Rising Gas Prices Within an Term Paper

  • Length: 10 pages
  • Sources: 2
  • Subject: Economics
  • Type: Term Paper
  • Paper: #57255289

Excerpt from Term Paper :

Under an efficiency standard it is very clear that the NCEP suggestions for CAFe standards are grossly over stated and should not be considered the final result for lowering CO2 emissions.

A more detailed analysis of two specific policies, the cap-trade policy, and CAFe standard increase, shows the inefficiency involved in this scenario. In the cap-trade case, higher energy costs reduce the amount of energy used. The cap-trade model limits the amount of energy that can be used per household and provide both price (permit fee) and non-pricing (standards) policies to lead to reduction of energy usage for businesses on a national level. At the current projections, GDP loss as a result of the cap-trade model is projected to be 0.04% lower than the reference figure. While the CAFe standard case, the loss is.26%, more than four times the loss incurred under the first model.

In the case of the cap-trade case, GHG credit prices added to the production costs of fuel, delivered energy prices that are higher than in the reference case, and thus real income of households is lowered. However, within the CAFe case, the implication is that widespread demographic impact upon consumers is larger because it targets specific demographics that need LDVs. Overall, CAFe standards increases will result in real GDP losses of 19 billion dollars by 2011, and approximately 27 billion dollars by 2025. The average loss in consumption per household over the period from 2006 to 2025 is about 78 dollars per year. When compared with these metrics it is obvious that the CAFe standards are much more ineffective than the cap-trade model, and that it should not be the foremost method for environmental protectionist policy under NCEP recommendations.

A further problem is highlighted by the above data that impacts the effective and recommended use of NCEP's suggestion. LDV sector sales are limited within targeted demographics. Most significantly, the demographics that are affected are large household families, with an income between 32,000 and 68,000, as well as small business retailers. The majority of the burden of these CAFe standards will be upon this segment that actually purchases LDVs.

In many cases, this specific target market requires LDVs for their household and business needs. With the expected price of such LDVs to increase by as much as 2,500 to 5,000 in order to meet higher mileage standards, this provides a significant strain on a small targeted demographic group. This implies an unfair distribution of burden upon the target demographic. The burdens placed by other policies such as the cap-trade case, are spread evenly across a large demographic, which means that the impact will be felt equally across the entire demographic. Since LDVs place an unfair burden across segments, they have an illegitimate method for achieving environmental protectionism.

The present discounted value for the purported changes to the CAFe standards makes it evident that there is no cost benefit associated with NCEP's recommendations. While reduction of CO2 emissions from CAFe standard increases in LDV will be lowered by as much as 6% by 2025, the social costs associated with such a move is tremendous. However, data shows that a reduction in CAFe standards will negatively impact consumers by making vehicles much more expensive to purchase. At the same time, reductions within emissions standards and greater miles per gallon is a diminishing returns problem, where the majority of changes that are occurring within emission benefits of the first five years when LDVs that are tremendous polluters come off the market and are discontinued. Therefore, the CAFe standards do not force industries to shift their strategy towards creating more efficient cars, but forces them into a position where they discontinue lines of LDVs because the cost equation for them to continue pursuing such vehicles would be prohibitory. The ultimate result is that they lack a cohesive strategy for implementing a CAFe standard increase that could have a positive effect on the industry, but also do not reduce consumer spending within the LDV sector. This cannot be achieved under the current NCEP recommendations from a cost perspective. From an efficiency analysis, it is evident that NCEP's suggestions at best only rank in the middle of the pack with other proposed suggestions on their effectiveness. Since this is a high cost solution while at the same time, is a moderately successful environmental protection mechanism, from an environmental econometric perspective, it is not an efficient solution.

The implicit problem from an econometric point-of-view is that CAFe standards of 36 mpg are not feasible criteria. EIA estimates that LDVs will only have the ability to meet 30 mpg by 2015 with the current rate of technology increases. The current level of technology will not be able to meet CAFe targets for light trucks of 10 miles per gallon by 2015, and thus is an infeasible goal. The NCEP's targeted metrics can only be achieved if a high cost is incurred by the automotive industry as well as by individual consumers to take upon themselves the burden of transformative change. The ratio of cost to benefit is significantly skewed towards high costs and moderate benefits. The above report has clearly shown that there are more effective methods to meet the stated goals of the NCEP. In addition, these standards unfairly place the burden upon the shoulders of a small percentage of individuals and families rather than even distribution of responsibility. Thus there is an unfair demographic burden that is being placed, making the CAFe standard increases even more disproportionate.


Committee on Effectiveness and Impact of Corporate Average Fuel Economy (Cafe) Standards, "Effectiveness and Impact of Corporate Average Fuel Economy (Cafe) Standards." National Academy Press. Washington, D.C. http://www.nap.edu/html/cafe/

Kleit, Andrew N. "CAFE changes, by the numbers." Regulation, 10/01/2002. P. 32

National Highway Traffic Safety Administration, "Budget in Brief" http://www.nhtsa.dot.gov/nhtsa/whatis/bb/

National Center for Environmental Economics, "Economic Incentives for Pollution Control 6.1.13. Corporate Average Fuel Economy Standards (CAFE). http://yosemite.epa.gov/

Scientific American, Editors. "Another cup of CAFE, please." Scientific American v. 265 (i.e. 285) no2 (Aug. 2001) p. 6

U.S. Environmental Protection Agency, "

Fuel Economy Program Fact Sheet" http://www.epa.gov/OMS/cert/dearmfr/fepfs.pdf

U.S. Department of Transportation, Bureau of Transportation Statistics, "National Transportation Statistics 2001" Bureau of Transportation Statistics publication BTS02-06. July 2002. http://www.bts.gov/publications/nts/html/table_01_16.html (http://tonto.eia.doe.gov/FTPROOT/service/sroiaf (2002)05.pdf


U.S. Environmental Protection Agency, "

Fuel Economy Program Fact Sheet"

U.S. Environmental Protection Agency, "Mobile Source Emissions, Past Present and Future" http://www.criterioneconomics.com/docs/CAFE_working%20paper_v1.pdf

U.S. Environmental Protection Agency and U.S. Department of Energy, http://www.fueleconomy.gov

Scientific American, Editors. "Another cup of CAFE, please." (http://tonto.eia.doe.gov/FTPROOT/service/sroiaf (2002)05.pdf

U.S. Department of Transportation, "Automotive Fuel Economy Program Annual Update Calendar Year 2001"

Kleit, "CAFE changes, by the numbers" (http://tonto.eia.doe.gov/FTPROOT/service/sroiaf (2002)05.pdf

Kleit, "CAFE changes, by the numbers"

Committee on Effectiveness and Impact of Corporate Average Fuel Economy (Cafe) Standards, "Effectiveness and Impact of Corporate Average Fuel Economy (Cafe) Standards"

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