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Just tightening failed CAFE standards will not work out

Just tightening failed CAFE standards will not work out. Xiaojiao Chen February 3 rd , 2010. Criterions of judging governmental interventions: . Whether the intervention could achieve its objectives;

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Just tightening failed CAFE standards will not work out

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  1. Just tightening failed CAFE standards will not work out Xiaojiao Chen February 3rd, 2010

  2. Criterions of judging governmental interventions: • Whether the intervention could achieve its objectives; • Whether the intervention is cost-effective. Are there other less costly alternatives to achieve the same objectives?

  3. CAFE doesn’t achieve its initial objectives in the cost-effective way. • Objectives of CAFE: To reduce oil intensity and therefore decrease oil consumptions; • In this way CAFE is supposed to: mitigate externalities of both oil dependency and environmental impacts; correct the imperfect.

  4. CAFE doesn’t achieve its initial objectives in the cost-effective way. • Check out the cruel facts: • CAFE didn’t not increase average fuel economy in U.S.; • The effect of addressing global warming problems is ambiguous and CAFE even increases local pollutions slightly; • Costs of correcting the imperfect market of fuel economy may exceed the benefits.

  5. CAFE doesn’t address environmental externalities well • Global warming • Local pollutions

  6. Costs of correcting the imperfect market • Costs of implementing a new technology • Forgone performance enhancements • Forgone R&D opportunity costs

  7. Other unintended consequences of CAFE • The rebound effects • Opportunity costs of consumers • Fleet mix effects

  8. The rebound effects • Congestion costs=the value of travel time * the extra time of driving Parry and Small 2001: 3.5 cents per mile • Accident costs: Parry and Small 2001: 3 cents per mile The rebound effects=(congestion costs + accident costs) * 15% * 20miles/gallon= 19.5 cents per gallon • Compare: externalities----24 cents per gallon

  9. Opportunity costs of consumers • The happiness of consumers If consumers correctly perceive fuel savings but value technologies more: Technology transfer from other techs(high value) to fuel economy techs=welfare loss See Mckinsey Abatement Cost Curve:

  10. Mckinsey Abatement Cost Curve

  11. Fleet Mix effect • If CAFE leads to lighter vehicles, how would this affect safety? • Weight reduction of cars increase fatality risk while weight reduction of light trucks decrease fatality risks;

  12. Suggestions • Modifications of CAFE • Alternatives

  13. Modifications of CAFE: tradable fuel economy credits • Problem: same standard regardless of costs • High marginal costs VS low marginal costs • Caution: appropriate cap

  14. Alternatives • Tax breaks or rebate Financial source; Hard to stop; No influence on the actual driving amount; • Insurance No incentives to spur fuel economy; hard to track • Broad oil tax Political feasibility? Fairness?

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