The administration estimates that complying with the rules would cost manufacturers about $6.3 billion over four years and add $54 to the cost of a 2008 truck and $275 to a 2011 truck. The benefits for the same period are estimated at $6.5 billion to $7.5 billion, depending on how quickly auto makers switch to the new system.
The net benefits are only $500 million to $1.2 billion, which isn't that big an improvement in social welfare. The low range is kind-of close to a bad deal. The methodologies used to value benefits, I'm guessing "off-the-shelf" estimates (aks, benefits transfer, we'll have a future post on this) are used, leading to much uncertainty about the true range of estimates. So, I decided to take a closer look at the benefit cost analysis.
It's a longish read so what I find will trickle out slowly. First, let's deal with the benefits of the proposed CAFE standards.
Right off the bat, one problem with the WSJ summary: I'm not sure where the WSJ is getting their aggregate benefit numbers. Table VIII-12 on page VIII-43 of the RIA summarizes the "present value of lifetime social benefits" of "reformed CAFE" for model year 2008-2011. At a 7% discount rate the benefits are $7.5 billion. So far so good. At a discount rate of 3%, however, the benefits are $9 billion. So where do they get the $6.5 billion?
I dunno. But the RIA does a comprehensive job of figuring the types of benefits from CAFE. Consumers will:
- spend less money on fuel
- drive more (a benefit because we enjoy driving and going places)
- refuel less, saving time
On the other hand the increased driving will increase congestion costs, traffic noise and decrease safety. The pollutant volatile organic compounds (VOC) will increase.
Other pollutants, NOX, PM, and SOX, will decrease.
Society will also enjoy a reduction in oil market externalities. The idea is that the U.S. is such a large buyer of oil that our demand drives the world oil price upwards. Any reduction in our demand will reduce the world oil price on every barrel that we purchase. These reduced expenditures are a benefit of CAFE.
Having done a complete job of estimating a wide range of net benefits, the analysis finds that the reduction in fuel expenditures is not much different than 100% of total benefits. Everything else cancels out. A bit of an anti-climax, eh?
Oh, and one other thing. The fuel expenditure benefits are based on a gas price of $1.50/gallon. The reformed CAFE standards are projected to save about 10 billion gallons of gasoline over 20+ years. The nominal savings are $15 billion. If gas is $3/gallon the nominal savings are $30 billion. A good guess is that the discounted benefits of reformed CAFE will also about double with higher gas prices making the net benefits of CAFE larger than the $500 million to $1.2 billion that I worried about above.
Next, sometime next week I hope, I'll take a closer look at the cost estimates. After that, we'll put the costs and benefits together and look at their uncertainty analysis.
 "Reformed CAFE" refers to the proposed rules relative to what will happen anyway in model year 2008-2010. I was unaware that "unreformed CAFE" will be applied to model year 2008-2010 light trucks. So, is this a new CAFE applied to light trucks or the status quo? I dunno? Any help out there?
The benefits of unreformed CAFE are $4.8 and $4.0 billion discounted at 3% and 7%. The incremental benefits of reformed CAFE are only $4.2 and $3.6 billion. Most of these benefits, about 75%, are due to the 2011 model year. If unreformed CAFE is extended to 2011 there is not much difference between the two. That means that there is not much difference between reformed CAFE and the status quo. This lends some credibility to those who say that the proposed CAFE standards will actually worsen overall fuel economy by ignoring Hummers and other mammoths.
 Oh, and still one more thing. The benefits don't include the value of reducing greenhouse gas emissions. The environmental assessment (Table 4-3) finds that CO2 emissions will fall by 34 million tons (2.6% of the current light truck output). The value of this is positive and would increase net benefits. Since they were very conscientious about develop monetary impacts of the other factors, I wonder why they didn't try to develop monetary estimates of this impact? Maybe we're still waiting for that zero-emissions technological fix, developed via subsidies from the energy bill, to kick in and solve global warming rending the valuation of CO2 impacts for light trucks meaningless (sarc).