Going the Extra Mile: Big Upsides from the New CAFE Standards

The EPA released finalized fuel efficiency (CAFE) standards today that will increase fuel economy to 54.5 miles per gallon for cars and light-duty trucks by 2025. In the accompanying press release, the Obama Administration noted that the new standards will save consumers more than $1.7 trillion at the gas pump and reduce U.S. oil consumption by 12 billion barrels. The new standards will also reduce greenhouse gas emissions and other pollutants in car exhaust, which will lead to cleaner air and increased health savings.

President Obama Test Driving a Chevy Volt

By all accounts, this is rule-making at its best- forward thinking, ambitious, with a clear public and private benefit. It also provides stability and predictability for the auto industry and could result in the U.S. surpassing even European fuel economy averages.

The increase in CAFE standards will encourage industry innovation and new technologies to meet the standards, which will create jobs and economic opportunity. The Administration included a set of targeted incentives to encourage early introduction of advance technologies into the marketplace, including:

• Incentives for electric vehicles, plug-in hybrid electric vehicles, and fuel cells vehicles;
• Incentives for hybrid technologies for large pickups and for other technologies that achieve high fuel economy levels on large pickups;
• Incentives for natural gas vehicles;
• Credits for technologies with potential to achieve real-world greenhouse gas reductions and fuel economy improvements that are not captured by the standards test procedures.

Targeted incentives provide financial support for emerging industries and are a smart way to leverage government investment. This support leverages the government’s ability to invest in long-term research and development without having to worry about rapid profit generation for private investors. And, as a result, big research gains, like the internet, can be realized. As we’ve highlighted, government investment is particularly important for things that have no private market incentive, like clean air or greenhouse gas reductions.

In applauding the rules, the UAW noted the predictability of future market conditions allows manufacturers to plan their investments and create jobs. Adding to this, a study by the Blue-Green Alliance estimated that the new standards would create 570,000 new jobs by 2030, mainly through secondary spending that comes with fuel savings. In other words, consumers will spend more money on other goods and services, creating demand for those areas, because they will save money on fuel.

There is a lot clamor about “job-killing regulations,” but as the CAFE example shows, the reality is quite the opposite. Smart, forward-thinking regulations can spur new innovations, create jobs, and make our air cleaner while helping to fight climate change. Let’s do more of this.