Eliminating the penalty for noncompliance, the recently passed reconciliation bill returns the nation to the regulatory environment that existed before December 22, 1975, when Congress first passed CAFE legislation governing fuel economy and now greenhouse gas (GHG) emissions. That was when motorists were free to choose the vehicles they wanted to drive. Years later, in 2017, when asked if he could think of a “good regulation,” Nobel Laureate Ronald Coase, editor of a leading law and economics journal, replied that in nearly every case “the prices were higher, [and] the product was worse adapted to the needs of the consumers... The government had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up.”
At the time, the evolution of fuel economy regulation had long since reached the stage of negative marginal returns, with every new regulation adding thousands of dollars to vehicle prices and billions of dollars to the cost of government regulation. Meanwhile, vehicle owners have been denied safety, performance, carrying capacity, and numerous other features they could have gotten in an unregulated free market.
The same is true for society, in general. In 2007, economists at a leading environmental think tank found that harmful “fuel-related externalities add to only 18 cents per gallon while mileage-related externalities [increased highway congestion, accidents, and pollution resulting from increased driving in less gas consuming vehicles and unintended consequences of the mandates] are equivalent to $2.10 per gallon.” “Higher fuel economy standards,” they concluded, “will significantly increase efficiency only if carbon and oil dependence externalities greatly exceed the [above] mainstream estimates... or if consumers perceive only about a third of the actual fuel economy benefits.”
That same year, a study by Congressional Budget Office economists found sufficient evidence to conclude that the existing tax on gasoline was more than enough to give the nation’s consumers incentives to reduce gasoline consumption to the point where “additional regulations would impose unwarranted costs on automakers and buyers of new vehicles and would reduce social welfare.”
The unwarranted costs arose when excessive regulations kept buyers from getting the levels of performance, safety, and other vehicle options they wanted more than the mandated increases in fuel economy.
Fuel efficiency is not the same as fuel economy. Too much of anything is bad if you must give up something you’d rather get for the money. The First Theorem of Welfare Economics says that a free market “economy will automatically allocate resources efficiently without the need for regulatory control.” This is true so long as taxes are sufficient to address adverse externalities as in the market for fuel economy.
And a vehicle buyer is nobody’s fool; he can see the EPA fuel economy ratings on dealer stickers and the price of gasoline at the pump.
Since the early 2000s, advances in fracking and horizontal drilling have sparked the shale oil boom, reducing energy security concerns, while stricter fuel economy standards have had little impact on greenhouse gas emissions. And the forced switch to EVs has increased the nation’s reliance on critical minerals and components.
The stricter mandates, along with taxpayer subsidies, have allowed electric vehicles to capture 22 percent of the market. With deregulation, only hybrid electric vehicles (HEVs) can save enough fuel to justify the additional manufacturing cost.
Yet HEVs reduce only a fraction of carbon emissions relative to gasoline internal combustion engine (ICE) vehicles. They were never going to get us anywhere near Net Zero.
The recent increase in market share is partly the result of significant performance improvements, especially in low-speed urban driving. But less expensive ICEs still excel in raw power and high-speed capabilities, and they often surpass hybrids in towing and payload performance. The increase is also a result of tightened Biden administration regulations. To maintain compliance, vehicle manufacturers have had to burden ICEs with ever higher “shadow prices,” while lowering them on HEVs. With the elimination of shadow pricing, deregulation may put a big dent in HEV sales.
Whatever happens will be for the best in this now best of all possible worlds.
Coase was right. Automobile prices will be much lower and the product much better. Single-minded regulators never understood the difference between fuel economy and fuel efficiency. Their costly, irrational regulations diverted manufacturers from making market driven improvements that would have made consumers and society far better off.
Fortunately, America is back on the road again: back to a happy and prosperous free market future.
Tom Walton is a Heartland Institute policy advisor. He was General Motors Director of Economic Policy Analysis before he retired in 2008.
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