The Flawed BlueGreen Alliance Report on CAFE Standards

The BlueGreen Alliance has released a new study arguing that tighter fuel economy standards on cars and light trucks will not only mitigate climate change, but will also create jobs. As with most studies in the “green jobs” literature, this one too rests on faulty economic analysis. The federal government doesn’t do consumers any favors by restricting their options in the marketplace.

The BlueGreen Alliance study at least has the honesty to admit—albeit in a very low-key way—that tighter federal regulations will raise vehicle prices for consumers. Yet the proponents of the increased interventions try to make lemons into lemonade in this fashion:

These proposed standards would reach the equivalent of 54.5 miles per gallon (mpg)…for the average new vehicle in 2025…

Our analysis finds that the proposed standards will create an estimated 570,000 jobs (full-time equivalent) throughout the U.S economy, including 50,000 in light-duty vehicle manufacturing (parts and vehicle assembly) by the year 2030…

The proposed standards create jobs by helping to save drivers money on transportation fuel through improved average fuel economy over time and increased variety of more fuel-efficient vehicles. These new, more fuel-efficient vehicles are incrementally more expensive due to technology upgrades, but fuel savings are expected to more than outweigh the added cost. [Emphasis changed from original.]

Although they don’t shout it from the rooftops, the BlueGreen Alliance is here admitting that these new regulations will make it costlier to produce vehicles, and hence will lead to higher prices for consumers. BlueGreen Alliance does not admit that according to a study from the National Automobile Dealers Association this price increase will force nearly 7 million drivers out of the automobile market by making cars more expensive.

The BlueGreen Alliance argues that in the long run, however, consumers will end up saving money, from lower fuel expenses. This is the source of the alleged job creation.

There are so many things wrong with this analysis, it’s hard to know where to begin. First of all, on the face of it we should be very suspicious when someone claims that a new government regulation will force businesses to become more productive and consumers to become richer. If switching to these new fuel economy standards really is good for the industry (look at how many jobs it will supposedly create!) and makes consumers better off, then why isn’t the market doing it already? At least with climate change issues, there is an alleged “market failure” that the regulations are supposed to address. Yet here, the BlueGreen Alliance is effectively claiming that federal regulators know more about the auto industry than the shareholders.

Another major problem is that consumers might not be able to afford the upfront higher prices for vehicles. Many households don’t have the almost $3,000 (the Obama Administration’s own estimate) in extra upfront cash, and might not even buy the same vehicle at such a higher price. Moreover, the National Automobile Dealers Association (NADA) points out that the EPA’s alleged fuel savings calculations assume the vehicles will be driven 211,000 miles.

Yet another problem is that consumers and businesses won’t respond to the tighter mileage requirements simply by raising prices, as the government’s models assume. Instead, they will “spread the pain” over a variety of dimensions, including vehicle safety. In other words, rather than increasing the sticker price and producing an otherwise identical vehicle (with better fuel economy), manufacturers can make lighter vehicles that offer less protection in a collision. Studies have estimated that since CAFE standards were introduced in the late 1970s, anywhere from 42,000 – 125,000 motorists have died in traffic accidents because the regulations led to a different vehicle design.

In the long run, federal regulations don’t “create jobs” for the simple fact that wages and other prices can adjust, so that the labor market reaches equilibrium. The real issue is the productivity of labor, and the corresponding standard of living for workers as well as consumers. By arbitrarily forcing vehicle design that attains better mileage, the government will simply violate consumer preferences, raise vehicle prices, and actually contribute to more traffic fatalities.