Driving Up the Cost of Clean Air
In 2002, car accidents killed nearly 43,000 and incapacitated another 356,000,
according to the National Highway Traffic Safety Administration. Vehicle
exhaust contributes to untold numbers of hospitalizations for asthma attacks
and other health problems, while car-related pollution contributes to lung
diseases and heart attacks. Cars and light trucks on American roads contribute
slightly less than 4% of the world’s
annual burden of greenhouse gases and about 20% of the U.S. burden. Each
year, car- and truck-related congestion costs the United States $63 billion
in lost time and wasted fuel, according to the Texas Transportation Institute’s 2004
Urban Mobility Report, and 5.6 billion gallons of gasoline are wasted
by idling in traffic.
Much controversy swirls in the debate over how best to mitigate the harmful
side effects of automotive transportation. It is somewhat helpful to sharpen
the debate by appealing to economic theory, although ideals usually become
badly dented when they collide with politics.
Some of these harmful side effects are what economists call “externalities,” or
costs that are not incorporated into the market price. A motorist buying
gasoline, for example, does not pay for the costs of the climate change
or the air pollution that will result from burning that fuel, or the military
cost of maintaining access to Persian Gulf oil.
Externalities have obvious solutions: figure out their costs, and incorporate
them into the price. The theoretically superior strategy would be to tax
individual greenhouse gas emissions and to incorporate defense costs into
the price of oil specifically from the Persian Gulf (although military
spending, generally viewed as a fixed rather than variable cost, is usually
excluded from computations of the optimal oil or gasoline tax).
Accidents are arguably not externalities, because they are largely paid
for through insurance. However, car insurance does not cover expenses such
as fire and police department costs or costs related to death and pain/suffering.
Furthermore, insurance is a lump-sum payment rather than a per-mile charge,
so motorists likely do not consider accident costs when deciding how much
to drive a given vehicle. Traffic congestion, a well-established result
of motorization, is less ambiguous as an externality, although people endure
part of the delays they help to create. But to the extent that accidents
and congestion are externalities, they are externalities of driving, not
of gasoline use, because cars can run on other fuels.
As yet, determining the cost of fuel-based externalities is a primitive
art, says Mark Delucchi, a research scientist at the Institute for Transportation
Studies of the University of California, Davis. “The best estimates
of virtually all important external costs--air pollution, noise, accidents,
congestion, and oil importing--vary by about an order of magnitude,” he
wrote in the spring 2000 issue of Access magazine. Delucchi
advocates using these estimates to inform but not determine policy.
A number of strategies have been suggested in the United States to reduce
the problems created by automotive transportation. One strategy in particular--the
corporate average fuel economy (CAFE) standards--has been around for several
decades. The pros and cons of personal transportation and the controversy
surrounding CAFE and other strategies demonstrate the need for careful
thought--as well as the hazards that arise--when policy meets politics.
High-Test CAFE
The legislation authorizing CAFE was enacted in 1975, following the 1973-1974
Arab oil embargo. CAFE standards set an average gas mileage requirement
for a manufacturer’s fleet. The fuel economy of all the cars sold by
a manufacturer in any given year must average 27.5 miles per gallon, and
the fuel economy of all light trucks sold must average 20.7 miles per gallon.
So Ford Motor Company, for example, must sell a lot of its diminutive Focuses
to make up for the portly Lincolns, and the relatively small Ford Escapes
must make up for the Lincoln Navigators, Ford Excursions, and other SUVs.
The goal of CAFE was to double new car fuel economy with no loss in performance,
a goal that was largely achieved by 1985, according to the 2002 National
Academy of Sciences (NAS) report Effectiveness and Impact of Corporate
Average Fuel Economy (CAFE) Standards. The same might have been accomplished
with a tax, but a cartel--or monopoly--is not an externality, and applying
a tax on top of monopoly pricing could damage the economy. Arguably, there
was no ideal solution.
CAFE is also credited with helping in 1986 to collapse prices set by
the Organization of the Petroleum Exporting Countries, bringing gasoline
prices down from an inflation-adjusted peak of $2.94/gallon in 1981. According
to the NAS report, without CAFE, the United States would be burning an
additional 2.8 million barrels per day--equivalent to about 14% of current
U.S. consumption and 3% of world consumption--at a cost of $120 billion
dollars annually (about 19% of the U.S. goods and services deficit for
2004).
