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Gas Tax or CAFE?

by Elaine Schwartz    •    Sep 22, 2012    •    696 Views

The goal is energy conservation. But what is the best way?

During the end of August, our newest fuel economy standards were announced. Now CAFE, our Corporate Average Fuel Economy mandate, is close to 29 miles per gallon. The goal is 35.5 for 2016 and 54.5 miles per gallon by 2025. So auto manufacturers have the incentive to produce hybrids, cars with more efficient gas mileage, electrified vehicles, lighter cars.

This takes us to the “rebound effect.” As we explained in a past Econlife post

“Citing the ‘rebound effect,’ a New Yorker Magazine article introduces us to {an 1865} book called The Coal Question…{which}explains that the energy efficiency created by the steam engine encouraged more energy use rather than less. {19th century economic thinker William} Jevons said, ‘It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.’”

What really makes us conserve? The law of demand. When prices rise, we are willing and able to buy less.

Or, as financial journalist Eduardo Porter explains, gas taxes are much better than CAFE because they make us drive less. Porter then describes what happens next, “When time came to replace the old family S.U.V., we would be more likely to consider a more fuel-efficient option. As more Americans sought gas-sipping hybrids, carmakers would develop more efficient vehicles.” For example, In the UK where the gas tax is $3.95 a gallon, Ford’s compact Fiesta goes 72 miles on a gallon. In the US, the number for the Fiesta is 33 MPG.

But, will you vote for a politician that supports higher taxes?

Sources and Resources: For the source of my Porter quote and much more detail on the cost benefit tradeoff between CAFE and gas taxes, this Porter article is excellent as is this New Yorker article that discusses the “rebound effect.” In addition, the specifics of CAFE standards are described further by the NY Times and an NHTSA press release.

One Response to Gas Tax or CAFE?

  1. Kevin Kelly says:

    It’s the old catch 22, seen also in energy efficient lightbulbs, people think they’ve made an economic saving and so are inclined to use it more. Counter-intuitive but fact. As a tax consultant we see these issues being played out in business more and more every day.

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