Don't Weaken Obama's Fuel Economy Standards

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When the Obama administration released its ambitious fuel economy rules for new vehicles in 2012, the economic rationale behind the standards was obvious. The price of oil hovered near $100 per barrel.

With more fuel efficient vehicles, Americans would save lots of money.

But since then, the price of oil has plummeted—and with it, the cost savings associated with the new rules. In response, automakers are furiously lobbying behind closed doors to weaken the standards, just as the rules reach a critical moment. This week, the Obama administration kicked off a two-year mandatory review of the fuel economy standards, releasing a report arguing that automakers can meet rising mileage targets with existing technology.

The automakers’ argument seems sensible at first glance; the oil price collapse is driving consumers toward gas-guzzlers and reducing the benefits of the fuel standards. The fuel standards, they argue, harm the industry and increase costs to consumers without commensurate benefits to the environment. But in fact this is a short-sighted way to see the problem. The administration and its successor should hold firm on maintaining ambitious mileage targets. The rules are not only critical to addressing climate change but will deliver significant economic and security benefits as well—even with low oil prices.

The U.S. Corporate Average Fuel Economy (CAFE) standards require automakers to improve cars’ and trucks’ efficiency every year from 2017 through 2025. The rules are one of two pillars of the President’s climate change legacy—the other pillar is the Clean Power Plan, an effort, currently in legal limbo, to slash power plant emissions. When the fuel economy rules were originally announced, the National Highway Traffic Safety Administration and the Environmental Protection Agency projected they would deliver benefits well in excess of their costs. But they now look far less valuable. The plunge in oil prices has slashed savings that efficient cars offer consumers. And, in the wake of revelations that Volkswagen cheated on U.S. pollution rules, the set of technology options for cutting emissions may narrow. In particular, diesel engines probably have no future in the United States, now that it’s clear that they degrade local air quality despite their superior mileage over gas vehicles.

So there is a real possibility that regulators could ultimately weaken the standards.

This isn’t an unrealistic worry. In fact, regulators did just that in the wake of the mid-1980s oil price collapse. After passenger car standards were relaxed in 1986, they stagnated for more than two decades, during which American automakers took advantage of the reprieve to design cars with more horsepower and torque but unimproved efficiency. Only by the late 2000s, as oil prices rose soared, did regulators belatedly react and begin raising standards again.

This time, in the face of another collapse in oil prices, it is important not to make the same mistake and undercut the administration’s rising fuel economy targets.. A colleague and I recently studied how lower oil prices might alter the benefits of CAFE standards and discovered that the benefits of current mileage targets still substantially exceed their costs—assuming that regulators’ assumptions about the costs of efficient technologies remain unchanged. In fact, we found that the current standards should outperform more lenient ones.

When regulators announced the current set of standards in 2012, they predicted that Americans would use less fuel by driving more efficient vehicles, resulting in substantial savings at the pump. With oil prices apparently on track to rise indefinitely, consumer fuel cost savings accounted for 80 percent of the benefits that regulators projected CAFE standards would deliver.

Now oil prices have collapsed from their high of over $100 per barrel in 2014 to under $50 per barrel today. But it turns out that even though consumers won’t save as much on fuel, the current rules still deliver benefits that outweigh costs—and more so than any weaker alternative. Americans will still consume less fuel by driving more efficient cars, curbing U.S. greenhouse gas emissions that contribute to climate change. And—critically—because the administration recently increased its estimates of the global costs of greenhouse gas emissions, higher projected environmental benefits from CAFE standards help offset lower forecast savings at the pump. Regulators also built a large margin of safety into the original standards, leaving breathing room to absorb the impact of the oil price fall.

Those benefits are enough to make a strong case for keeping the current standards unchanged. But the current standards would yield at least three additional types of benefits that regulators should include when they revisits the standards.

First, driving a more fuel-efficient car reduces a consumer’s exposure to volatile fuel prices. And, though oil prices are low right now, they are more volatile than they were before the collapse in prices. As consumers switch to more fuel-efficient vehicles due to the fuel standards, they will be better insulated from wild swings in fuel costs—a benefit that we found might be worth as much as 20 percent of the fuel savings themselves.

Second, reducing U.S. fuel consumption can also lead to lower global oil prices. This benefit is smaller than it was a few years ago, since the United States imports less oil than it used to, but could still add about 10 percent to the benefits that fuel economy standards deliver.

Finally higher mileage standards today also give policymakers the option to raise them even further if oil prices spike. There is a limit to how quickly automakers can improve the fuel economy of their vehicles, and if the oil price dip causes regulators to relax standards, industry may not make valuable technological progress in anticipation of the next big oil price swing. Applying a method frequently used by businesses to value investments today with the option to invest further tomorrow, we found this flexibility could add another 10 percent to the rule’s net gains.

To be sure, regulators will have to rigorously reassess not only the benefits but also the costs of the fuel economy standards, especially if automakers can convincingly demonstrate that more efficient cars are more expensive to manufacture than the administration previously estimated in 2012. But even here, the fuel economy rule itself is critical. Relaxing the standards now would remove a policy bulwark bolstering emerging technologies aimed at reducing reliance on oil, just when low oil prices threaten to besiege innovation.

History demonstrates that altering the trajectory of the fuel standards can lead to decades of policy stagnation. With falling oil prices potentially bringing the rules under increased pressure, a full accounting of the benefits CAFE delivers is essential to ensure that critical policy is sustained. If so, the United States can live up to its international climate commitments and reduce its economy’s exposure to volatile oil markets, a benefit everyone can agree on.

>Varun Sivaram is the Douglas Dillon Fellow at the Council on Foreign Relations.

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