A new paper from Resources for the Future summarizes the literature:
…gasoline taxes are a far more cost-effective policy than CAFE standards because they exploit more margins of behavior for reducing gasoline use. Austin and Dinan (2005) and Jacobsen (2010a) estimate that CAFE standards are about 2–3 times more costly than a gasoline tax for a given long-run reduction in fuel consumption. In Jacobsen’s (2010a) study, total welfare costs average about $2 per gallon of fuel saved for a 1 mpg increase in the CAFE standard, while a gasoline tax that saves the same amount of fuel imposes welfare costs of about $0.80 per gallon. The cost disadvantage of fuel economy standards is even more pronounced in the short run, as fuel taxes give all motorists an immediate incentive to save fuel by driving less, while new vehicle standards only permeate the vehicle fleet gradually.
Yet despite their much higher cost, CAFE standards are more popular than gas taxes. Our desire to have costs hidden from us is a very expensive preference. The Obama administration was able to pass aggressive CAFE increases in 2009, in contrast both democrats and republicans were campaigning on a gas tax cut in the 2008 election. Would either party be receptive to abolishing CAFE standards in exchange for a higher gas tax? I doubt it, but it would be good for the environment and the economy.
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Monday ~ October 25th, 2010 at 7:35 am
jazzbumpa
The auto industry had to be dragged, strenuously resisting all the while, into every fuel economy and safety improvement that has ever happened. The choice isn’t between CAFE standards and a gas tax, It is between CAFE standards and little to no fuel economy improvement over long time periods.
Cheers!
JzB
Monday ~ October 25th, 2010 at 8:22 am
jazzbumpa
As this graphic shows, imposed fuel economy standards are the ONLY driver for fuel economy improvement.
http://www.pewfuelefficiency.org/docs/cafe_history.pdf
Cheers!
JzB
Monday ~ October 25th, 2010 at 8:58 am
Adam Ozimek
That’s a pretty low burden of proof for an extreme claim you’ve got there. I’ll have to remember this for the next time you claim you’re skeptical of something.
Monday ~ October 25th, 2010 at 10:35 am
jazzbumpa
Sure. Feel free to ignore a direct lock step correlation in a resultant variable that is otherwise virtually unchanged over decades.
Or,on the other hand, you could show some actual evidence of gas-tax effectiveness.
Cheers!
JzB
Monday ~ October 25th, 2010 at 9:39 am
ryan
Do I sound like too much of a “rational irrationality” fanboy if I ask “who is the ‘our’” in the sentence “Our desire to have costs hidden from us is a very expensive preference.”?
Monday ~ October 25th, 2010 at 9:41 am
Mike Mathea
If in fact your goal is an immediate change in consumption of gasoline then the gas tax is the correct methodology. Maybe the solution is a gas tax that is by law reduced as the average fleet mileage is reduced. That would have the additional impact of helping the short run deficit issues.
Monday ~ October 25th, 2010 at 11:09 am
jazzbumpa
From the conclusions of the paper you cited (emphasis added):
On the other hand, by revealed preference, standards seem to be more practicable than high fuel taxes for the United States. Regulations may also help create a more stable environment for the development of clean technology by removing some of the downside risks to innovators in a world of uncertain fuel prices. It is not well understood, however, whether fuel economy regulations are better or worse than other instruments (e.g., technology prizes, fuel taxes, and fuel price floors) along this dimension.
Cost is not the only thing worth considering, if you want something to actual work. The authors quite deliberately do not conclude that taxation is better than regulation.
To Ryan’s point, this statement needs some sort of validation:
Our desire to have costs hidden from us is a very expensive preference. I’d certainly like to understand it better.
Cheers!
JzB
Monday ~ October 25th, 2010 at 11:27 am
ryan
JzB,
I don’t understand what the authors could really mean by “revealed preference” in this case — you would have to posit that there exists some singular entity that (a) decides on the policy, and (b) pays the costs and receives the benefit of the policy. This is clearly not the case. You might as well say, “by revealed preference, pollution is more practicable than reducing pollution.”
