Presentation on theme: "Just tightening failed CAFE standards will not work out Xiaojiao Chen February 3 rd, 2010."— Presentation transcript:
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; Whether the intervention is cost-effective. Are there other less costly alternatives to achieve the same objectives?
CAFE doesnt 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.
CAFE doesnt achieve its initial objectives in the cost-effective way. Check out the cruel facts: 1.CAFE didnt not increase average fuel economy in U.S.; 2. The effect of addressing global warming problems is ambiguous and CAFE even increases local pollutions slightly; 3.Costs of correcting the imperfect market of fuel economy may exceed the benefits.
CAFE didnt not increase average fuel economy in U.S.;
CAFE doesnt address environmental externalities well Global warming Local pollutions
Costs of correcting the imperfect market Costs of implementing a new technology Forgone performance enhancements Forgone R&D opportunity costs
Other unintended consequences of CAFE The rebound effects Opportunity costs of consumers Fleet mix effects
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
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:
Modifications of CAFE: tradable fuel economy credits Problem: same standard regardless of costs High marginal costs VS low marginal costs Caution: appropriate cap
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?