As the latest round of global climate negotiations were set to commence in Doha in late November, Environment Minister Peter Kent announced that Canada would enact new vehicle fuel economy standards that he claimed would reduce greenhouse gas emissions while saving Canadians money on gas.
While some might interpret the announcement as an early Christmas gift, the hard reality is the proposed new regulations are the proverbial lump of coal for the average Canadian, and will force them to pay significantly more for new motor vehicles. Any claims of saving Canadians money are based on flawed analysis of the benefits and the costs and the dubious assumption that the government knows best.
Kent introduced the new regulations as part of Canada's effort to ensure its vehicle fuel economy standards are harmonized with the aggressive standards recently enacted in the United States. The proposed amendments to the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations require auto manufacturers to increase fuel economy standards for their fleets over the years 2017 to 2025. These amendments expand on existing regulations implemented over the 2011 to 2016 period.
The government's analysis recently published in the Canada Gazette suggests the proposed regulations will produce $41.9 billion in total benefits and $11.2 billion in total costs. However, a closer look suggests these numbers may be flawed. The government's analysis estimates that over 79 per cent ($33.2 billion) of the benefits from the regulations are from fuel savings to consumers, i.e., vehicles on average become more fuel efficient, so drivers spend less on gasoline. Ironically considering the name of the regulations, the government estimates that only nine per cent ($3.9 billion) of the benefits are from reduced greenhouse gas emissions.
Including consumer fuel savings in the analysis is problematic. It implicitly assumes that consumers are making an irrational decision when purchasing vehicles. In other words, it assumes that the government better understands which cars consumers prefer than consumers understand themselves. However, as argued in a recent paper by economists Ted Gayer of the Brookings Institution and Kip Viscusi of Vanderbilt University, there is evidence to suggest that consumers make rational decisions with respect to choosing the energy efficiency (e.g., fuel economy) of products. They note that the decisions may appear to be irrational when only one product characteristic, such as fuel economy, is considered, but are rational when all product characteristics are included in the analysis. In the context of vehicle emission regulations, consumers may indeed save money, but they may be sacrificing something else they value, such as trunk space, all-terrain performance, safety, passenger capacity, and more. Reductions in these other characteristics are ignored by the government's analysis.
If fuel savings are excluded from the analysis, the total benefits of the regulations plummet from $41.9 billion to $8.7 billion. When fuel savings are excluded, the costs of the regulations ($11.2 billion) outweigh the benefits producing a net cost of $2.5 billion. And this assumes that government estimates of the cost of new vehicles ring true.
The Canadian government estimates that meeting the standards will add $2,095 to the cost of a new vehicle, but others believe this to be an understatement. The U.S. Environmental Protection Agency estimates that meeting the very similar U.S. standards will add $3,200 to the cost of a new vehicle in the U.S. Furthermore, the U.S. National Automobile Dealers Association estimated that the new standards will add more than $5,000 to the cost of a new vehicle. Studies also show that fuel-sipping cars are more expensive to insure and maintain.
It is true that the North American auto market is highly integrated, so there may be some benefit from harmonized regulations between the two jurisdictions. But does this policy offer a net benefit to motorists? It seems unlikely. At the very least Canadians deserve a comprehensive analysis that presumes they are rational, excludes fuel savings, includes higher vehicle costs, insurance costs, and repair costs, and shows the real consequences that will attend harmonizing the standards. As well, less-intrusive approaches, such as more effective and accurate fuel economy labelling on new cars, could be tried first before heavy handed regulations.
Anytime a politician touts a policy as a 'win-win,' citizens should be skeptical. Especially if the policy assumes that the government knows what is better for consumers than consumers know themselves. Kent's comments and the government's analysis of the new vehicle emissions regulations overestimate the benefits and hinge on the assumption that government knows best.
Kenneth P. Green is a Senior Fellow with the Fraser Institute. You can follow him on Twitter @KennethPGreen. Joel Wood is an economist with the Fraser Institute; on Twitter @JoelWWood.