Environmental economics and sustainability principles

Rising gas prices within an era where severe trauma is occurring on an international level due to oil price shocks has Congress and the National Commission on Energy Policy working to secure a viable solution to these problems. NCEP has proposed in a document on December 2004 entitled, "Ending the Energy Stalemate: A Bipartisan Strategy to Meet America's Energy Challenges." The NCEP has proposed a 36% increase or 10 miles per gallon for cars, and 8 miles per gallon for light trucks, in the corporate average fuel economy or CAFe standards for light duty vehicles. These increases are to be phased in over the 2010 and 2015 period. The impact upon national fuel standards as well as upon the environment will be tremendous and it is necessary to judge the actual quality of this work when compared with economic metrics. The actual impact upon the environment by NCEP's proposal for CAFe standard increases must be fully analyzed in order to understand the implicit details associated with them.

NCEP's suggestion and posited increase is nothing new, in fact many attempts have been made to increase CAFe standards to meet higher requisites for LDV fuel efficiency. However, the economic costs associated with such increases and projections have curbed congressional interest. For years, the automobile industry has fought against the rise in CAFe standards through many different tactics between competitive disadvantages to European and Japanese competitors. The advent of Hybrid technology has pushed the issue on CAFe standards and has led to the suggestions made by the NCEP to increase fuel economy within the LDV division. The CAFe standards, when originally instituted in 1993 was meant to become an industry filter to increase fuel efficiency standards on a national level for automakers. Currently such levels are set for LDVs at 20.7 miles per gallon and with a manufacturer's fleet average of 27.5 miles per gallon. The proposed changes as accorded by the NCEP will have a dramatic impact upon fuel efficiency. However, the reality is whether or not such changes will actually have a positive and efficient impact on the environment. This can only be understood through a thorough econometric analysis.

The first step is to examine the implicit conditions of the CAFe standard increases upon the future of vehicular analysis. The 36% increase within CAFe standards for LDVs will affect petroleum use and imports. As well as vehicle miles traveled and vehicle costs. As a singular factor on automobile production and general impact upon the economy, there are several analysis implications. First, CAFe standards increase of 36% will result in a reduction of petroleum consumption within the United States. Figures will drop by.61 million barrels per day in 2010 and could project to decrease by as much as 1.61 million barrels per day by 2025. This corresponds to an almost 5.8% decrease within petroleum consumption within the United States. This also will impact the import share of petroleum products, allowing it to fall from 62.4% to 61.6% by 2015.

The impact of NCEP's suggestion for CAFe will also be substantial for the fuel efficiency of new LDVs by 2015. New LDVs on average will have a higher efficiency of 6.8 miles per gallon, up 26.2% over current standards. Although these figures are below the projected cutoffs of the CAFe increase, the current fleet of LDVs will already test at a significantly lower level than projections according to the NCEP. The implications of both a lower dependence upon petroleum and the greater fuel efficiency of LDVs is that it will lower the overall CO2 emissions of the United States by a substantial level. It will reduce CO2 emissions by 79 million metric tons in 2015, and 242 million metric tons by 2025, or a 2.8% difference.

Although the above metrics seem to show that there are many positives to the proposed increase by NCEP of CAFe standards, this does not mean that there are no costs associated with such a change. The cost burden placed on consumers are substantial, an increase in the average price of new LDVs will result in an average increase of 1400 dollars per vehicle by 2015. This is a substantial cost increase, which would correlate to almost 12 billion dollars by 2015 alonee. The cost burden upon consumers is one of the central complaints of any increases on CAFe standards by the automotive industry.

The problem with a CAFe standards increase is that it will have a severe impact upon current LDVs in production. The majority of LDV produced within the United States do not meet the specifications needed to become CAFe compliant and as a result will have a significant financial burden. A cost benefits analysis using econometrics shows revealing analysis of the cost structure for environmental improvement. The first aspect of the CAFe standards we will analysis is how efficient the CAFe increase will be compared with its proposed environmental benefits. In order to meet the standards proposed through NCEP, two steps will have to be taken for LDVs. Models that cannot meet the standard will have to be discontinued or reduce their current MPG to match with standards. According to NHTSA database analysis, 36 light truck models would fail to satisfy the projected changes proposed by CAFe, with little or no ability to close the gap (average MPG is 18.6). As a result, these models will be considered for the sake of this study to be discontinued with no chance of model recovery. For instance, the Dodge RAM 1500 currently has an MPG of 18.2; its projected increase in mileage is at the 24.6 MPG by 2015. A 10-mile per hour increase cannot be attained because of the relative curb weight metrics cannot be supported, as a result this would be a line that has to be discontinued to meet with CAFe standards.

Using a least-squares line to understand the relationship between fuel efficiency vs. cost effectiveness reveals their relationship.

The figure shows that using a least squares test us can see that fuel efficiency is maximized at the cost of high input levels, with a 10% increase in cost leading to 4.865% increase in fuel efficiency. This implies that to have LDVs meet the specified requirements, they would have to obtain almost 20% overall cost increase to accomplish this goal. The implications from an efficiency perspective are tremendous. Within 2002, consumers purchased a total of 1,219,815 million light trucks that exceeds the current limitations of LDV specified by NCEP. The majority of these LDVs will have no ability to meet specified standards unless they receive dramatic cost increases. If we understand the ratio proportionate to the increase of CAFe standards, we can create a linear growth equation to express the overall cost per vehicle and per population for LDVs under this policy.

By 2025, the average price of new LDVs is approximately 4.2% above their current projected levels. The impact is slightly lower than in 2015 because technological progression will take away some of the burdens placed upon automotive manufacturers. However, the costs of such a policy will be significant as sales of LDVs will fall in proportion to the price increases. There will be a projected 910,000 fewer units sold or approximately 5% lower than current projections by 2015. Between 2016 and 2025, the decrease in LDVs sales will be 4.3% below current projections.

Through the above analysis it is clear that the cost incurred through the CAFe standard increases would result in dramatic decrease in consumer desire for LDVs as well as an unfair burden for the auto industry. However, to understand the efficiency standard proposed by this study, we have to further analyze a comparison between other methods of achieving lower CO2 emissions within the LDV class. The Energy Information Administration analyzed five competing metrics for lowering pollution standards in the next twenty five years to find out the efficiency standards through a comparison analysis. The four different comparison mechanisms they tested were the Incent model, Cap-trade analysis, Building standards evaluation and NCEP recommendations of CAFe increases. The Incent model is a model for environmental protection by providing a 3 billion dollar tax incentive to corporations to promote domestic manufacturers' conversion and consumer adoption of hybrid and advanced diesel vehicles. The Cap-trade model implements a GHG emissions intensity target with a cap-and-trade program, where a mandatory, market based, tradable emissions allowance/credit program is used to reduce U.S. GHG intensity. Finally, the building standards evaluation method reports using new efficiency standards within the building sector to provide for the minimization of pollutants in the construction process. Each of these models is compared against the CAFe model to reveal a comparative efficiency test.

In these two figures it is evident that CAFe increases in their standards for LDVs are not the most productive model when compared with other energy reduction and environmental protection measures. They are in fact comparatively mid-tier in the implications for environmental protection. This analysis shows that while CAFe standards could imply hundreds of billions of dollars in losses in consumer consumption and automotive industrial costs, it only yields moderate results. 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.