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Hennessey on CAFE
Excellent post, filled with detail, by Keith Hennessey on CAFE. Some highlights:
The NHTSA analyses look at a range of benefits to society, including economic and national security benefits from using less oil, health and environmental benefits from less pollution, and environmental benefits from fewer greeenhouse gas emissions (this is new). They also consider the costs, primarily from requiring more fuel-saving technologies to be included by manufacturers....
Rather than maximizing net societal benefits, [the Obama] proposal raises the standard until (total societal benefits = total societal costs), meaning the net benefits to society are roughly zero...
The Obama plan will increase costs enough to further suppress demand for new cars and trucks. This will cause significant job loss, and probably in the 150K 50K range over 5-ish years, with a fairly wide error band....[updated to reflect an error in calculation, AT]
The Obama option would reduce the global temperature by seven thousandths of a degree Celsius by the end of this century....[and] would reduce the sea-level rise by six hundredths of a centimeter. That’s 0.6 millimeters.
...As early as this fall, greenhouse gases could become “regulated pollutants” under the Clean Air Act. Once something becomes a “regulated pollutant,” a whole bunch of other parts of the Clean Air Act kick in, and EPA is off to the races in regulating greenhouse gases from a much (much) wider range of sources, including power plants, hospitals, schools, manufacturers, and big stores.
One of the scariest elements of this is called the “Prevention of Significant Deterioration” permitting system. In effect, EPA could insert itself (or your State environmental agency) into most local planning and zoning processes. I will write more about this in the future. It terrifies me.
Posted by Alex Tabarrok on May 20, 2009 at 09:08 AM in Data Source, Economics, Science | Permalink
Comments
insure that economic growth will occur in a manner consistent with the preservation of existing clean air resources
That is terrifying. I wish the government would just let companies make as much money as possible. Clean air is simply not that important, especially when compared to personal wealth.
Posted by: Nartin at May 20, 2009 9:22:33 AM
If you are prioritizing national security though, then he's almost certainly understating benefits.
Since the US tends to import oil, a commodity produced in unstable and volatile regions, anything that reduces the amonut of oil per citizen the US consumes, or per unit GDP, is going to increase its national security.
If you think, someday, that world oil supply might run out, or production peak, then that is even more true.
That's true whether someday is now, or in 12 years time (average life of US car) or 24 years time (when the US car fleet is that much more fuel efficient).
It's no surprise that China, Europe and Japan have all chosen to do something similar in terms of dictating higher gas mileage. This despite much higher gasoline prices to start with (except in China).
Posted by: valuethinker at May 20, 2009 9:58:35 AM
"Since the US tends to import oil, a commodity produced in unstable and volatile regions, anything that reduces the amonut of oil per citizen the US consumes, or per unit GDP, is going to increase its national security"
Unless the cost to lessen that consumption in some other way decreases national security, say through the loss of economic base which funds the hard side of national defense.
Japan and Europe can far more easily afford to dictate higher gas mileage. They are geographically small (or a collection of geographically small) states that have long had extensive public transit systems. China is at a jumping off point in the development of its transportation system for massive swathes of the country, supportable by lower costs and a far higher population density. I'm not saying I oppose increased mileage requirements in and of themselves, but the causes, considerations and effects elsewhere are not the same.
Posted by: PM at May 20, 2009 10:09:11 AM
What was it that Mises said about the ability of central planners to calculate? Oh now I remember... They can't.
Posted by: JP White at May 20, 2009 10:23:48 AM
Nartin,
The fuel economy mandate has very little to do with air quality. Air quality is improving because of pollution control technologies. Air quality isn't going to reverse a 50-year-trend of getting better if Obama didn't mandate more fuel efficient cars.
Value,
If Obama was concerned about national security and oil he would allow more energy exploration in America. Currently the federal government only leases 97% of federal lands for energy development. The US only has 3% of the world's proven oil reserves only because Americans are forbidden from exploring in new areas. For example, there are 2.5 trillion barrels of oil equivalent in oil shale in the western U.S. They thing that 800 million to 1 trillion of that is extractable. That's more than 3 times the Saudi's reserves.
If national security were the driving factor, Obama would be opening up more American lands for energy production.
If national security were a driving factor, Obama wouldn't be promoting a low carbon fuel standard. This mandate is discriminates against oil sands oil from Canada.
