An Economic Assessment of the Weight-Based Cafe Standard Proposed by the National Highway Traffic Safety Administration

Abstract

In December 2003, the National Highway Traffic Safety Administration (NHTSA) issued an Advanced Notice of Proposed Rulemaking that sought comments on suggested changes to the corporate average fuel economy (CAFE) program. Among other regulatory concepts, NHTSA suggested that future CAFE standards should be based on the curb weight of trucks up to 5,000 pounds, and should encourage reductions in the curb weights of trucks over 5,000 pounds, by holding truck models in the currently regulated fleet over 5,000 pounds to standards that would not be based on curb weight. This paper analyzes the changes that manufacturers could make to bring all light trucks in the currently regulated fleet with a curb weight of 5,000 pounds or more into compliance with a standard of 18 miles per gallon (mpg), intended to encourage the downweighting of those trucks. The analysis reaches two important empirical conclusions: (1) the attributes of model year (MY) 2002 light trucks over 5,000 pounds that would not meet an 18 mpg standard are significantly different from the attributes of light trucks in the same weight class that would meet an 18 mpg standard; (2) consumers value highly the attributes that would be sacrificed if they were forced to choose from those models that satisfy the standard. We estimate the reduction in consumer welfare that would be associated with two possible reactions of automobiles manufacturers to the proposed change in the CAFE program. If manufacturers react by eliminating light trucks in the currently regulated fleet with weights over 5,000 pounds that do not comply with the new standard ("Scenario 1"), forcing consumers to choose from only those vehicles of the same weight that achieve the standard today, the associated reduction in consumer welfare would likely be between $432 and $648 million per year. Alternatively, if manufacturers react by reducing the weight of the vehicles in that fleet to comply with the new standard ("Scenario 2A") for those models that do not require a significant change in the weight, the associated reduction in consumer welfare would be between $636 and $748 million per year. If instead manufacturers react by reducing the weight of the vehicles in that fleet to comply with the new standard ("Scenario 2B") regardless of the required change in the weight of the light truck, the associated reduction in consumer welfare would be $1.516 billion per year. Setting aside any methodological problems with NHTSA's safety model, if each of the 36 models that failed the new standard were to comply with the standard solely through weight reduction ("Scenario 2B"), then roughly 6.0 lives per year would be saved according to a preliminary safety analysis published by NHTSA in September 2003. Assuming that society values a life saved between $3 and $4 million, the present discounted value of expected benefits under Scenario 2B is between $179 and $238 million in 2002. If only those models that did not require a significant reduction in weight were to reduce their weights (Scenario 2A), then roughly one-quarter of a life per year would be saved. The present discounted value of the associated safety benefits would be between $8 and $11 million. We conclude that the reduction in consumer welfare associated with each of these scenarios vastly exceeds the purported benefits of this reform to the structure of the light truck CAFE standards. Therefore, the ratio of consumer welfare reductions to safety benefits is in the range of 6 to 95. Even in Scenarios 2A and 2B, in which the regulated firms react in a manner consistent with that envisioned by the Notice, the proposed reform would greatly decrease welfare. Hence, consumer welfare considerations require the rejection of this CAFE reform.