Wagoner certainly doesn”t deserve any approbation, but isn’t he right on the mark with this? Beside acknolwedging that we have real problems, isn’t there a huge risk we’re not going to be solving problems, but simply shoving more pork around? Fore example, what politician/candidate ISN’T saying that we should be subsidizing Archer Daniels-Midland and ethanol?

Here is the link to David Greene’s recent senate testimony:

http://www-cta.ornl.gov/cta/Publications/Reports/Policies_to_Increase_Passenger_Car.pdf

and another interesting study done by Kurani and Turrentine out of UC Davis a few years ago:

http://www.its.ucdavis.edu/publications/2004/UCD-ITS-RR-04-31.pdf

Thanks for the clarification. We seem largely to agree on much of whats under discussion here.

Would you happen to have a citation handy for the David Green paper on consumer preferences that you refer to?

Thanks for the link to the Sperling paper. I’ve been following his work on the California LCFS, but hadn’t come across the gasoline demand paper…

In my initial post, I mentioned that VKT is driven primarily by factors other than vehicle fuel efficiency, which is what you seem to be suggesting as well. Similarly on the issue of consumer’s irrational payback expectations wrt investments in fuel efficient vehicles (I think David Green has a good paper on this).

To clarify my position, I’m all for consumption taxes in principle provided they are implemented in a way that isn’t unduly regressive. In other words I support a higher gasoline tax. Evidence (i.e. Europe) shows that this drives consumers to purchase more fuel efficient vehicles which means that they consume less gasoline. I agree that this doesn’t necessarily make them drive less, as VKT is pretty inelastic as you mentioned, since the bulk of people’s driving is for non-discretionary purposes (i.e. driving to work).

In both cases, at least as applied to gasoline, we find problems because to two properties of the demand curve. First, as Sperling and colleagues measure, you’d have to put very large taxes on gasoline to have more than a trivial effect on driving.

Second, there is extensive research showing that people apply very different discount rates to large and small expenditures. They discount small expenditures, such as gasoline purchases, with a steep rate but large expenditures, such as a new car, are discounted very little.

This means that when a rational consumer would spend more up front to buy a more efficient refrigerator or auto whose improved energy efficiency would save money in the long run at market interest rates, the consumer would reject the purchase because saving $2000 gradually over then next five years might not seem worth spending a lump sum of $1000 today (see, e.g., George Loewenstein and Jon Elster, Eds., “Choice Over Time” (Russell Sage, 1992)). See also the economics literature on hyperbolic discounting.

Thus, a Pigovian tax that exactly equals the value of an externality would not optimally reduce consumption because of irrationalities in consumers’ time preferences.

The measured demand elasticity suggests that stricter CAFE standards would significantly reduce consumption of gasoline because the shift in the equilibrium point on the demand curve would be much smaller than the improvements to fuel efficiency.

See, e.g., Jonathan Hughes, Christopher R. Knittel, and Dan Sperling, “Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand” (February 14, 2007). Center for the Study of Energy Markets. Paper CSEMWP-159., http://repositories.cdlib.org/ucei/csem/CSEMWP-159/

Can you point to any literature that suggests that car sales have gone down because of CaFE?

You seem to want it both ways. Either CAFE increases the cost of driving (more expensive car), so people drive less or CAFE decreases the cost of driving (more efficient vehicle) so people drive more. Which is it?

I agree with most of what you say wrt to consumption taxes and they would certainly be regressive if they were crudely implemented (i.e. without offsetting measures for low income).

I get the sense that you’re against any kind of income redistribution and on that point I’ll have to disagree, but let’s leave it that so as not to stray to far off topic .

By the way, a good primer on fuel efficiency can be found here : http://www.pollutionprobe.org/Reports/vehiclefuel.pdf

The other consists of not-so-affluent folks in less expensive places inland (as well as the coastal urban underclass) who firstly don’t want to pay import prices and secondly favor, style wise, American cars.

CAFE forces the Big 3 to – in essence – make their cars more like the imports. Since the existing import makers already have a corner on the coastal urban affluent market, the Big 3 will never crack that market. Inland less affluent and urban underclass will buy fewer of their cars, and it’s a lose-lose proposition.

“There are plenty of studies out there showing that consumers do not value fuel efficiency rationally (i.e. they expect very short payback periods), so it’s a bit odd to be trotting out the economics 101 line IMO.”

It doesn’t matter that they are not fully rational in this regard. All that matters is that their propensity to drive is an increasing function of the cost of driving. As far as I am aware, there’s plenty of evidence that this is the case.

“Also it’s important to remember that Jevons Paradox doesn’t invalidate the CAFE approach it just lessens the benefits a little; vehicle miles traveled (VMT) is governed by a whole suite of factors other than just the fuel efficiency of the vehicle — people aren’t going to start driving 30% more simply because their cars are 30% more fuel efficient.”

That’s true. I’m not saying that CAFE doesn’t decrease fuel consumption at all. It does. My point is that it’s a very inefficient way of doing it, and that it has a lot of unintended consequences, such as creating incentives to drive more, put off buying a new car and continue driving a more dangerous gas-guzzling old car, etc. A far better approach, with fewer bad side effects, is to tax fuel consumption.

“Kevin, I’m also curious why consumption taxes haven’t had more traction across the political spectrum. Maybe because they are a basic tenet of environmental (aka left-wing commie) economics .”

There’s nothing left-wing about consumption taxes. Lots of conservative tax reformers want to switch to some form of consumption tax.

IMHO, the main reason it doesn’t get traction is because it will make the tax code a lot less progressive. The rich consume a lot smaller proportion of their income than the middle class, so a switch to consumption taxes will shift the tax burden. I am all for that, since I don’t think the tax code should be used for income redistribution, and I’m also in the highest tax bracket, but it makes it a non-starter politically.