SECOND BEST AND BEYOND - The Climate Casino - page 263

This would be similar to a gasoline tax that is lower on large cars than
small cars.
Moreover, an economic analysis of the regulation shows that most
of the “benefi ts” come from fuel savings, not from reduced CO 2 emis-
sions or reduced pollution. 3 The rule is primarily justifi ed by what I call
“energy-cost myopia,” discussed in the second half of this chapter.
The cost of different approaches is illustrated in a careful study by a
team at Resources for the Future (RfF), a nonpartisan research institute
that focuses on environmental and resource economics. The RfF team
evaluated the effectiveness of CAFE (Corporate Average Fuel Economy)
standards along with other approaches to reducing CO 2 emissions. It
estimated the emissions reductions and the cost (deadweight loss) per
unit of CO 2 emission reduction. 4
Begin with their fi ndings for the standard economic approach,
called “no market failures.” This approach assumes that markets work
effi ciently and that consumers understand the fuel costs and savings.
The team calculated that the gold standard for emissions reduction is
a carbon-pricing system like cap and trade or carbon taxes. They then
examined the costs and CO 2 savings from different fuel effi ciency stan-
dards under the assumption of no market failures. (An alternative as-
sumption is discussed shortly.) The team found that with no market
failures, the CAFE standards were much more expensive than a fi rst-
best, effi cient carbon tax or cap and trade. The cost was $85 per ton of
CO 2 removed for CAFE standards compared to $12 per ton for the eco-
nomically effi cient policies.
The regulatory policy is so expensive for two reasons. First, in the case
of no market failures, automobile manufacturers are assumed to incorpo-
rate the price of gasoline into car designs. Designs would be optimized so
that the cost of an additional gallon of gasoline is just balanced by the cost
of the gallon saved by improved fuel economy. Additionally, because the
2012 rule required very large miles-per-gallon changes, the costs of the
last fuel effi ciency improvements are extremely expensive. The basic
point is that, without market failures, the cost of reducing CO 2 emissions
through CAFE standards will exceed the cost of reducing emissions
through the fi rst-best approaches of carbon taxation or cap and trade.