Also, the batteries in hybrid cars are lithium ion batteries. The world's largest supplies of lithium are in Bolivia and China. http://www.nytimes.com/2009/02/03/world/americas/03lithium.html Does it decrease national security to have more hybrid cars?
National security implications of energy aren't high on the President's agenda.
Posted by: Daniel at May 20, 2009 10:32:04 AM
Nartin is an idiot,
valuethinker is wrong. If the United States reduces the demand for oil, India and China will benefit from lower energy costs. But they will in turn become more dependent on middle east oil, leaving the US more isolated in international relations. If the United States stopped the import of all foreign oil tomorrow we would not see peace around the world or in the middle east.
This will kill off the domestic auto industry and lead to the importation of vehicles from low wage countries - until wages in this country fall behind third world countries.
The American infatuation with Obama is going to leave us all with a terrible perhaps fatal,case of VD. Increasing regulations, stealth taxes, massive borrowing, will create the greatest crisis this country has ever seen. Lower living standards, lost freedoms, and civil unrest.
Posted by: DanC at May 20, 2009 10:36:17 AM
I am largely impressed by the intelligence represented by the two bloggers here, and I often learn new things during my daily visits. Could someone please explain to me why these chicken little scenarios of economic destruction never actually happen with regulations? The same arguments were made about safety belts, previous CAFE standards, other emissions standards (SO2), etc., and never came to be. It reminds me of the Malthusian ideas of peak resources that sound reasonable, but never actually occur in history.
Is it perhaps because these studies ignore the new industries that spring up to meet the regulations, which might be impure from a market point-of-view, but are successful enough to offset the expected loss in jobs?
I'm really trying to understand this, but I think I'm missing something. Thanks.
Posted by: Brian O at May 20, 2009 10:42:58 AM
The same arguments were made about safety belts, previous CAFE standards, other emissions standards (SO2), etc., and never came to be. It reminds me of the Malthusian ideas of peak resources that sound reasonable, but never actually occur in history.Is it perhaps because these studies ignore the new industries that spring up to meet the regulations, which might be impure from a market point-of-view, but are successful enough to offset the expected loss in jobs?
Part of it is that it's difficult to evaluate any sort of claim. It's like measuring jobs "created or saved." The second issue is that, yes, measuring "jobs lost" is always impossible, because eventually, over the long run, labor moves to other jobs. The impact of most of these policies is not higher structural unemployment, but people working in different jobs. If the policies are economically inefficient, then the effect is slightly lower wages and everyone slightly poorer than we would be otherwise. But how would we know?
We wouldn't. There's only one economy. One group of people can say, "well, in the counterfactual, incomes would be higher." Someone else can say, "Nuh-uh!" equally reasonably.
Posted by: John Thacker at May 20, 2009 11:30:09 AM
valuethinker: "Since the US tends to import oil, a commodity produced in unstable and volatile regions"
Are you sure about that? The major sources of oil for U.S. refineries are: U.S., Canada, and Mexico. Nearly 60% of oil consumed in the U.S. is produced in North America.
Perhaps you are arguing that by reducing gasoline consumption, the U.S. would no longer purchase oil from Venezuela and Saudi Arabia. But why should that be the case? U.S. refineries are going to seek the lowest cost feedstock. The cost to produce and transport Middle Eastern and Venezuelan oil to refineries in Texas and Louisiana is lower than the cost to produce Canadian and Mexican oil. Saudi Arabia and Venezuela can simply reduce the price of their oil in response to any U.S. demand reduction. Canadian and Mexican producers cannot do so. A reduction in gasoline demand will almost certainly increase our relative dependence on Saudi Arabia and Venezuela.
valuethinker: "anything that reduces the amount of oil per citizen the US consumes, or per unit GDP, is going to increase its national security."
How so? If Middle East oil production were halted, global oil prices would skyrocket - for all sources of oil. Reducing the oil consumption of the U.S. by 20%$ or even 40% will not change the impact of Middle East instability on global oil prices.
Posted by: John Dewey at May 20, 2009 11:52:30 AM
The idea that refraining from trade with Saudi Arabia, Iran, Iraq, Kuwait, UAE, and Kazakhstan could make the United States safer baffles me. How many times have those countries invaded the United States? How many Americans have they killed when those Americans were on American soil?
