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Mar 4 / Jonathan

Contra CAFE

James Hamilton argues against CAFE and in favor of a gasoline tax.

CAFE standards are based on the premise that auto manufacturers and consumers are making inappropriate decisions about the kind of vehicles that get produced. The clearest way to motivate this from an economic perspective would be to suggest that there are costs to using gasoline beyond those paid directly by consumers, such as a geopolitical cost when the U.S. relies on imported oil or possible consequences for the world climate. But if that is the motivation, an economically more efficient way to accomplish the objective would be to tax the gasoline use itself so that the after-tax price paid by consumers completely reflects whatever these true costs are deemed to be. This has the benefits of providing an incentive not just to purchase more fuel-efficient cars, but also to encourage more fuel conservation in the use of the existing fleet through such measures as driving slower, driving less, or getting more of the existing mileage from the more fuel-efficient vehicles. And it allows consumers and firms the maximum flexibility to figure out how to do this in the least disruptive way.

Hamilton cites research by Stanford economics student Mark Jacobsen.

Overall, Jacobsen estimates that a one-mile-per-gallon increase in the required average corporate fuel efficiency would increase the average fuel-efficiency of all new cars sold by 2.5%. However, since most of the older cars would still be on the road, Jacobsen estimates that during the first year, total U.S. gasoline consumption would decline by only 0.8%. He estimates the costs of this 1 mpg tightening of CAFE would be $20 billion in the first year, with these first-year costs shared about equally between U.S. consumers and producers. For comparison, Jacobsen claims that a gasoline tax could accomplish the same first-year effect at an efficiency cost of significantly less than $1 billion.

Over time, the fuel savings from tightening CAFE would of course increase, but even after 10 years, Jacobsen concludes that that a gasoline tax could accomplish the same thing at 1/6 the cost.

2 Comments

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  1. Mark Swanson / Mar 10 2007

    I hope I don’t get you in trouble for saying this but I think this is the way to go. You didn’t specifically say you agree with this proposal, but, assuming you do, this might just be a first!

    The only point I would add is that because this tax would disproportionately affect the less wealthy (as a % of income) I would offset it by raising the personal exemption on federal income taxes.

  2. Jonathan / Mar 11 2007

    Or create a payroll tax exemption.

    Another advantage of a gasoline tax is that it can be implemented relatively easily at the state level.

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