2007 09:25 AM


Jonathan,

Here is the link to David Greene's recent senate testimony:

http://www-cta.ornl.gov/cta/Publications/Reports/Policies_to_Increase_Passenger_Car.pdf

and another interesting study done by Kurani and Turrentine out of UC Davis a few years ago:

http://www.its.ucdavis.edu/publications/2004/UCD-ITS-RR-04-31.pdf

Posted by: Marlowe Johnson [TypeKey Profile Page] at June 16, 2007 08:05 AM


"I think our concern is, let's make sure that we also fix the real problems while we're doing that."

Wagoner certainly doesn"t deserve any approbation, but isn't he right on the mark with this? Beside acknolwedging that we have real problems, isn't there a huge risk we're not going to be solving problems, but simply shoving more pork around? Fore example, what politician/candidate ISN'T saying that we should be subsidizing Archer Daniels-Midland and ethanol?

Posted by: TokyoTom [TypeKey Profile Page] at June 21, 2007 01:59 PM




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