I like Brian O's question. Economists often mention that as countries grow rich they opt to consume more clean air, water, etc. How does the purchase of those goods typically take place? Which one of regulation, tort law, or social norms is more important?
Posted by: Gary at May 20, 2009 11:53:52 AM
All that said, Obama is working us towards a great libertarian future. Right? I think that's why libertarians voted for him.
Posted by: thehova at May 20, 2009 12:05:25 PM
If there is any partisanship in the NTHSA analyses, then it does not follow that the Obama plan is zeroing out the net benefit. Relative to an analysis directed by a Republican administration, the new analysis will tend to overestimate the national security benefits, pollution and health benefits, economic benefits. So the new analysis might also be designed to maximize net societal benefits, but is just computing the benefits in a different way.
Posted by: mobile at May 20, 2009 12:09:18 PM
Gary,
No, those countries aren't going to invade us, but if there was no oil in that part of the world, there are two wars and hundreds of billions, perhaps trillions of dollars in defense spending and aid that would not have been spent to keep the oil flowing.
Posted by: KingM at May 20, 2009 12:24:28 PM
@John: the previous CAFE standards were a disaster! They are why we have all these SUVs running around. Before CAFE, people with families bought large CARS. Nowadays, you need a truck or a van to haul around a few kids. Throw in the mandates for booster seats,and it gets worse.
We could cut carbon dramatically with far less regulation. Simply replace FICA with a carbon tax and throw a few billion of research money at liquid fluoride thorium nuclear reactors.
Posted by: Carl at May 20, 2009 12:29:19 PM
Let's see, the free market is best at allocating idle resources.
Except when it comes to labor.
When restrictions are placed on labor saving oil and coal, which allow production with less labor, the laws of supply and demand work in reverse. If you can't save labor by using cheap oil and coal, then less labor is demanded which then results in increased idle labor.
Yeah, right.
When it comes to problems like creating wealth from nothing, the government must get out of the way and let the physicist innovate in ways to turn loans that can't be repaid into safe and secure highly profitable capital by financial innovations.
But when it comes to the problem of figuring out how to use labor to make capital which will convert free solar and wind energy into power that will substitute for oil and coal, well, that is absurd. Physicists know nothing about creating capital using labor. The economist knows that capital is created by innovations that eliminate labor.
Posted by: mulp at May 20, 2009 12:36:41 PM
mobile: "the new analysis will tend to overestimate the national security benefits, pollution and health benefits, economic benefits."
I briefly searched for national security benefits in the 929 page NTHSA document. If we assume that "national security of benefits" means a reduction in military expenditures, the NTHSA included none. They concluded that with respect to the Middle East:
"levels of military spending in that region have been largely governed by political events, emerging threats, and other military and political considerations, rather than by shifts in U.S. oil consumption or imports ... levels of U.S. military activity and expenditures are likely to remain unaffected by even relatively large changes in light duty vehicle fuel consumption."
Posted by: John Dewey at May 20, 2009 12:37:24 PM
John Dewey
You can't have the argument both ways. If oil is a fungible commodity, with global demand (which it is, kinda sorta), then the effect the US has on world oil demand is significant. If the US economizes by, say, 2m b/d (10% of consumption) then that is equivalent to 1 revolution in a major producing country (a mid sized one, anyways).
Otherwise, we say the US imports from Canada and Venezuela, and it doesn't matter about oil from the rest of the world. So reducing US consumption by 2m b/d reduces US oil imports from volatile political regions by 25% (40% of 21m b/d). Surely a good thing?
Of course, Venezuela isn't stable, either ;-). Canada I guess we can say probably is.
You've trapped yourself into arguing that the US shouldn't economize on fuel, because if it does, and the world price for oil falls, that will mean that Canada and Venezuela won't invest in more oil production, which the US would consume. But on the other hand, if the US doesn't economize on fuel, the US will need to import more, and will import that, presumably, from Saudi Arabia and co?
The practical reality is that cars last a long time. So improving fuel economy now has an impact on US fuel consumption 12 years from now. We can't anticipate the geopolitics then (although I will say that I don't see that the Middle East will be more stable).
Let's take it as a given that if the US consumes less gasoline, it lowers the risk of a competitive race with India and China for that same fuel. You're in the land of absurdity to argue that (as one poster here appears to) the US should consume as much fuel as possible to make it harder for China and India to consume it.
