N. Gregory Mankiw may have been Chairman of the President Bush’s Council of Economic Advisers but he is seriously confused about the relative economics of fuel economy and carbon taxes. In today’s New York Times, he repeats a variety of standard myths and makes one classic blunder.
Why does he prefer taxes to raising fuel economy standards?
A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving [the "rebound effect"]. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.
Uhh, nice try. But if having more efficient cars encourages more driving, then why has driving — vehicle miles traveled (VMT) — soared in the past two decades while the average fuel economy of US vehicles has actually declined? The answer is that people drive more mainly because they have gotten wealthier. It is a myth that the rebound effect is significant, as this recent study makes clear.
But won’t a carbon tax cut gasoline consumption? Not likely. The only carbon tax that Mankiw cites is $15 per metric ton of carbon dioxide ($55 per metric ton of carbon). That would add a whopping 14 cents to the price of gasoline.
How high would gasoline prices have to be increased through a carbon charge to significantly change the average fuel economy of U.S. cars, which currently averages some 20 miles per gallon for all vehicles and 27 mpg for new cars?
Consider that European countries have taxes of more than two dollars per gallon, which is five times more than the U.S. tax. Yet, as of 2002, the average fuel economy of European Union vehicles was 37 miles per gallon. Moreover, some of that fuel economy improvement was achieved not just with high fuel prices, but with strong tax incentives to promote diesel vehicles, which are typically more fuel efficient.
A carbon tax equal to at least $1 per gallon would probably be required to achieve the same oil savings as the kind of increases in fuel economy currently being considered by Congress. Yet that would require a tax of more than $100 per metric ton of carbon dioxide – far more than anyone considers plausible today. In Bingaman’s climate bill, for instance, the safety valve starts at $12 per metric ton of carbon dioxide.
The notion that a carbon tax — or even a cap-and-trade system — can possibly substitute for higher fuel economy standards is a major blunder for an economist to make.
Mankiw, of course, like all classical economists, believes the economy must be humming along at its maximum efficiency today. He repeats the tired myth:
And don’t expect savings on gas to compensate consumers in a meaningful way: Any truly cost-effective increase in fuel efficiency would already have been made.
Why? Because car companies have already designed their cars to optimize efficiency vs. price? Yeah, that’s what GM and Ford have been doing all these years of losing market share to more fuel-efficient Toyota. Of course there are many cost-effective technologies to boost vehicle fuel economy.
With this guy running the CEA, no wonder Bush’s energy policy has been such a dud. Now Mankiw is advising Romney. Good luck, Mitt!