Friday, January 04, 2008

Will fuel efficiency laws save motorists money?

With petrol prices in Australia nudging $1.50 a litre, the clamour to 'do something' is growing and even the Australian Conservation Foundation is jumping on the bandwagon. Its solution: mandatory fuel efficiency standards for new cars sold in Australia:

ACF’s Sustainable Australia program manager Alison Cleary... said the introduction of mandatory fuel standards would reduce emissions and save Australian motorists money.

“With petrol nudging A$1.50 a litre, a fuel efficiency standard of 6.8L/100km would save the average Australian driver around A$1,000 on petrol each year.”

The previous Federal Government had a voluntary agreement with the car industry for vehicles manufactured in Australia to achieve an average fuel efficiency of 6.8L/100km by 2010. But almost no progress has been made towards that target, with only one Australian manufactured car model having an efficiency of less than 10L/100km in 2006. The auto industry failed to meet similar non-binding efficiency targets in 1983, 1987 and 2000.

“Mandatory efficiency standards for new cars are needed to help Australians cope with higher oil prices and ensure we remain competitive in international and domestic markets,” Ms Cleary said.

But is this true? There are some clues from the US, which has had mandatory fuel efficiency standards ("CAFE standards") for some time. And in 2004, the Congressional Budget Office examined the cost of using tighter fuel standards to achieve a 10% reduction in fuel use.

Their findings?

Raising [fuel efficiency] standards would impose costs on both the producers and buyers of passenger vehicles. To comply, producers would need to incorporate technologies to boost the fuel economy of their vehicles, which would increase their cost of production. Consumers would face higher prices for new cars and trucks. But consumers would also see lower operating costs for new vehicles because they would use less gasoline, offsetting some of the sting of the higher purchase prices.

CBO estimates that raising [fuel] standards by ... enough to reduce the amount of gasoline consumed by new vehicles by 10 percent would cost the U.S. economy a total of $3.6 billion per year.

That figure translates to about $230 per new vehicle. Consumers would most likely bear about two-thirds of the costs. Although the average price of a new passenger vehicle would go up by nearly $900, fuel savings would lower the additional costs to consumers to roughly $150 per vehicle, on average. Automakers' lost profits would constitute the remaining $80.

Now Australia is not the US and 2008 is not 2004. The costs to Australia's motorists and manufacturers might be higher or lower than those. But there's no reason to think that tighter standards should automatically save motorists money overall. If saving $1000 a year in petrol is important to motorists, they'll buy more efficient vehicles without the need for mandatory standards. And, indeed, more and more are doing just that. But for many motorists, there are trade offs. Not everyone wants a Prius.

A clue to the trade-offs lies in the ACF's two stats: that the average driver would save about $1000 on petrol a year if the 6.8L / 100 km standard was introduced and that only one Australian-produced car gets better than 10L / 100 km (and presumably not 6.8). To achieve that $1000 saving then, either drivers would be prohibited from buying Australian cars or Australian cars would have to get more efficient, fast. Either way, there's obvious costs to both consumers and local producers.

Now don't get me wrong: there are valid environmental arguments for tighter efficiency standards. And if the net cost to the driver over the life of the car is a couple of hundred dollars, the environmental benefits may well outweight the economic costs. But let's not kid ourselves that tighter environmental regulation is always costless. Far from helping motorists save money and making industry more competitive, the opposite is more likely.

As I've said before, environmentalists need to be making environmental claims strongly and eloquently and taking on the economic arguments too. But we should be careful about overplaying economic arguments. A weak economic argument can distract from a strong environmental one. And from where I'm standing, the economic argument for tighter fuel efficiency standards looks like a weak one.


Rob Dawg said...

In the US CAFE requirement costs were measured in lives not gallons. Cars were made lighter and less safe to conform. This isn't the big deal it was back then but still applies to some extent. 34.5mpg if I converted correctly from 6.8l/100km is not rerasonable

luis said...

Great blog!

If the economics don't work, recycling efforts won't either.
As our little contribution to make this economics of recycling more appealing, blogs about people and companies that make money selling recycled or reused items, provide green services or help us reduce our dependency on non renewable resources.

Ryan Placchetti said...

Excellent write up. It's amazing, I clicked "next blog" and yours came up (after some Thai recipes. I just finished blogging about electric cars.

Sometimes chance is wonderful.

Great blog.

SpamMan said...

Great thoughts here

As a driver based in regional Australia I've previously gone down the route of a standard 4cyl car and over the 60,000kms+ I do a year they just don't cut it.

Funnily enough my new VE Commodore ute gets 7kms/litre outa town which is most of my driving.

I'd love a vehicle which had "long legs" (comfortable driving on a long trip where you don't need to "flintstone") and did 50mpg.

Having just traveled 10,000kms in UK and Europe I'd love to see the great diesel cars they have here at an affordable price.

In the end it's big govt, big business, big oil companies, big car makers who dictate things. Yes we do influence them but only incrementally ... more's the pity

A Year in a Day said...

The simplest way to get a massive reduction in emissions and save drivers a huge amount of money would be to drop the speed limit by 20km on all freeways. The EU did a major study on it and, despite the fact that it's the simplest win/win solution noone's willing to go with it .... people want speed more than they want to save the lives of the millions of people who will starve while we fill our cars with biofuels.

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bob55 said...

Great view....
now a day it's one of the major problem....
we must take care of our economic...
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