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Friday, February 26, 2021

Joe Biden’s fuel economy review affects car buyers

On Day One of his presidency, President Biden started to reverse course on U.S. energy and environmental policy with a slew of executive orders. His decisions to reenter the Paris Agreement and cancel the Keystone XL pipeline received much attention.

But his order telling his agencies to review the Trump administration’s fuel economy mandates drew scant notice. If the new administration ratchets up those standards, it will spell bad news for consumers.

To provide some context, the 1975 Energy Policy and Conservation Act charged the National Highway Traffic Safety Administration to establish fuel economy standards for cars and light-duty trucks. At the time, policymakers thought we were running out of oil, and forcing conservation this way was meant to slow the depletion.

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Even then, the mandates made little sense because rising fuel prices would have generated the necessary investments in fuel efficiency. The standards make even less sense today amid a global glut of oil.

Over time, the mandates’ rationale transitioned away from saving fuel to saving the planet. The Obama administration increased the mandate twice, ultimately setting a fleetwide target of 54.5 miles per gallon by 2025, a 5% annual increase. The Trump administration revised this target downward, requiring a fuel efficiency improvement of 1.5% annually through 2025.

The reality is, however, that fuel economy standards are bad economic and environmental policy.

First, the mandates impinge on consumer choice. Car buyers, as opposed to regulators, should decide what type of vehicles they can buy. If consumers value saving money on gasoline over other vehicle characteristics, then they will choose to purchase more fuel-efficient cars. Automakers will meet that demand without a federal mandate. Americans value other attributes too, as evidenced by the fact that all three top-selling vehicles in the U.S. in 2020 were pickup trucks.

By increasing MPG targets, regulators override those consumers’ preferences and force automakers to install costly technologies. As a result, fuel economy mandates increase the prices of new vehicles. The National Automobile Dealers Association estimated that the Obama-era regulations would increase the average price of a new vehicle by $3,000 in 2025.

It remains to be seen what the Biden administration will propose, but one can expect higher sticker prices on the lot if it chooses to increase the standards. Those higher prices will set off a chain of decisions by potential car buyers and car owners in the new and used vehicle markets.
Mandates that drive up sticker prices by thousands of dollars will price many buyers out of the market. The National Automobile Dealers Association estimated that 7 million buyers would have been kicked out of the new vehicle market had the second Obama-era mandate gone into effect.

In turn, those buyers will head to the used car market, increasing demand and causing the prices of used vehicles to increase, too. Even when factoring monetary savings from greater fuel economy, economists have shown that there is a net cost to consumers. As with other energy regulations that drive prices higher, the costs fall disproportionately on the poor.
Further, the nature of the program reduces some of the estimated fuel savings and pollution reduction. Higher prices in the new and used car markets encourage car owners to hold on longer to older, less-efficient cars. Better fuel economy encourages drivers to drive more, causing a “rebound effect.”

The Biden administration would be wise to leave the current standard in place. It would be even better for Congress to junk the outdated mandates altogether. Instead of using a complex regulatory system that distorts automakers’ investment decisions and overrides consumer choice, a far more efficient approach would be to simply regulate the pollution from vehicles using a transparent, objective cost-benefit analysis.

Americans should have the freedom to buy the vehicles of their choice. Price signals and consumer preferences will steer the auto market in a better direction than will Washington.

Nicolas Loris is The Heritage Foundation’s Morgan fellow in energy and environmental policy and deputy director of the think tank’s Roe Institute for Economic Policy Studies.


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