Loophole in new fuel rules could lead to bigger cars

at 02:36 PM ET, 12/14/2011

One of the odder side-effects of the old fuel-economy standards for vehicles, first introduced in 1975, is that they ushered in an era of bigger, heavier automobiles in the United States. The Corporate Average Fuel Economy standards had two sets of rules — one for cars and a looser one for light trucks. Automakers quickly realized that they could build more SUVs and light trucks (as well as cars designed to meet light-truck standards, like the Subaru Outback) in order to sidestep the rules. All in all, CAFE standards did help constrain gasoline consumption, but as economist Christopher Knittel has found, their effects were blunted by these “bigger car” loopholes.

(Jeff Kowalsky/Bloomberg)
And so, in the past few years, Congress and the Obama administration have drawn up a new, stricter batch of CAFE standards that are supposed to avoid these pitfalls and boost fuel economy to 54.5 miles per gallon by 2025. To that end, the light-truck loophole was shuttered in 2007. Yet according to a new study from University of Michigan researchers Kate Whitefoot and Steven Skerlos, automakers probably will still have incentive to churn out bigger, hulking cars. And, once again, this loophole could undermine the regulation’s effectiveness.

Whitefoot and Skerlos start off by observing that the new fuel-economy standards for 2011 to 2016 are “footprint-based,” which means that larger vehicles have lower fuel-economy targets. They then tried to game out how automakers would respond to these rules by running hundreds of different model simulations, looking at various tradeoffs, including the cost of modifying vehicle footprints, the cost of complying with stricter fuel rules, shifts in consumer demand, and so forth. And what the researchers found was that, by and large, it would be more profitable for automakers to keep building larger and larger vehicles.

That, in turn, would chip away at the rule’s effectiveness. Bigger, heavier vehicles tend to consume more gas and churn out more pollution. Whitefoot and Skerlos estimated that carbon-dioxide emissions from new vehicles would be 5 to 15 percent higher than they would be if automakers couldn’t game the system by going big. That’s the equivalent of building three to 10 coal-fired power plants. And that’s not even counting the traffic safety risks — after all, bigger vehicles (and especially bigger light trucks) are associated with higher traffic fatalities.

In any case, these are just modeling results — the reality could prove to be quite different, although automakers obviously aren’t likely to pass up an opportunity to maximize their profits. Whitefoot and Skerlos suggest that regulators should pay closer attention to the perverse incentives for bigger vehicles when drawing up the next batch of CAFE rules for 2017-2025, which are due to be finalized next year.

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