It might be true that gas taxes aren’t on the political menu, and that seems a good point. I for one don’t really understand how political opinion works, so I appreciate information on that score. On the other hand, that doesn’t really seem relevant to the question of “would gas taxes, if they were possible, be more efficient and effective than CAFE standards?” If we start by only looking at what is already politically possible (which presumably is informed at least somewhat by voters’ and politicians’ understanding of the relevant costs and benefits), then it’s hard to see what is the point of finding out new information about costs and benefits. Besides, if CAFE has high costs (not to mention the indirect effects on labor supply by reducing the cost of driving, given that driving and leisure are complements), then if we’re restricted between higher CAFE and status quo, status quo may be more efficient.
Monday ~ October 25th, 2010 at 2:48 pm
jazzbumpa
Ryan -
You’ve lost me, but that’s OK.
In this model . . .
http://www.ucei.berkeley.edu/POWER-09/Slides/von_haefen_Roger.pdf
. . . a tax increase of $2.40 nets between 4.53 and 4.87 mpg.
They also estimate that a sustained price or $4.00 per gal will result in a 14% fuel economy increase (to 2005 results) over an unspecified time frame. 14% of 25 is 3.5 mpg.
CAFE requirements got us about 10 mpg.
Gasoline prices increased from about $1.5 per gallon in 2001 to about $2.50 in 2005.
Gas prices.
http://zfacts.com/p/35.html
From the chart in my earlier comment, actual MPG achieved hardly budged – some fraction of one MPG. Meanwhile miles driven per capita increased in the U.S overall from 9744 in’01 to 10087 ’05. Per state results are similar.
Miles per capita.
http://www.bts.gov/publications/state_transportation_statistics/state_transportation_statistics_2006/html/table_05_03.html
Help me out if I have this wrong, but increasing the price per gallon does not seem to be very effective at either raising fuel economy performance or reducing actual miles driven in the real world.
Cheers!
JzB
Monday ~ October 25th, 2010 at 3:41 pm
ryan
First of all, you can’t just compare correlations in prices & MPG and from this deduce impact of prices on mpg — for one thing, you don’t know if price is moving around because of supply or because of demand, and just off the top of my head I would expect demand-induced price changes to have a smaller effect on mpg.
More importantly, you don’t care about MPG — you care about consumption, and it seems pretty clear that gas taxes work towards that goal while CAFE only does it indirectly (if at all) and in a very ineffective manner. (It’s particularly hard to imagine how CAFE could reduce “actual miles driven.” After all, if I have a more efficient car, I want to drive more, not less — the only way CAFE could reduce miles driven is if it simply made it impossible for people to own cars.)
Third, even insofar as MPG is a good metric of outcomes, the scale of observed changes doesn’t really tell us much. The discussion above is, essentially, would gas taxes be a better strategy if we tried them? To say that we have not, in point of fact, actually tried them doesn’t actually answer the question. (Put another way, no one has ever argued that an arbitrarily small change in the gas tax will have larger quantitative effects than an arbitrarily large change in CAFE standards.)
Are you arguing that raising gas taxes by, say, $1000, wouldn’t change mpg or consumption an enormous amount? I’m sure not. To argue that even in principle gas taxes are an inferior policy instrument, you have to argue that the amount of gas taxes necessarily to achieve X outcome results in larger welfare losses than the necessary CAFE standards.
Monday ~ October 25th, 2010 at 6:20 pm
jazzbumpa
Ryan -
Yes you absolutely care about consumption. That is a resultant of two things: fuel economy and miles driven, so you have to care about both of those as well.
What I’m showing is that a large increase in price from 2001 to ’05 had no meaningful effect on either. The price changes, BTW, were almost exclusively supply/cartel driven due to the effects of war.
The only empirical data I know of suggests not very much price sensitivity in the $1:50 to $2:50 range: basically no effect on MPG or miles driven.
Modeling at the $4:00 range suggests those ultimate 3.5+ mpg efficiency increases.
I’m not arguing that taxes are an inferior instrument. I am arguing that we do know exactly what we got from regulations, and the tax angle is a big unknown, with no actual data to suggest it will work. It is not at all clear that that gas taxes work towards that goal.
