Analytics of wealth redistribution through fuel-economy regulation

Analytics of wealth redistribution through fuel-economy regulation
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The Environmental Protection Agency announced on Monday that it and the National Highway Traffic Safety Administration would reinstitute the mid-term evaluation of the greenhouse gas (GHG) emission standards — the fuel-economy rules — for model-year 2022-2025 light-duty vehicles.

That mid-term review was truncated by the Obama administration a few days before leaving office. Amid the tiresome manifestations of environmentalist grief that have followed, one central truth has been ignored: Every analytic argument in favor of the fuel-economy rules is fatally flawed.    

Reductions in GHG emissions:

Proponents of the Obama fuel-economy standards claim that the rules will reduce GHG emissions by 6 billion metric tons. That figure actually is for vehicle model years 2012-2025, but never mind. Annual worldwide GHG emissions are about 49 billion metric tons; using the EPA climate model, the temperature effect of that cut in GHG emissions would yield a temperature reduction in 2100 of 17 one-thousandths of a degree. (The standard deviation of the surface temperature record is about 11 one-hundredths of a degree.) How much is that worth?

Reduced dependence on foreign oil:

Put aside the massive change in U.S. fossil-fuel import/export trends attendant upon the recent increase in domestic fracking operations. That the use of imported oil somehow is “bad” is a Beltway perennial, driven by an assumption that fewer imports yield a reduction in exposure to the effects of international supply disruptions, or perhaps to embargoes.

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However popular, that argument is silly. There can be only one price in the world market for oil (abstracting from differences in transportation costs and other such minor complications). A supply disruption — the continuing decline in Venezuelan production is a good current example — yields the same price effects globally, regardless of whether a given economy imports all or none of its oil; merely consider those price effects in Japan and the UK, respectively.

Many believe that it was the 1973 Arab OPEC oil “embargo” that created the sharp price increases that year, along with the gasoline lines and other market dislocations. Nope.

It was the production cutback by Arab OPEC that raised international prices; and it was the U.S. system of price and allocation controls that created the queues and other market distortions. Note that there was no embargo in 1979, but there was a production cutback in the wake of the Iranian revolution, and the U.S. again imposed price and allocation regulations. And, once again, there were queues and market distortions. The “reduced dependence” argument in support of fuel-economy rules is wholly incorrect.

The stupidity of consumers:

The Obama EPA/NHTSA claimed (Table III-8) that the fuel-economy standards will cost vehicle consumers $1800 up front, but will save $5700 in fuel costs (in present value terms), yielding a net benefit of $3400. At a narrow level, that conclusion is inconsistent with standard economic analysis, as it assumes a growth path for gasoline prices ($3.87 in 2025) that rises at a rate faster than the market rate of interest. (Respectively: 5.5 percent and about 3.85 percent.)

Since changes in gasoline prices are driven almost entirely by the price of crude oil, except in the very short run in the face of unexpected refinery outages and the like, that assumption about the price path implies less oil production now in favor of more several years down the road, so as to take advantage of that higher rate of return to holding oil. Why did the Obama EPA/NHTSA fail to ask whether that was happening?

More generally, why is it that the proponents of the fuel-economy standards assume that market forces somehow are incapable of seeing the higher future fuel prices that the bureaucrats predict? Are consumers and producers stupid? Is it really the case that markets are more myopic than politicians driven by the imperatives of the looming election cycle? Merely peruse the history of U.S. government projections for the price of oil to see whether it is the bureaucracy or market futures prices that are to be trusted. More generally: Why should we believe that bureaucrats and politicians are so smart?

It is far from irrelevant to note that in the context of the eternal quest by government to expand its power at the expense of individual freedom, the presumption of market rationality is closely analogous to the presumption of innocence for those accused of crimes, not because we believe it to be true in any given case, but because the opposite presumption leads toward a system of totalitarianism.

The arguments offered in support of the fuel-economy standards are so weak that it is easy to conclude that there is a deeper political agenda underlying the leftist rage at the decision to reinstitute the mid-term review.

Notice that the regulatory system allows auto manufacturers failing to meet the fleet average requirements to buy credits from others. In 2016, for example, Fiat Chrysler purchased 21.9 million credits, while Honda sold 20.7 million. This system means that purchasers of SUVs and trucks subsidize buyers of small autos and electric cars; that is, urban consumers receive a transfer from rural and suburban drivers. Is it an accident that this transfer subsidizes blue-state constituencies at the expense of red-state ones? Would the left support the fuel-economy standards if the reverse were true?

That subsidy would grow as the fuel-economy requirements tighten. That is all one needs to know to understand why California politicians are vociferous in their demand that the EPA continue to give that state a waiver to impose rules stricter than the federal ones, so as to force that stricter standard upon the entire nation. This is despite the fact that GHG emissions have nothing to do with the ground ozone problem afflicting California, and despite the preemption under the Environmental Policy and Conservation Act of state regulations “related to” fuel economy.

The Trump administration is to be commended loudly for beginning the process of depoliticizing energy and environmental policy.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.