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July 30, 2007

Kill the Fatted CAFE: Let Feebates Encourage the Purchase of Fuel-Efficient Cars


Can we trust Detroit when it comes to fuel efficiency?


For as long as anyone can remember, the Big Three have argued that greater fuel efficiency would kill their domestic market. That remains true today, when practically everyone is yelling at the automakers for producing inefficient cars.


The real question, however, is this: Can we trust the American consumer to buy more efficient cars?


The answer? No.


Todayís call for fuel efficiency isnít a new thing. There has been a 20-year lull between the last time people were hot for fuel-efficient cars, and coincidentally itís been 20 years since the price of gas was high enough to cause personal discomfort to consumers.


That should tell us something as Congress moves to increase Corporate Average Fuel …conomy (CAF…) standards. The federal government could require Detroitís automakers to increase their fleetwide fuel efficiency averages, only to watch consumers lose interest if the price of fuel were to again drop. This would leave the Big Three with an unfunded federal mandate to manufacture something no one wants to buy.


Although this isnít likely (the price of gasoline will probably continue to increase a little faster than the rate of inflation), policy makers should keep it in mind. Itís one thing, in reaction to our growing awareness of our twin problems of energy dependency and global warming, to demand action. Itís another thing entirely to demand action that in the long run might not be sustainable in the marketplace.


Rather than tinkering, Congress should simply scrap CAFE and address efficiency through something that stimulates demand, not dictates supply. An idea worth considering is something called a feebate.


A feebate is a fairly simple thing. Those who choose to buy a gas-guzzling truck or car are charged extra. Thatís OK, those of us who donít own these things are already subsidizing those who do through our taxes that help pay for things like keeping open our oil supply, public health costs created by auto exhaust, environmental damage, wear and tear on roads and a few other things. This extra fee would reflect those costs currently covered by everyone else.


Rather than dropping that money into a government treasury, it would be distributed to people who choose to buy smaller, more efficient cars. The only money held by government would be what is necessary to administer the program.


Although this requires government to offer the kinds of incentives that would artificially stimulate demand for fuel efficient cars, it would fulfill two things that that are highly positive.


The first is that a feebate program is sound economics. The government doesnít mandate that people buy more efficient cars, and it doesnít require the automakers to make cars that people could very easily opt not to buy in the near future. It instead relies on incentives meant to encourage good behavior.


The second is that it frees Detroit from what is an unfunded government mandate. You can point fingers at the Big Three for not anticipating this moment, and you should, but theirs is not at all like the tobacco industry. Punitive policy would have a number of unintended negative consequences. Bu, this would provide an ongoing incentive for Detroit to conduct real research, not just play the numbers game of CAFE.


Feebate programs are still new enough that no one knows what kinds of problems they might cause. A 2005 study in Canada concluded that they would achieve their goal of more efficient cars, but at a cost to both government and consumers. Earlier this year, Canadian auto lobbyists said that the program (to the interpretation of this reader) hadnít worked or was hurting the Canadian auto industry. And the Rocky Mountain Institute, the most prominent organization pushing feebates, caveats its reports with qualifications.


Itís become a fairly frequent thing to dismiss an idea because it comes either with associated problems, or because it might require frequent monitoring and tweaking. Thatís unfortunate, because we already know that the two things weíve so far tried Ė nothing and CAF… Ė havenít been effective at keeping fuel efficiency in check.


As soon as gas prices dropped in the mid-80s, itís worth repeating, so did consumer interest in small, fuel-efficient cars. That people today want fuel-efficient cars Ė with gas prices regularly hovering at an uncomfortable $3 a gallon every summer Ė should be instructive. The sound practices of fuel-efficiency and consumer demand are today aligned, and it would be smart government to make sure they stay that way


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