Sure, somewhere between $0.50 and $1000, there’s a break point. I do try to avoid making absurd arguments.
Off to rehearsal. Gotta run. Cheers!
JzB
Tuesday ~ October 26th, 2010 at 7:25 am
Adam Ozimek
JzB, you’re looking at one short period of data and not controlling for other important factors like, say, household wealth. I’m not sure why you’re insisting that your simple and extremely incomplete analysis here should trump the considerable research on this topic. By what basis are you asserting that your example here is more reliable than the analysis cited above? For instance:
“Austin and Dinan (2005) and Jacobsen (2010a) estimate that CAFE standards are about 2–3 times more costly than a gasoline tax for a given long-run reduction in fuel consumption.”
I think you need to back off our statement that the a graph of average fuel economy and a narrative description of CAFE standards is sufficient to show that “fuel economy standards are the ONLY driver for fuel economy improvement”. The largest change in fuel economy comes after the huge oil price shock in the late 70s. How does that graph and narrative suffice to disentangle the effects of the price spike from the effects of the CAFE standards?
Tuesday ~ October 26th, 2010 at 2:04 pm
jazzbumpa
Adam –
The analysis above talks about cost, I am talking about results. The authors draw no firm conclusions, and I don’t think you should either. If anything, they seem to be leaning towards CAFE.
The effects of price shocks of the 70′s are confounded with the CAFE effects of that time period.
But -
During the price shock period, vehicle driving did not decrease.
After the price shocks were over, fuel efficiency remained at a new higher level. (Regulation drove permanent technology changes.)
However, there were no further improvements later. One may then infer that other potential technology-drivers were, at best, ineffective.
There have been other price shocks with little effect on miles driven, and no effect on the fuel efficiency of vehicles.
Other variables one might consider – though not controlled for – do not appear to have effected driving habits in a big way.
This is, at least, a coherent narrative.
I spent my entire adult life in or close to the auto industry, and I have some knowledge and feel about what levers move them. The CAFE requirement was something that they had to respond to. A tax increase hits the driver, not the car company. Big Motors would always rather sell a high margin SUV or pick-up than a low margin sub-compact. Seriously – they care about fuel efficiency exactly to the extent that they are forced to.
On the demand side the history has been that whenever a price shock has been either absorbed or relieved, customer demand (which is pretty fickle) always reverts to size, power and comfort.
And I’m not making any kind of absolutist argument. I am simply saying that CAFE standards have been effective in improving the fuel efficiency of vehicles, while I know of no compelling reason to think that anything else has. So let’s not blithely disregard them. A fuel tax might work, but the idea is speculative, and there is no way to know it’s effectiveness.
The industry has not further increased fuel efficiency since CAFE regs were satisfied. Miles driven has not shown much price sensitivity in the real world, and the tax solution depends on price sensitivity.
I’m also concerned about externalities. I haven’t had a chance to delve deeply into any of the supplied links to see how this is considered, but a gas tax looks regressive. The hardest hit will be low wage earners with significant commutes.
Cheers!
JzB
Monday ~ October 25th, 2010 at 6:40 pm
ryan
“[C]onsumption is a resultant of two things: fuel economy and miles driven, so you have to care about both of those as well.”
No, it doesn’t follow that you care about both of those things, particularly in a case like CAFE that decreases one only when simultaneously increasing the other. See for instance, West & Williams 2005 http://www.jstor.org/stable/4132835
“It is not at all clear that that gas taxes work towards that goal.”
Of course it’s clear. We know empirically that gas taxes reduce consumption. All of economic theory suggests they will continue to work towards that goal even if we use new levels of gas taxes. We also have plenty of data on all manner of price increases decreasing consumption on all kinds of goods. Furthermore, we know that if you want to reduce consumption by X amount, we know that gas taxes do this more efficiently than CAFE standards. We know from common sense that CAFE standards do not raise government revenue (and so cannot be used to achieve any other goal). Finally, we have also observed (as theory predicted) that gas taxes can be used to increase labor supply (thus reducing deadweight loss elsewhere) whereas CAFE standards have the opposite effect (thus increasing deadweight loss even over and above the cost we pay from using such an inefficient instrument).
