Sunday, May 24, 2009

Obama's deal with California for uniform national fuel economy standards

An interesting paper by Lawrence H. Goulder, Mark R. Jacobsen, and Arthur A. van Benthem, "Impacts of State-Level Limits on Greenhouse Gases per Mile In the Presence of National CAFE Standards" comes at the same time that Obama makes a deal with California for a uniform national CAFE standard.

The paper by Goulder, Jacobsen, and van Bentham finds that differential CAFE standards between states has very little impact on national CAFE standards. Their finding is one of those "why didn't I think of that" results, surprising at first, but completely obvious after you look at it. National CAFE standards are currently 27.5 mpg for passenger cars. If we assume that is binding, and it seems to be, then you can expect car manufacturers to offset any higher average fuel economy in California (and the 13 other states) by selling cars with lower averages in the remaining states. The federal regulations apply to the entire fleet sold by a manufacturer, so an increase of 1 mpg in California could theoretically be offset by, say, a reduction of 1.3 mpg in Texas (Texas's market is smaller than California's, so the mpg offset would be greater than the increase in California's mpg standard.) The paper finds that about 80% of the gains in fuel economy in the states with higher standards would be offset by lower fuel economy in the remaining states. The paper also finds that the added cost of the fuel efficiency gain by the two-tier system would be 50% higher than if the federal government simply set a higher uniform CAFE to gain the same net fuel efficiency increase.

You can read the paper here. Warning: after the abstract it gets very technical.

California recently won its court fight to set greenhouse gas (GHG) emissions standards for new cars sold in the state that will effectively set higher fuel economy standards for California cars than are required by federal CAFE regulations. This week the Obama administration announced a deal whereby EPA will set higher CAFE standards than those currently on the books and California will adopt the federal standards rather than set its own more stringent ones. All other states are preempted from forming independent standards, although they are allowed to choose California's or the federal standards. 13 other states have so far adopted the California GHG standard. All will now have only one choice since California will match the federal standards. This means Obama's deal will be more effective than the two-tier CAFE standard, and it will cost less than the two-tier system. The manufacturers are willing to go along with the higher standard because of the cost savings.


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