Calculating the costs of the new fuel economy standards

"The government wants to force us to buy tiny, unsafe cars that get 27 mpg. Can you imagine such a thing?"

There’s no question that the recently announced White House plan to increase CAFE standards to 54.5 mpg will make cars more expensive. But does that necessarily mean it will be more costly for consumers?

One might be tempted to look at the often-compared Chevy Volt and Cruze. For about $20,000 you can get a Cruze Eco sedan that’s rated at 42 mpg on the highway, or for about $40,000 (before tax credits), you can get a Volt that’s rated at 93 mpg by the EPA.

So, high-mileage cars will be really, really expensive, right?

Not necessarily. As recent articles in Forbes and the Cleveland Plain Dealer point out, automakers have a variety of options for making cars more fuel efficient – some exotic, like carbon-fiber body panels, but mostly more mundane upgrades like direct injection and electric water pumps.

The White House estimates the additional costs of those upgrades will be about $3,500 per car. Will the gas savings make up the difference? It all depends.

The current average for American cars is about 27 mpg; a car getting 54.5 mpg will use half as much fuel. If we assume a car’s useful life to be about 150,000 miles, and an average gas price over that time period of $5 per gallon, the higher-mileage car will save its owners a collective $14,000 in fuel costs over its lifetime. The Obama administration, whose calculations I can only assume are more sophisticated than mine, puts the number at $8,200.

Of course, individual results will vary, and those more-advanced cars will likely be more expensive to fix as they get older. But still, you’d have to really strain to find a way to run the numbers that makes the new fuel economy standards look like a bad deal for consumers (that doesn’t mean people won’t try).

It’s also useful to look back at what happened the last time fuel economy averages were doubled – from 13 mpg in 1974 to 27.5 mpg in 1985 (where, incidentally, we still are today). The average price for a car went from about $3,750 in 1974 to about $9000 in 1985. More than double, right?

Not really. That $3,750, adjusted for inflation, is the equivalent of about $8,200 in 1985 dollars, which means a car in 1985 was only about 10 percent more expensive after a decade of major efficiency, pollution and safety regulations.

Don’t get me wrong – I’d love to drive a big, cushy land yacht as much as the next person. But considering the safety, efficiency and pollution control improvements made during that decade, would anyone really want that 10 percent back?

Photo by Alden Jewell via Creative Commons

2 thoughts on “Calculating the costs of the new fuel economy standards

  1. These standards have some potential, despite all the hue and cry from auto makers, to give the auto industry in the US a better bottom line. The industry has teetered for years now, hoping that large profit margins on low sales would keep them going. By the way, that’s counterintuitive to a free-market situation, in which low demand should lead to reduced prices. This is a free-market economy? Maybe if the new fuel standards lead to brisk sales over several years, manufacturers will do something else counterintuitive: rely on high sales volume to counteract relatively low pricing and net profits per unit sold.

  2. “[The average] car in 1985 was only about 10 percent more expensive after a decade of major efficiency, pollution and safety regulations.”

    It might not even be that bad. Looking at the averaging price can hide some relevant details. Like the fact that fuel efficient cars are often much cheaper than gas guzzlers.

    Compare the Chevy Cruise to the Chevy Suburban.

    One obvious way for a carmaker like GM to meet the stringent new CAFE (corporate average) standard is to sell more of the former and less of the later. Which would help bring down the average cost of light duty vehicles, all other things being equal. It would especially help bring down the cost of the more-efficient models, because the way a carmaker “sells more” of a model is by reducing its price.

    SUVs and muscle cars will continue to be expensive, and some folks will continue to buy them. But CAFE should help bring the cost of more-efficient cars way down.