US oil production will also be lower in 12 years: it has been falling steadily since 1971, and even Alaskan production is falling. If 150/bl didn't find that oil from existing fields, nothing will.
On Lithium, yes, one or two key sources. But there could be more in the future, or we could use a different battery technology. Most of the gains in fuel economy are, in any case, not about hybrid engines-- more diesels alone would make a big difference.
Daniel
You've fallen into the 'shale trap'. As Deffyes says 'it ain't oil, and it ain't shale'. It's a kerogen.
Those of us who were around in the 70s remember this was going to be the saviour too. The reality is, if it was, then oil prices have been high enough, for long enough, for us to overcome the incredible problems of producing oil out of a substance that isn't quite a hydrocarbon.
So shale oil is one for the future, and likely always will be. Even if we could find enough water in a part of the USA that is water short, even water desperate, to produce it. It's a gruesomely expensive and inefficient (and not currently doable in scale) way of generating liquid fuel.
Now the Alberta Tar Sands and the Venezuelan resource are real. Alberta really is another Saudi Arabia (200bn barrels extractible, say) and Venezuela 100-200bn barrels. The environmental issues are huge though.
Alberta will get to 2m b/d of oil sands: that's almost certain. 3 or 4 would stretch the logistics and environmental capacity of that part of the world to the breaking point-- Fort McMurray just couldn't handle the strain. So let's say 3m b/d as a base case, with 4 to 5 as the upside case if the world goes back to $150/bl oil. Probably not before 2025-30 though given the time cycle on these plants (and the probable need to build a nuclear reactor up there to provide steam for the SAGD processes).
Now that 4-5m b/d would be equivalent to 1/4 of US *current* consumption (70% of which is transportation). So if US transport got 25% more efficient, say, that would be 3.7 m b/d.
Venezuela we know the problem: they nationalized the oil companies that were doing it. They won't be in a hurry to go back. But there's probably 2 m b/d there, some day, when they have a more compliant government (like Cuba does, or Ecuador, or Bolivia, or Iraq).
Over to the US unexploited lands canard. Well, say they find 30bn barrels extractible. That's an enormous amount. Given that that basically comes from offshore California, offshore Florida, and ANWR. Plus a bit from national parks (where we've generally not found oil). Most estimates for ANWR are around the 4-5bn mark and there's not perfect evidence there is anything there at all (other than gas).
Roughly speaking that is 600m barrels pa over 50 year field life. So say 1.5 m b/d at peak (just less than 7% US current consumption). Or about half of what the US might get by improving its fleet fuel economy by just over 20%. Except of course the fleet economy improvement is a permanent 'source' of oil.
My main point is the 'national security benefits' are a flakey number-- what's the cost of nearly 5,000 American lives in Iraq? Wouldn't that have been worth $1 trillion of conservation measures? Is there any American now who, having lived through the last 6 years of the Iraqi agony, wouldn't logically rather that the US have spent that money on conservation?
Remembering how the Japanese got into WWII (their Navy told them they would run out of oil, if they did not seize Dutch Indonesia) reminds us that being dependent on a foreign commodity reduces your strategic options.
Once you see this from the lens that a dependency by the US on any external oil supplier, other than Alberta, is a strategic vulnerability, you start to think about doing quite dramatic things to cut oil imports.
So on a good day, with a fair wind, in 25 years time Alberta can supply 5 m b/d. Maybe domestic sources another 5 m b/d, if we can beat the normal logistic decay curve US oil production seems to be on. Who knows, maybe 1-2m b/d out of an ice free Arctic.
12m b/d. That's probably where the US needs to be on oil consumption needs in 2034.
Posted by: valuethinker at May 20, 2009 12:53:21 PM
KingM:
Sounds like we are protecting ourselves from ourselves, then. Hardly worthy of semi-xenophobic tough-talk about national security.
Also, the ROI on wars for natural resources is _so_ bad already that reducing it shouldn't much affect a warmongering country's decision to suit up. Agree?
Posted by: Gary at May 20, 2009 12:58:09 PM
"Could someone please explain to me why these chicken little scenarios of economic destruction never actually happen with regulations? The same arguments were made about safety belts, previous CAFE standards, other emissions standards (SO2), etc., and never came to be. It reminds me of the Malthusian ideas of peak resources that sound reasonable, but never actually occur in history."
Please visit 1930, USA and the New Deal. A decade of misery.
