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Fuel Economy Standards Versus a Gasoline Tax 1 (March 2004)

handle is hein.congrec/cbo8848 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office MARCH 9, 2004 Fuel Economy Standards Versus a Gasoline Tax Proponents of increasing corporate average fuel economy (CAFE) standards for passenger vehicles see the policy as a relatively low cost and proven way to decrease the United States' dependence on oil and emissions of carbon dioxide (the predominant greenhouse gas). Opponents argue that CAFE standards are a costly and cumbersome way to reduce gasoline consumption, that they interfere with the market and unduly burden U.S. business, and (because they may encourage more driving and alter vehi- cle design) that they may compromise the safety of mo- torists. CAFE standards are currently 27.5 miles per gallon (mpg) for cars and 20.7 mpg for light trucks. The stan- dard for cars has not changed since 1990, and the truck standard has been fixed since 1996 but is scheduled to in- crease to 22.2 mpg by 2007. The average fuel economy of each manufacturer's fleets of cars and light trucks must meet those standards, or the firm will be subject to a fine. All major automakers currently meet or exceed the stan- dards. This issue brief focuses on the economic costs of CAFE standards and compares them with the costs of a gasoline tax that would reduce gasoline consumption by the same amount. The Congressional Budget Office (CBO) esti- mates that a 10 percent reduction in gasoline consump- tion could be achieved at a lower cost by an increase in the gasoline tax than by an increase in CAFE standards. Furthermore, an increase in the gasoline tax would reduce driving, leading to less traffic congestion and fewer acci- dents. This analysis stops short of estimating the value of less congestion and fewer accidents and, therefore, does not draw any conclusions about whether an increase in the gasoline tax would be warranted. However, CBO does find that, given current estimates of the value of de- creasing dependence on oil and reducing carbon emis- sions, increasing CAFE standards would not pass a benefit-cost test. What Would It Cost to Raise CAFE Standards? Raising CAFE standards would impose costs on both the producers and buyers of passenger vehicles. To comply, producers would need to incorporate technologies to boost the fuel economy of their vehicles, which would in- crease their cost of production. Consumers would face higher prices for new cars and trucks.1 But consumers would also see lower operating costs for new vehicles be- cause they would use less gasoline, offsetting some of the sting of the higher purchase prices. CBO estimates that raising CAFE standards by 3.8 mpg (to 31.3 mpg for cars and 24.5 mpg for trucks)-enough to reduce the amount of gasoline consumed by new vehi- cles by 10 percent-would cost the U.S. economy a total of $3.6 billion per year.2 That figure translates to about $230 per new vehicle. Consumers would most likely bear about two-thirds of the costs. Although the average price of a new passenger vehicle would go up by nearly $900, fuel savings would lower the additional costs to consumers to roughly $150 per vehicle, on average. Automakers' lost profits would constitute the remaining $80. Although a 3.8 mpg in- crease in CAFE standards would reduce gasoline use by new vehicles by 10 percent, it would take 15 years for to- tal gasoline consumption (by both new and older cars and light trucks) to fall by 10 percent-only after all ve- hicles currently on the road were retired. 1. Alternatively, producers could comply by raising the prices of their gas-guzzling vehicles and lowering the prices of their most fuel- efficient cars to encourage consumers to buy more of the latter, in which case consumers would still see higher vehicle prices on aver- age. Or producers could offer new vehicles that provided better fuel economy in place of other attributes that consumers might prefer, such as additional horsepower or more interior space, in which case prices might not increase. 2. That figure incorporates the value of gasoline savings; it also reflects the reduced profits, and reduced value, that producers and consumers would receive as a result of lower sales of new vehicles.

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