But not everyone agrees that CAFE has been that effective at curbing
fuel consumption. In the May 1997 issue of the Journal of Regulatory
Economics, materials scientist Steven Thorpe wrote that CAFE standards
may actually have contributed to a decline in the average fuel economy
of the new fleet by shifting sales to less fuel-efficient vans, trucks,
and SUVs.
CAFE opponents--such as Tom Walton, director of economic policy at General
Motors--argue more generally that the cost of CAFE is greater than the
benefits. A 9 March 2004 issue brief by the Congressional Budget Office
(CBO) found that “[u]nless current estimates of the benefits of reducing
gasoline consumption are significantly understated, increasing CAFE standards
would not pass a benefit-cost test.”
Many opponents say that in the absence of higher gasoline prices, improved
fuel economy encourages people to drive an extra 10-20% (however, according
to David Greene, an environmental engineer at Oak Ridge National Laboratory,
a 10% increase in fuel economy will result in only about a 1% increase
in driving). Opponents further argue that the additional accidents and
congestion caused by this surplus driving cost roughly $1.00 and $1.40
per gallon, respectively, at current average U.S. fleet fuel economy. These
costs subsume the benefits of greater fuel economy, a combined savings
on greenhouse gas effects and oil dependency of 30¢ per gallon, and
on pollution of an additional 40¢ per gallon at current fleet average
fuel economy.
However, Roland Hwang, vehicles policy director for the Natural Resources
Defense Council, says that these arguments fail to acknowledge that fuel
economy can be raised while saving consumers money. “There are private
benefits to raising fuel economy--benefits which the market has not organized
to capture,” he says. He points to the Energy Star labels and efficiency
standards created for the appliance market by the government as an example
of how to attach a social responsibility value to a product--a value that
many consumers prize and thus will pay more for.
Furthermore, says Hwang, the benefits of CAFE are understated.
Standards send a strong signal to manufacturers to organize research, which
frequently pushes down the cost of incorporating advanced technologies
into new models, he explains. For example, California’s stringent
emissions standards led to car companies’ discovery that instead
of using an expensive electrically heated exhaust-cleaning catalyst, they
could move the catalyst close enough to the engine for the latter to heat
it, without damaging the catalyst’s materials. The result was a substantial
economic savings.
Althought the 2002 NAS report failed to endorse CAFE, it did describe
a potential modification that might be more attractive--manufacturers would
receive fuel economy credits for exceeding the target fleet average, and
instead of meeting the target, they could buy credits from other manufacturers
or the government. The prospect of selling extra credits might motivate
manufacturers to boost fuel economy beyond the target--although Ian Parry,
a senior fellow at Resources for the Future, notes this would be offset
by other manufacturers buying credits so their fuel economy could be lower
than the standard.
A carbon cap-and-trade system, also favorably described by the NAS, could
extend this type of system to other fossil fuel uses as a means of reducing
greenhouse gas emissions. In this scenario, the government would set a
mandatory cap on total emissions, and distribute emissions rights to sellers
and users, which they could trade among themselves.
Other Measures
While CAFE has been a continuing source of controversy, the Environmental
Protection Agency (EPA) Tier I regulations for tailpipe emissions have
reduced emissions by about 90% since the 1970s, according to the Union
of Concerned Scientists. However, automotive pollution remains a local
problem in some regions, says John Millett, a spokesman for the EPA. Diesel
pollution also is still a problem and will remain so for many years, says
Delucchi.
The regulation strategy incorporates a political decision to protect
the most vulnerable, rather than just the average person, says Hwang. The
new Tier 2 regulations finalized in 1999 and the retirement of most Tier
1 automobiles by around 2030 will be the equivalent, in terms of air quality
improvement, of removing 164 million cars from the road. These standards
will add about $100 and $200 to the purchase price of cars and light trucks,
respectively. Additionally, the removal of sulfur from gasoline adds about
2¢ per gallon at the pump.
The EPA estimates, however, that the health and environmental benefits
will ultimately be worth $25.2 billion annually, at a cost to industry
of $5.3 billion. The Tier 2 standards will prevent as many as 4,300 deaths,
more than 10,000 cases of chronic and acute bronchitis, and tens of thousands
of respiratory problems per year, the EPA estimated in its 1999 announcement
of the standards.