Posted by: anon at May 20, 2009 1:31:25 PM
Brian O,
I think the reason why these regulatory catastrophes never seem to happen is not because the economic destruction does not take place, but because we don't recognize it when it does. The problem is that we cannot observe the economic growth that would have taken place in the but-for world. I would argue that trade barriers, strict immigration barriers, and much of the local zoning and development regulation could all qualify as economic disasters. They don't seem like disasters because life goes on just fine. But if we could observe the economic growth that likely would have happened without these policies and compared it to the amount of growth with them, the amount of human suffering these policies have inflicted as a result of the foregone economic growth would qualify them as true catastrophes.
Posted by: Aguirre at May 20, 2009 2:17:34 PM
valuethinker
if prices fall then the lowest cost producers can continue to produce, others drop out of the market. The middle east is the home of the lowest cost producers and they will continue to dominate world markets. The world's dependence on middle east oil will remain substantial. Indeed investment in locations outside the middle east will fall if the world price of oil falls.
You also seem to miss my earlier point. If we impose huge costs on our economy by reducing the demand for oil who benefits? Assume that the US drop in demand leads to a drop in world prices, China and India will see a drop in world energy costs as a big boost to their economies. They will become increasingly dependent (heavier consumers) of middle east oil. If an international crisis occurs what side will India and China take in a middle east dispute? China and India will do what is in their national interests independent of the United States. The United States will become more isolated on middle east issues, especially Israel. Is that good or bad?
Simply, the Obama plan will do nothing, zero. to increase national security. It will do nothing to bring peace to the middle east. It will impose greater costs on the American citizens.
The Obama estimates on cost are conservative and estimates on benefits are often silly. The power we are giving to regulatory agencies will be destructive to the future of the country
Posted by: DanC at May 20, 2009 2:27:02 PM
This is where the "Atlas Shrugged" meter hits the peg. . .
Posted by: Matthew at May 20, 2009 2:32:07 PM
valuethinker: "If oil is a fungible commodity, with global demand (which it is, kinda sorta)"
No "kinda, sorta" about it, valuethinker. Oil is a fungible commodity, with global demand.
valuethinker: "the effect the US has on world oil demand is significant."
I doubt it is as significant as you apparently believe. If the U.S. reduces demand for oil by 20%, prices will decline only slightly. Other nations will take advantage of temporarily cheaper oil by increasing demand.
valuethinker: "You've trapped yourself into arguing that the US shouldn't economize on fuel"
I never made that argument.
For me, the issue is not so much whether U.S. consumers purchase efficient vehicles. It's whether or not they are allowed to do so voluntarily.
valuethinker: "if the US doesn't economize on fuel, the US will need to import more, and will import that, presumably, from Saudi Arabia and co"
More than what? More than it does today? Doesn't the level of imports depend on the number of vehicles we drive? the distance we drive them? the amount of domestic crude production?
So what if the U.S. imports more oil than it presently does from Saudi Arabia, Brazil, Nigeria, and Venezuela? If political instability outside the control of the U.S. causes oil prices to rise, the market for oil and oil products will quickly adjust.
By the way, how many times in the past half-century did political instability not caused by the U.S. significantly change the price of oil? When Saddam Hussein invaded Kuwait is one. When else?
valuethinker: "So reducing US consumption by 2m b/d reduces US oil imports from volatile political regions by 25%"
Why do you make this conclusion? Again, U.S. refiners are going to seek the lowest prices for their feedstock. If Saudi Arabia can offer the lowest prices, that's where U.S. refiners are going to get their oil.
Posted by: John Dewey at May 20, 2009 2:33:51 PM
But what about all the government jobs created? Their incomes add to GDP, so what's the problem?
Posted by: Yancey Ward at May 20, 2009 3:22:22 PM
They should have mentioned the non-linear relationship between emissions and temperature reductions. If x emissions reductions yield y temperature decreases, then 2x emissions reductions will yield greater than 2y temperature decreases. A better way to estimate the temperature reduction of a policy is to ask what would happen if every country on the planet was operating under the same constraints vs. no constraints, and what other policies are being used in conjunction with this one. If you don't do that, you're going to end up with small numbers that don't sound like much. They only start to add up when you put the different policies together. Also, their baseline scenario of 3 degrees Celsius by 2100 is significantly lower than the most recent studies.
Posted by: David C at May 20, 2009 3:34:35 PM
