CAFE Standards and the new Energy Bill

A while back I posted a definitive proof that all politicians are idiots.  Well, they're at it again.  Last night, the U.S. Senate passed a new Energy Bill.  And at first glance, it contains more overwhelming evidence of the unwillingness of Congress to pay attention to basic economic principles.

From CNN.com:

The Senate passed an energy bill late Thursday that includes an increase in automobile fuel economy, new laws against energy price-gouging and a requirement for huge increases in the production of ethanol.

In an eleventh-hour compromise fashioned after two days of closed-door meetings, an agreement was reached to increase average fuel economy by 40 percent to 35 miles per gallon for cars, SUVs and pickup trucks by 2020.

I'm not a fan of CAFE standards.  I like targeting the externalities directly (through prices) rather than command and control.  If I want to drive a gas guzzler that should be my prerogative, as long as I pay the full social cost of my driving--which I don't currently but that's because nobody is making me.  Yeah I know it's childish.

But what really scares me about this excerpt is the casual mention of "a requirement for huge increases in the production of ethanol." 

Bad idea--really bad idea.

But the legislation provides a bonanza to farmers and the ethanol industry. It requires ethanol production to grow to at least 36 billion gallon a year by 2022, a sevenfold increase of the amount of ethanol processed last year.

And royally screws consumers of...everything.  Higher corn prices means higher prices on just about all food products.  I am always stunned--and I know I shouldn't be--when politicians are willing to impose a small cost on a large number of people to provide a huge bonus to a few. 

But there's even more nonsense in the bill including:

Price gouging provisions that make it unlawful to charge an "unconscionably excessive" price for oil products including gasoline and give the federal government new authority to investigate oil industry market manipulation.

Price gouging is the most ridiculous idea ever contrived by politicians to create the illusion of action.   Rational decision makers can't be gouged--that is, forced to pay prices they don't want to pay.  They just can't.  Oh crap, why do I bother?  I already said all of this here. 

Comments

[Dan Cole]

CAFE standards are like the minimum wage: raising them is economically harmful unless they are raised to a level below the market rate, in which case they are meaningless, except as political gestures. Given rising gas prices, I think it's likely that Congress's new CAFE standards will be meaningless by 2020. But see David Gerard and Lester Lave, The Economics of CAFE Reconsidered: A Response to CAFE Critics and A Case for Fuel Economy Standards. Regulatory Analysis 03-10. Oct 2003 (presenting efficiency-based arguments in favor of raising both gas taxes and CAFE standards).

[odograph]

I've been merely saying that CAFE is designed to lag the market, but you say it better, Dan.

[odograph]

BTW Tim, I don't really like "externalities" lumped in as "social costs." Am I wrong, are you really semantically correct in the case of environmental costs?

I tend to think of social costs as associated with more touchy-feely "fairness" issues, and morality judgments.

Protecting "environmental services" seems more brass-tacks.

[Mace]

It's all public choice theory. An increase in the CAFE standards is really a stealth tax. The public will not associate the higher costs of new vehicles (due to CAFE requirements) directly with the politicians. However, increasing gas taxes **will** result in a lot of incumbents not being re-elected. It's all very easy. The "stealth tax" approach is being used much more frequently of late, especially here in California. Thanks to Arnold.

[odograph]

How do stealth taxes relate to voluntary taxes?

I, the sneaky '05 Prius buyer, don't think I'll be touched by CAFE.

[Tim Haab]

Odo,

That's probably a case of econ jargon. In the simplest forms, there are private costs and social costs. Private costs are costs captured by the market. Any cost not captured by the market is a cost imposed on 'society'--anyone outside the market. That is, a cost borne by someone not receiving the benefit of the action. So it that sense, any externalitiy is a social cost.

[odograph]

Well alrighty then.

[AC]

"Higher corn prices means higher prices on just about all food products."

Maybe the secret plan is to cut gasoline consumption by leaving us less money to spend on other things.

[joshua corning]

Opps...

And at first glance, it contains more overwhelming evidence of the unwillingness of Democrat controlled Congress to pay attention to basic economic principles.

Fixed =)

[dWj]

How does the ethanol mandate work? Who is required to produce the ethanol? Sam Bodman? What happens to whom if it isn't produced?

BTW, efficiency doesn't require that you pay the social cost, just that you would be willing to. The distinction requires that you be able to be honest with yourself about how you would respond to a hypothetical situation. The general economists' maxim that "Actions speak louder than words" — which economists like to call "the principle of revealed preference" — inveighs against the distinction.

Incidentally, there was talk about letting the car manufacturers trade CAFE credits; did that get through? That would be brilliant, not least in making the costs of CAFE credits more transparent.

[rodneylbrownjr]

This post demonstrates with perfect clarity why politicians don't do what economists want: because economists in their personal lives are selfish like all other voters. "If I want to drive a gas guzzler that should be my prerogative, as long as I pay the full social cost of my driving--which I don't currently but that's because nobody is making me. Yeah I know it's childish." That's what childish voters do. And grown-up politicians do what their childish voters want. It's a selfish world that leads to irrational results which Coase understood perfectly. I wish that humans would behave differently and therefore allow their politicians to increase the price to capture externalities. But since that almost never happens, I'll take the second-best solution rather than no solution at all.

[sfogreen]

I like the idea the senate is making an effort to help the environment. A colleague of mine who works at a non-profit sent this website to me: www.svn.org/imaginewhatsnext I thought I would pass it along if anyone was interested. They are holding a contest to reward business leaders for starting or running socially responsible companies. This seems to be a growing trend!

[AC]

The CAFE standards are not a "second-best" solution to anything. By mandating a reduction in the cost of driving per mile, they artificially encourage more driving, which means more congestion and accidents. (Oh, and the extra driving wipes out a large chunk of the putative gas savings.)

We could handle the congestion and accident externalities with appropriate gas taxes, but if we can do that, why not dispense with CAFE altogether?

[jabber]

If you want to------------------ 1)link US transportation fuel supplies and prices ENTIRELY to world petroleum supplies, bio fuels may be a bad idea. -- 2)ignore carbon emissions from petroleum vs ethanol or just think that more carbon in the atmosphere is A OK then again bio fuels may be a bad idea.-------- 3) believe media articles suggesting world bio fuel policies have lead to the DRAMATIC food inflation in things such as - tortillas price increases in Mexico of 32 to 64 pennies per pound(Wash Post,Reuters, the Heritage Foundation), German beer price increases of 40%(USA Today and the London Times), etc --think again. You have failed to truth these articles with common sense and easily accessed information. Corn at it's all time high only cost less than 9 pennies per pound. Corn prices from high to low in the last 12 months did not rise 4 pennies per pound.(Mexicans paid an increase of 32 to 64 pennies per pound for tortillas while corn went up 4 pennies per pound.) A doubling in Barley prices could only increase the costs of a finished product like German beer by about 5%. Food inflation is here to stay if we are to deal with high priced energy. Food production and distribution are energy intensive. Any thoughts of food prices of the past with higher energy costs of the present and future is nonsense. Properly managed bio fuels programs will be better for the environment and US consumers overall than a world without bio fuels. -------Be sure to test what you read about food inflation and the suggested link to bio fuels. Very much of what has been written is easily disproved. How can you cause dramatic food inflation with something that has never cost more than 9 pennies per pound(actually corn now is 6 pennies per pound)? A pound of grain makes a lot of food.