A gasoline tax represents another strategy. In theory, a gas tax can
function as a carbon tax and therefore may be appropriate for addressing
the fuel-related externality of carbon dioxide emissions and the resulting
climate change. But carbon dioxide is not the only vehicle emission to
affect climate, and using a gasoline tax to reduce personal vehicles’ contribution
to greenhouse gases could be considered wasteful, because coal-fired utilities’ contributions
dwarf those of cars and trucks. In addition, a gas tax is of little use
against congestion, because it doesn’t differentiate between rush
hour city miles and non-rush hour or rural driving. A better method would
be to tax the carbon content of all fossil fuels.
So-called feebates, endorsed by the NAS report, would provide a rebate
to buyers of cars and trucks that exceed a fuel economy benchmark, and
charge a fee to buyers of cars that miss the benchmark. (The federal “gas
guzzler” tax represents such a fee, but lacks the complementary carrot.)
Researchers at Rocky Mountain Institute (RMI) in Snowmass, Colorado, have
proposed a program in which the benchmark would be reset every year to
keep it revenue-neutral. The program would be size-neutral and would make
money for automakers as well as consumers. “Unlike standards, feebates
reward and propel continuous improvement,” according to the RMI report Winning
the Oil Endgame.
RMI proposes complementing feebates with a scrap-and-replace program
for low-income households, which would get what are traditionally the least
efficient cars off the road, and provide poorer families with reliable,
affordable personal transportation. “There is a growing consensus
that limited mobility is an important missing link in a comprehensive strategy
for reducing poverty,” according to Winning the Oil Endgame.
One of two proposed mechanisms would finance highly efficient new cars
through high-volume procurement and lease them to qualified low-income
citizens. The corresponding scrappage of clunkers could start with the
dirtiest cars.
Two other novel proposals still in the experimental stages--pay-as-you-drive
(PAYD) and pay-at-the-pump (PATP)--tackle the issue from the insurance
point of view. These strategies lack the poisonous aura of a tax because
they would merely shift the way people make their car insurance payments
without adding to the cost of driving.
By making insurance payments directly proportional to vehicle miles traveled,
PAYD would act like a gas tax in boosting the motivation to reduce driving,
especially for high-risk drivers. “[PAYD] insurance conveys to drivers
the true costs they impose on others, and allows motorists . . . to save
money by reducing these costs,” states the Online TDM [transportation
demand management] Encyclopedia published by Canada’s
Victoria Transport Policy Institute. “Vehicle crashes should decline
even more than mileage because higher-risk motorists (who currently pay
high premiums per vehicle-year) would pay higher per-mile fees, and would
therefore have the greatest incentive to reduce their driving.”
The result could be to save an estimated 5,000 lives that would have
been lost to crashes involving reckless drivers, according to the encyclopedia.
Yet, the cost of driving would fall, on average, by $50-100 per vehicle.
Parry cautions that it would take time for insurance companies to adopt
PAYD, and he advocates a tax credit for insurance companies to kick-start
the market. But PAYD is no panacea. Parry, a proponent, foresees a need
for separate congestion charges, which he thinks might completely replace
gasoline taxes several decades hence.
PATP, on the other hand, trades PAYD’s incentive to drive less
for an incentive to drive less, buy a more fuel-efficient car, or both.
A basic insurance fee would be charged at the gas pump, and motorists could
buy more comprehensive coverage or pay for higher-risk coverage directly
from the insurance companies.
The Best Deal
Ideally, policies should “deal directly with a problem, not indirectly,” says
David O. Dapice, an economics professor from Tufts University. He suggests
that a gasoline tax is no better than a Swiss army knife for dealing with
safety, congestion, and air pollution. “If you are worried about
congestion, tax congestion,” he says. “If you are worried about
safety, set standards, or require technologies that promote safety, such
as rollover standards for SUVs. If you want to deal with carbon dioxide,
tax carbon.” But, he adds, “If you want to save fuel, tax fuel.”
As the controversy continues over how best to mitigate the harmful
side effects of automobiles, one thing becomes abundantly clear: cars aren’t
going away anytime soon, and the more we can reduce their impact on our
environment and our health, the better it will be for all humankind.
David C. Holzman
Last Updated: March 21, 2005 |