Fuel Taxes/Price vs. Efficiency Standards

The Obama administration has thankfully changed course from the previous adminstration and is allowing California to set greenhouse gas requirements for cars (essentially creating fuel efficiency standards). Much of the reason cars have continued to be built so inefficiently is because fuel costs have been very low for a long time. I agree with the idea that increasing fuel prices will reduce miles driven and will also help drive the market for more efficient cars, but higher fuel prices (through taxes or other means) will not drive the market for more fuel efficient cars all by themselves. Efficiency requirements must be part of the policy, too.

Here's why.
  • Decisions about fuel efficiency are made by car manufacturers.
  • Car manufacturers sell their cars to new car buyers.
  • New car buyers are wealthier than the population as a whole and fuel costs make up a smaller portion of their income and spending. ($85,000 avg. household income for new car buyers in 2003 according to J. D. Power)
Therefore new car buyers are less influenced by fuel prices than used car buyers and lower income households are--the ones who are most affected by higher fuel prices. New car buyers often consider other features: safety, GPS, style, perceived utility, etc. ahead of fuel efficiency--even at $4 or $5 per gallon. Cars that are built this year will exist for 13-17 years through several owners and their fuel efficiency is locked in for the life of the car.

If fuel prices are raised high enough (say, $7-$8 gallon) to affect the purchasing decisions of new car buyers, the buyers of used cars will be bearing the brunt of the high priced fuel, because they will own the less efficient, older cars.

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