In November 2010, the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) jointly proposed new federal regulations mandating improvements in fuel economy among heavy-duty commercial vehicles (HDVs)—i.e. heavy-duty trucks, buses and vans. This industry is no stranger to government regulation in many different policy areas. NHTSA has for many years regulated vehicles for safety, for example, and EPA regulates emissions of conventional air pollutants. But this is the first federal attempt to use regulation to improve fuel economy in heavy duty vehicles. Meanwhile, light-duty household vehicles (LDVs) have been subjected to fuel economy standards since 1979.
Proposed regulations are trial balloons in which the regulatory agency can request information from the regulated community about what it is thinking in terms of stringency and regulatory approach. The proposing agency studies the comments received and other information that comes in and if all goes well, a final regulation is issued a year or so later.
Last week, that final regulation was issued. A brief look at the preamble and regulation (which total almost 1000 pages) reveal some small changes, but evidently, no major changes in direction.
The issuance of the regulations is only the first step of what promises to be a long regulatory journey. The requirements spelled out in the proposal do not become effective until 2014 to 2017, in order to give manufacturers the lead time necessary to respond. Moreover, the regulations are expected to impose only modest costs and require reductions in fuel intensities of seven percent to 23 percent by 2017,depending on vehicle category.
By comparison, a recent study by the National Research Council identified a suite of technologies that could become available in the 2015-2020 time frame that would reduce fuel intensities in various truck classes by almost 50 percent, albeit at much higher cost. The real significance of the proposed regulation is not in their immediate contribution to fuel savings. It is that they pave the way for future regulations—regulations that will exploit the technological possibilities identified by the NRC, among others. If past regulatory actions are any indication, the structure and the path taken by these future regulations will follow the path laid out in the current regulatory proposal.
That path will be familiar to students of government environmental regulation and especially to those who have paid attention to the 32-year history of the CAFE policy for light-duty vehicles. That is not to say that the HDV fuel consumption regulations are a rerun of the LDV CAFE standards; they are much more complex. Nonetheless, those who study the proposed HDV rules will see amid the
Regulatory familiarity can be quite an advantage for almost all interested parties. Regulators know what to do, since they have done it before; the regulated parties and other interested parties know what to expect; there is also a common vocabulary and many shared assumptions. Also, familiarity can breed consensus. While the comments on the proposed regulations that have been received—from the firms to be regulated, the environmental groups pushing for more stringent regulation, and other interested parties—are highly critical of many details, they accept the broad approach taken by the two agencies for reducing fuel use among HDVs. The approach is also quite consistent with the recommendations of the NRC committee.
The confidence of stakeholders in the overall approach taken by NHTSA and EPA to HDV fuel consumption might, in the end, be well placed. Besides its familiarity and the support it enjoys in the regulated community, it appears to offer reassurances that something will actually be done to improve fuel economy. But this regulatory approach also has weaknesses that are well known to the regulators and the regulated parties.
In the first place, despite heroic attempts by regulators to introduce features into the regulations that promote economic efficiency, features that provide some much-needed flexibility to this sort of regulation, it cannot take complete advantage of the heterogeneity of either the characteristics of the vehicles produced or the needs of the purchasers of vehicles. Moreover, the very act of introducing flexibility risks the creation of incentives that will give rise to unintended consequences. That is precisely what happened with light duty vehicles, when the much more lenient CAFE standard for light-duty trucks, together with an exceedingly loose definition of “truck,” allowed manufacturers to market vehicles (small pickups and SUVs) that appealed to households but that were considered trucks for regulatory purposes. The ratio of light trucks to cars in the household vehicle fleet was already increasing prior to the introduction of CAFE, but the CAFE rules enacted at that time no doubt gave it a powerful shove.
Finally, and most seriously, the current approach is problematic because it attacks the fuel intensity, rather than fuel use itself. Total fuel use depends not only on the rate of fuel use in each vehicle, but the total size of the vehicle fleet, the speed with which the new fuel-efficient vehicles are introduced into the fleet, and the intensity of use in all vehicles. Fuel intensity regulation can conceivably delay the rate of replacement, because new vehicles are more expensive, and it can induce greater use of the new vehicles, because the improved fuel economy reduces the cost of a given trip (the so-called rebound effect). The combined effect of these mechanisms is not powerful enough to reverse the downward effect of fuel economy regulation on total fuel use, although they can affect it noticeably.
The bigger problem is that, in the long run, such rate regulation is not likely to be effective. Since the dawn of the Industrial Revolution, technological progress and expansion of markets have combined to increase by many orders of magnitude the efficiency by which productive inputs were turned into useful outputs, but rarely did this spontaneous increase in technical efficiency generate a sustained reduction in the rate of use of the inputs. Is there any reason to believe that a regulated increase in technical efficiency is likely to be any different? Petroleum (as well as other fossil fuels) is a valuable and versatile resource, and as long as its price remains low, its demand is likely to remain high.