From where I sit, it looks like we have plenty of reason to prefer gas taxes to CAFE and even more reason to educate others about why we should prefer gas taxes to CAFE.
Monday ~ October 25th, 2010 at 6:54 pm
ryan
To perhaps make this a bit clearer, why do you say very large gas taxes are absurd? Isn’t it because you’re saying there’s some point at which the benefits of lower consumption are outweighed by their costs? It seems to me that you find this argument dispositive because the costs of high gas taxes are much more obvious than those of CAFE standards.
So this actually cuts the opposite way. If you’re not willing to cut consumption 1% using a tax, then (since CAFE is a more expensive way of doing the same thing) you should think CAFE standards are too high and should be lowered
Tuesday ~ October 26th, 2010 at 1:13 pm
jazzbumpa
Ryan -
We seem to be talking past each other.
Here is the history of federal gasoline taxes.
http://www.taxfoundation.org/taxdata/show/1067.html
Here is the history of total miles driven.
http://www.project.org/info.php?recordID=443
No correlation that I can see.
I didn’t say that high gas taxes are absurd. I intended that I recognize a difference in the effects of small vs huge tax increases.
Cheer!
JzB
Tuesday ~ October 26th, 2010 at 1:27 pm
ryan
“No correlation that I can see.”
Which is why we have empirical methods more involved than eyeballing an aggregate time series and looking for correlations big enough to be visible to the eye past the noise and confounds. C’mon. Are you actually saying you don’t believe all other theory and evidence of the ceteris paribus link between gas prices & miles driven because a one-to-one correlation doesn’t pop out at you?
Tuesday ~ October 26th, 2010 at 2:06 pm
jazzbumpa
Ryan -
Theory is a hypothetical. Show me the evidence and I will believe.
Cheers!
JzB
Tuesday ~ October 26th, 2010 at 2:08 pm
ryan
I’m confused. We have. There is all kinds of evidence. You seem to be rejecting it all out of hand.
Wednesday ~ October 27th, 2010 at 8:19 am
jazzbumpa
I’m confused. We have. There is all kinds of evidence.
Please cite it for me.
You seem to be rejecting it all out of hand.
Really? I’ve provided references that indicate expected correlations between gas tax increases and fuel efficiency improvements. So I clearly am not rejecting the idea. You’ve provided no data and a single link to a paper where I can only see the first page.
Here is some more recent data.
Average miles driven per vehicle.
http://www.project.org/info.php?recordID=146
Virtually no change over a decade.
Total miles driven
http://www.project.org/info.php?recordID=146
Only a slight decline from ’07 to ’08, and almost no change from ’03 to ’08, despite gas prices more than doubling over that time span.
This is the sort of thing that you are rejecting out of hand.
I think some healthy skepticism on my part is justified.
Cheers!
JzB
Wednesday ~ October 27th, 2010 at 9:23 am
ryan
Well, there’s the original paper to begin with, which you seem to either be studiously ignoring or just completely misunderstanding. (Hint: if $1 worth of policy X does twice the work of $1 worth of policy Y, that means policy X is more effective. Second hint: if you think gas taxes don’t do anything, than that means its costs must be infinite.) Or you could go ahead and actually read the papers you’re linking to (like the von Haefen one). Or again, try google scholar and tell me if you find a single paper that actually does serious empirical work (i.e., more than glancing at an aggregate time series and saying “I don’t see anything”) that is in fact consistent with your insistence that gas taxes don’t do anything at all.
Healthy skepticism would be great. But I gotta say, that’s really not what you’re doing here
Tuesday ~ October 26th, 2010 at 2:18 pm
ryan
“I’m also concerned about externalities. I haven’t had a chance to delve deeply into any of the supplied links to see how this is considered, but a gas tax looks regressive. The hardest hit will be low wage earners with significant commutes.”
