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February 15, 2012

Breaking down EPA's Light-Duty GHG Emission Standards

February 15, 2012
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Earlier this week, IER submitted its comment on EPA’s proposed light-duty truck greenhouse gas emissions standards. As we will see, even relying on the EPA’s own analysis shows just how absurd federal intervention into energy markets has become. The debate would be funny, if it didn’t have such serious consequences in terms of economic welfare and indeed traffic fatalities.

Takeaway Messages

For those readers with a busy schedule, the following bullet points summarize the main issues raised in IER’s comment:

EPA’s proposed regulation:

  • Would force 6 million drivers out of the market, according to one estimate.
  • Would increase the price of a new car by thousands of dollars.
  • Assumes that Americans are too dumb make good decisions about fuel economy, even when those mistakes add up to billions of dollars per year.
  • Is supposed to do something about global warming, but according to EPA itself the rule would, at most, reduce global temperatures by 0.02 degrees C in the year 2100.

 From the Introduction of IER’s Comment

On December 1, 2011, the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) proposed light-duty vehicle greenhouse gas emission standards and corporate average fuel economy standards for light-duty vehicles for model year 2017–2025. In other words, EPA is proposing to regulate carbon dioxide emissions from cars and trucks.

This comment explains that EPA, and by extension NHTSA, fail to justify increasing the greenhouse gas emissions standards for light-duty vehicles. According to EPA, the entire reason it is regulating carbon dioxide emissions from cars and trucks is to reduce global warming and climate change, but EPA’s rule does not affect the pace of climate change in any meaningful way. Therefore, this rule is fatally flawed or the endangerment finding is fatally flawed.

EPA’s cost-benefit analysis for this rule is also fatally flawed. EPA’s cost-benefit analysis shows positive net benefits only because EPA omits the cost to consumers of limiting consumer choice. Instead, EPA credits forced fuel savings as a benefit. Because the rule increases the upfront cost of buying a car, the rule forces 7 million drivers out of the car market. This means that 7 million people will not be able to enjoy the fuel savings calculated by EPA because they will not be able to afford a car in the first place.

Furthermore, EPA’s cost-benefit analysis utilizes the “social cost of carbon.” The “social cost of carbon” is a metric developed to try to estimate the impact of emitting on ton of carbon dioxide. The estimates developed through EPA’s social cost of carbon analysis, however, are arbitrary and capricious. In reality, the social cost of carbon is an unsupportable metric for use in federal rulemaking. Even on its own terms, the social cost of carbon estimate is inapplicable for EPA’s analysis, because of what is called “leakage” in the climate change literature. Specifically, EPA ignores the possibility that its rule will increase greenhouse gas emissions outside of the United States, through mechanisms such as a lower world price of oil due to restricted American demand.

For these reasons, EPA should not regulate greenhouse gases from vehicles using the Clean Air Act.

Consumers Massively Dumb?

Perhaps the most revealing aspect of the paternalism underlying the EPA’s position is how thoroughly it relies on massive consumer error. It’s true, standard economic theory allows a role for government intervention to correct “market failures” arising from the negative externalities of greenhouse gas emissions. However, that’s not what EPA’s case focuses on. Instead, depending on the parameters, anywhere from 56 to 73 percent of EPA’s claimed “net benefits” from its rule, derive from EPA’s assumption that motorists irrationally fail to understand how much money they could save by buying more fuel-efficient vehicles.

For example, in the year 2040 alone, EPA’s analysis estimates that American car buyers—in the absence of the farsighted rule on light-duty trucks—will miss out on $104 billion in savings they could have reaped, had they paid higher sticker prices for vehicles that would get better fuel economy. In contrast, EPA’s estimate for the total gains from avoided climate change damages as well as other factors (such as reduced macroeconomic volatility from reduced reliance on oil imports), might yield as little as $29 billion in the year 2040, in the scenario where the “social cost of carbon” is relatively low.

The reader should not be fooled that EPA is promulgating this rule in order to combat climate-change damages. When trying to justify the higher sticker prices its methods will impose on vehicle buyers, EPA’s analysis rests primarily (again, 56 to 73 percent, depending on the other assumptions) on the view that it will be directly doing these buyers a favor, by making them buy more fuel efficient cars that will pay for themselves.

EPA Rule Will Lead to More Traffic Fatalities

Besides the generic harm to consumers coming from government intervention, a specific consequence of the new rule will be increased traffic fatalities, relative to what the trend otherwise would have been. EPA’s analysis (from which it derived estimates of the impact on vehicle prices) assumed that all other vehicle attributes would be held constant, and that the increased cost of production (to meet the higher fuel economy standard) would be passed entirely on to the final buyer.

However, in reality what will happen is that in the new equilibrium, manufacturers will produce vehicles that are lighter than otherwise would have been the case, and hence they will not need to be as expensive as EPA assumes. In other words, in practice consumers will not choose to have the full brunt of the new rule show up merely in higher sticker prices, but they will spread the pain around to other dimensions, such as vehicle safety.

As we document in the comment (pp. 14-15), estimates of excess traffic fatalities attributable to the introduction of CAFE standards in the 1970s range from 42,000 to 125,000 deaths.

But At Least the Rule Will Halt Climate Change, Right?

The most alarming and yet humorous piece of IER’s comments revolves around EPA’s own discussion of the rule’s effect on climate change. Here is EPA making the case for its rule:

The results of the analysis demonstrate that relative to the reference case, projected atmospheric CO2 concentrations are estimated by 2100 to be reduced by 3.29 to 3.68 part per million by volume (ppmv), global mean temperature is estimated to be reduced by 0.0076 to 0.0184 °C, and sea-level rise is projected to be reduced by approximately 0.074–0.166 cm, based on a range of climate sensitivities.

Yes, you read that right: EPA itself suggests that the upper range of the likely impact of the proposed rule will slow global warming by less than 2 hundredths of a degree Celsius…by the year 2100. It is for this social goal (as well as the free money EPA will give to ignorant consumers who can’t calculate fuel savings on their own) that justifies—again, according to EPA’s own numbers—imposing aggregate costs on vehicle buyers of $36 billion in the year 2030 alone (to pick just one year’s figure).


As a cursory examination of IER’s formal comment shows, the proponents of government intervention into the energy sector simply cannot make a decent case, when they are asked to come up with actual numbers. As IER’s analysis of EPA’s own table shows, the only way to ensure that the purported benefits of the rule exceed the admitted costs is to invoke massive and systematic consumer irrationality. The innocent layperson may have thought that looming climate change damages would be enough, but that isn’t the case for the lower range of sensitivity estimates, again as EPA’s own table shows.

Rather than imposing new regulations that will stifle manufacturing sector and lead to a higher rate of traffic deaths, the government would be better advised to remove other interventions and let the market work.

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