Economists see errors in government claims on pricing

Source: Anne C. Mulkern, E&E News reporter • Posted: Tuesday, August 7, 2018

The Trump administration argues that weakening rules on gas efficiency for cars will save motorists money. Economists say it’s not that simple.

Several economists questioned the government’s assertions that freezing standards at about 30 mpg would save consumers $1,850 to $2,260 on the price of a vehicle. Former President Obama wanted cars to travel about 36 mpg.

It’s hard to predict the price of a car in 2025, especially if it might have technology that doesn’t exist yet, the economists said.

EPA and the National Highway Traffic Safety Administration assume that manufacturers will meet the mileage and emissions standards by “putting new technologies into the vehicles,” said Christopher Knittel, professor of applied economics at the Massachusetts Institute of Technology’s Sloan School of Management. “They add up what those technologies would cost, and then that is the change in prices of the vehicles.”

Automakers do that, too, but they also adjust their prices based on other considerations, Knittel said. Some dealers will take a loss to sell an electric vehicle, which goes toward meeting standards on greenhouse gases. They might do that so they can sell a popular truck, which emits more pollution, at a bigger markup.

“The EPA and NHTSA analysis, I think, is missing a major part of how the markets operate in the presence of fuel economy standards,” Knittel said.

The analysis assumes all consumers are buying a higher-mileage vehicle and paying for upgraded technology, he said, which isn’t how the market works.

EPA and NHTSA discussed costs in a 1,625-page analysis made public as they took the first step in rewriting the rules. They asked for comments on the rule change while saying the preferred option was to freeze the 30 mpg standard between 2020 and 2026. They also proposed peeling back California’s authority to set more stringent standards.

The agencies’ analysis looked at a number of factors that they said justified freezing the existing standards, including that higher-mileage cars would cost more to produce.

“The industry has achieved tremendous gains in fuel economy over the past decade, and these increases will continue at least through 2020,” the study said. “Along with these gains, there have also been tremendous increases in vehicle prices, as new vehicles become increasingly unaffordable — with the average new vehicle transaction price recently exceeding $36,000 — up by more than $3,000 since 2014 alone. In fact, a recent independent study indicates that the average new car price is unaffordable to median-income families in every metropolitan region in the United States except one: Washington, D.C.”

Technologies to improve fuel economy and reduce carbon dioxide emissions haven’t dramatically improved from what the agencies assumed in 2012 when they finalized the current standards, the study said.

Opponents of the proposed rollback criticized the agencies for cherry-picking its numbers.

“Closer inspection reveals that these new Trump Administration numbers are based on some, shall we say, creative math,” two critics of the plan — Dan Sperling, a California Air Resources Board member, and Nic Lutsey, program director at the International Council on Clean Transportation (ICCT) — wrote in an opinion piece published in Forbes.

They pointed to an ICCT analysis that said the additional cost for meeting the 2025 standard is closer to $550. That study said automakers have been able to deploy new technologies less expensively.

Also, the Consumer Federation of America said in a critique that adding mileage improvements doesn’t necessarily lead to higher prices. The analysis looked at the inflation-adjusted price of multiple car models in 2017 compared with the same vehicle in 2011. It found that one-quarter of the cars cost less but had improved mileage. Where prices went up, it argued, those were offset by gains in fuel economy in nearly all cases.

NHTSA said in a statement that it and EPA “have proposed 8 alternative options to open a public discussion for shaping future fuel economy standards for model year 2021 and beyond.”

The agency said it was opening a comment period, not making a final decision, and that “economists, or any member of the public, can inform the agencies on what they think and present additional information that might be relevant.”

International markets

Higher mileage standards can trigger developments in technology, said Knittel with MIT. If there’s a significant amount of innovation, that would put the increased cost “closer to ICCT” than it would the NHTSA number, Knittel said. He added, however, that ICCT’s estimates “have traditionally been on the low end of things.”

The Trump administration ignored some factors that could buffer potential price increases, the economists said.

“These automakers, they don’t just operate in the U.S.,” said Arthur van Benthem, professor of business economics and public policy at the University of Pennsylvania’s Wharton School. “They also sell cars everywhere all over the world. Standards are tightening in Europe, in Japan and China.”

So it’s likely a lot of the technology to raise mileage will be developed anyway, he said. That’s a fixed cost for the car companies, and they can transport some of what they develop to the U.S. market.

“There’s good reason to believe a lot of the costs will be lower once you factor that international landscape in,” van Benthem said.

Automakers don’t always raise the price of cars relative to the costs of meeting fuel economy standards, said Mark Jacobsen, associate professor of economics at the University of California, San Diego. They often have price points they’re trying to meet for specific markets. To make up for added technology costs, he said, they might reduce horsepower, make smaller cars or cut luxury trims to shrink overall costs.

“It would be perfectly possible to make a car that’s fuel efficient and yet didn’t increase in costs,” Jacobson said. “People might be sacrificing something else. But it’s not that the manufacturers have to make the car more expensive to meet the rule.”

It’s also unclear whether the government’s claim about car prices rising this year is connected to the Obama-era rules on fuel efficiency, he said.

The gross domestic product is also on the rise. “It’s not all that surprising people are spending more money on cars,” Jacobson said. “Part of it is for fuel economy, but part of it is for luxury items and electronics and things as well.”