Just a comment on externalities and distribution effects (which, incidentally, are in no way the same thing). A number of gas tax papers have in fact looked at distributional effects. In particular, West & Williams have a few on this subject (together & separately). Williams has one on “quasi-Pareto improvements” where you recycle the revenue from the gas tax to modify the income tax (lowering it and making it more progressive) so that no income group is made worse off in expectation.
Note that CAFE also has regressive effects. In fact, if you were to argue that they could in principle reduce driving in the long run (it’s more or less impossible for them to do so in the short run), it would be by making cars unaffordable for lower-income people. However, since CAFE doesn’t raise any money for the gov’t, there’s pretty much nothing you can do about this — you don’t have any new money to redistribute. Which, again, if you care about distribution, means you should want lower CAFE than otherwise.
Regarding externalities, the big externality that the gas tax works towards is not so much pollution as congestion. This drives the lion’s share of the estimates of the “optimal gas tax.” Note that CAFE can’t help here either — in fact, it tends to make things worse by making people drive more.
Wednesday ~ October 27th, 2010 at 8:28 am
jazzbumpa
Note that CAFE also has regressive effects. In fact, if you were to argue that they could in principle reduce driving in the long run (it’s more or less impossible for them to do so in the short run), it would be by making cars unaffordable for lower-income people.
Almost half the cost of new car ownership is depreciation. That can be largely avoided by buying a 5 year old car. It’s mostly the NEW cars that become less affordable.
And that cost is avoidable, if you can keep your current car running.
Cheers!
JzB
Wednesday ~ October 27th, 2010 at 9:17 am
ryan
“Almost half the cost of new car ownership is depreciation.”
Ok, I’m not even sure what that means, literally speaking (there’s depreciation during the entire life of the car, and it continues until the value drops to zero). What you seem to mean is that the price drops a lot in the first few years. But you also seem to believe that the effect on the price of new cars has no effect on the price in the secondary market, which is obviously untrue. (Not to mention that CAFE can’t increase the mpg of old cars and tends to keep them in service longer while at the same time increasing driving among new cars, which again is defeating the point.)
But if you don’t believe me, fine. Go to google scholar and look around for distributional effects of CAFE. (Or if you don’t like that a lot of decent papers are behind a firewall, I promise you that most decent libraries will have copies of AER.) Tell me if you find any that say CAFE has progressive effects. Or that CAFE is more efficient.
Wednesday ~ October 27th, 2010 at 4:13 pm
jazzbumpa
Ryan:
in fact consistent with your insistence that gas taxes don’t do anything at all.
It doesn’t look as if you’ve actually read my comments, since I never said anything even remotely like that. Or you are engaging in sophistry.
Either way, the conversation has become fruitless.
Adios!
JzB
Wednesday ~ October 27th, 2010 at 4:31 pm
ryan
Really? How about
“basically no effect on MPG or miles driven” or
“It is not at all clear that that gas taxes work towards that goal [" or
"One may then infer that other potential technology-drivers were, at best, ineffective. There have been other price shocks with little effect on miles driven, and no effect on the fuel efficiency of vehicles" or
"No correlation that I can see." or even
"Miles driven has not shown much price sensitivity in the real world, and the tax solution depends on price sensitivity.
I'm sorry, but I think I have been reading what you're writing. And it really does seem like you are at least often arguing for an effectively zero price elasticity of gas demand. And even when you seem open to the suggestion that it's not, it's really not clear to me what the basis of your argument is. If you're willing to accept that the elasticity isn't zero (the RFF paper at the top suggests it's around -0.4, which IIRC is in line with other estimates), then tell me what other claim you're disagreeing with. If you agree that taxes are less costly per gallon of gas reduction, then tell me why we would use the more costly tool.
(NB: if you think a tool simply won't work anymore, that means you think the cost of doing more with it is infinite, so you've rejected the premise. In which case you should [a] acknowledge that’s what you’re doing, and [b] say what went wrong in the RFF analysis that makes you disagree.)
Tuesday ~ October 25th, 2011 at 2:22 pm
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[...] these guys are smart men, and both know that CAFE standards are much more costly (2-3 times) than a gas tax, which would focus on the demand side (consumption) rather than the supply side [...]