Reducing the Use of Gasoline | Corporate Average Fuel Economy

Whatever the actual motivation, American policymakers perceived a need after 1973 to restrict automobile and light truck consumption of gasoline. How The Energy Policy and Conservation Act of 1975 imposed Corporate Average Fuel Economy (CAFE) standards on all auto and light truck manufacturers who sold vehicles in the Unite d States. The weighted average of miles per gallon (MPG) for each manufacturer’s car sales was required to be at least 18 MPG by 1978 and 27.5 MPG by 1985. Manufacturer s that failed to meet this standard were to be fined $50 per vehicle sold for each gallon (of MPG rating) by which they failed.

One of the first questions Corporate Average Fuel Economy raises is, why control the average fuel economy of a fleet of cars rather than the fuel economy of each car? Manufacturer s like to provide a spectrum of cars, some large and powerful, and some small and fuel-efficient. With the average requirement, they could continue to do this. Indeed, the average requirement permitted car manufacturer s to raise the MPG of their various model s in a cost-effective way, equating the marginal cost of the CAFE-mandate d higher MP G across their models. Big cars would have lower MPG because it is expensive to make them fuel-efficient; small cars would compensate for this by exceeding the Corporate Average Fuel Economy standards because it is cheap to make them more fuel-efficient.

This much makes some sense. But it is hard to resist the next question. If the averaging of fuel-efficiency standards across each manufacturer’s models permits them to achieve a more cost-effective increase in MPG, then would it not be even more cost-effective to permit such averaging on an interfirm as well as an intrafirm basis? This could have been achieved by permitting manufacturers to buy and sell CAFE excesses and CAFE shortages between firms.

The “Gas Guzzler” Tax and the “Luxury” Tax. Beside Corporate Average Fuel Economy, two taxes were introduced in the 1970s in an effort to reduce U.S. gasoline consumption, the “gas guzzler” tax and the automobile “luxury” tax. The gas guzzler tax is an excise tax levied on new cars that fail to meet even moderate MPG standards. Currently, the tax begins at $1000 for cars that get 21.5-22.5 MPG and rises progressively to $7700 for cars that get less than 12.5 MPG. The luxury tax is an excise tax levied on new cars that sell at very high prices. Since high-priced cars are usually low-MPG cars, this also is, albeit indirectly, a tax on fuel inefficiency. As of 1998, the tax rate was 8% of the excess of the sales price over $36,000. Clearly, both of these taxes discourage the purchase of low-MPG cars (though not much). But do either discourage driving these cars once they are purchased ?

Gasoline Rationing The U.S. government rejected the idea of gasoline rationing in the face of OPEC price increases, but it has not always rejected this idea. During World War II, though gasoline was not yet imported, the price elasticity of supply was low in the short run. In order to provide huge amounts of gasoline for military use without bidding up the price of gasoline, the government rationed civilian usage. Each motorist was given coupons that permitted the purchase of 5 gallons of gasoline per week (about two-thirds of the average prewar consumption at that time). These coupons, even if unused, could not be sold. Why was the U.S. government unwilling to use the price mechanism to collect its wartime gasoline needs? Why was rationing used rather than “first come, first serve” queuing (Freeh and Lee, 1987)? Why was the ration coupons passed out per licensed driver rather than per person? Why were the coupons nonmarketable? If we really want to reduce gasoline usage now, why do we not consider a return to gasoline rationing ?