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Thursday, January 4, 2007

CAFE or tax hike on gas

I have been involved in an online struggle of epic proportions - mostly with economists that I respect and admire - who are quite adament that a gas tax increase is the way to: reduce our dependence on foreign oil, increase tax revenue, reduce congestion, reduce pollution etc.

I have been very adamently not in favor of said hikes. I've heard some economists, like Mankiw say an additional $1 tax is needed. I've heard others say as much as $3 or $4 US dollar increase. Most all of them use, in my view, out-of-date (and too large) elasticity figures (see paper on the right) for gasoline and simulation models based soundly on the assumptions that the modelers themselves think will produce their desired result.

I won't go into too much detail on my disagreement about a gas tax since I've discussed / commented on it ad naseum on Mankiw's blog, and economics.about.com and elsewhere. Suffice to say I have deep-seeded disagreements on the basic assumptions of said tax hike. Namely, I don't think it will reduce dependence on foreign oil (rather than simply making high-cost producers suffer - albeit slightly). I don't think congestion will be helped except in perhaps large cities with significant public transportation and/or high density. I don't think pollution (or congestion again) will be largely effected because I view the short-run and the long-run demand for gasoline to be very inelastic (the paper I have linked on the right says elasticity is about -.04 in short-run and also much lower than previously thought in long-run). This means that tax revenues can be expected to be large, but at the cost of primarily causing the poor consumers in the society to suffer the most. The assumption with this last point being that the EITC or some offsetting tax credit is not as easy or as accessible as it sounds to be (either politically or on a tax form).

Ok, so I guess I did go into a little more detail than expected ;).

But what about good ole' CAFE? Proponents of a gas tax increase a very quick to dissmiss CAFE. I worked on CAFE a little when I worked for the US DOT. I wonder how many people are aware that the DOT has been working on an incredibly complex model to try and rework CAFE to account for some of the known biases. I think a revised CAFE is a little less heavy handed than a tax increase in this case - and should not be thrown out without consideration.

Consider this:
Reformed CAFE , (2),
"...Effective 2011, a reformed CAFE program has been adopted for light trucks. During a transition period 2008-2010, manufacturers have the choice of complying either with the unreformed CAFE standards shown in Table 1, or with the reformed CAFE rules.
Under reformed CAFE, each manufacturer’s required level of CAFE is based on target levels set according to vehicle size. The targets are assigned according to a vehicle’s “footprint”—the product of the average track width (the distance between the centerline of the tires) and wheelbase (the distance between the centers of the axles). Each vehicle footprint value is assigned a target specific to that footprint value. Compliance is determined by comparing a manufacturer’s fleet average fuel economy in a model year with a required fuel economy level calculated using the manufacturer’s actual production levels and the category targets.
The target values are determined from the following continuous mathematical equation, based on the vehicle footprint and four parameters (a ... d) which are adopted for each model year, Table 2.
T = [1/a + (1/b - 1/a) e(x-c)/d/(1 + e(x-c)/d)]-1
where:T - fuel economy target, mpga - maximum fuel economy target, mpgb - minimum fuel economy target, mpgc - footprint value at which the fuel economy target is midway between a and b, ft2d - parameter defining the rate at which the value of targets decline from the largest to smallest values, ft2e = 2.718x - footprint of the vehicle model, ft2

The resulting CAFE target curve is an elongated S-shape, with fuel economy targets decreasing as the footprint increases. An example target function is shown in Figure 1.

Figure 1. Example CAFE Light Truck Target Function
The reformed CAFE regulation also applies to medium duty passenger vehicles (MDPVs) of GVWR up to 10,000 lbs as part of the MY 2011 regulated light truck fleet. Thus, the regulation captures nearly all larger size pick-up trucks and SUVs which were excluded from the unreformed CAFE fleet. The DOT estimated that the average light truck target required of manufacturers under the reformed CAFE rule in MY 2011 will be 24.0 mpg.
CAFE Testing. CAFE fuel economy testing is done over the same laboratory test that is used to measure exhaust emissions (FTP-75). CAFE certification is typically done based on fuel economy data provided by the manufacturers. In some cases, the EPA performs the testing in its laboratory in Ann Arbor, MI.

The CAFE values—used to determine manufacturers’ compliance with the average fuel economy standards—are significantly higher than the EPA on-road values. The CAFE data reported by the DOT is not adjusted by the 15% factor used by the EPA. Furthermore, the following caveats apply to the CAFE values:

The unreformed CAFE standards (before MY 2011) did not apply to vehicles above 8,500 lbs GVWR. Many pickup trucks and some of the largest SUVs which belong to this category were excluded from CAFE data.

Credits are provided for alternative fuel vehicles. The CAFE fuel economy of an alternative fueled vehicle is calculated by dividing its real fuel economy by a factor of 0.15. For instance, a 15 mpg natural gas vehicle will be rated as a 100 mpg gasoline vehicle. For bi-fuel vehicles, this calculation is applied to the expected percentage of alternative fuel use.

Manufacturers who exceed the standards earn CAFE credits, which can be applied to any three consecutive model years immediately prior or subsequent to the model year in which the credit was earned. "

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