Everybody Wins, Everybody Loses

The Jevons Paradox and Law of Diminishing Returns Suggest the Most Significant Impact of Obama’s New Fuel Efficiency Standards Are at the Low End

Perhaps more extraordinary than President Obama’s announcement yesterday that the federal government was finally doing something concrete to raise fuel efficiency standards in American-made cars was the virtually unanimous acclaim it wrought. As Obama decreed cars must rise from their current standard of 27.5 miles per gallon to 39 mpg and light trucks from 24 mpg to 30 mpg by 2016 – at the estimated cost of an additional $1,300 in price per vehicle – automakers stood arm in arm with environmentalists and regulators singing his praises.

Obama reassured everyone that reduced fuel consumption would offset any up-front price increases in the long run. His Administration estimates the average driver will save $2,800 over the lifetime of a new more fuel-efficient car. Moreover, increased fuel efficiency should cut greenhouse gas emissions by more than 900 million tons.

“Everyone wins,” the President happily told the crowd. “Consumers pay less for fuel, which means less money going overseas and more money to save or spend here at home. The economy as a whole runs more efficiently by using less oil and producing less pollution. And companies like those here today have new incentives to create the technologies and the jobs that will provide smarter ways to power our vehicles.”

It seems hard to believe that when Obama first proposed similar tough standards almost exactly two years ago during the campaign, the Chicago Tribune worriedly described them as “a frontal assault on the automobile industry.” Yesterday this same paper cheerfully hailed the announcement “a vindication of California’s long battle to toughen standards.” The New York Times is even giddier. “The Earth Wins One” its lead editorial trumpets this morning.

However, the Washington Post may have been most spot on when it encouraged its readers to “Think of all this as a three-ring circus.” The Post did not evoke the phrase with its usual disparaging nature but that would have been appropriate. While Obama’s announcement represents a step in the right direction, more hype than hope was in the air.

There is certainly an efficiency gap for U.S. automakers to fill. The ten most fuel efficient American car for 2008, as selected by Forbes magazine, had an average rating of 28 mpg, as compared to the 35.5 mpg average for the ten most fuel efficient cars in the world, as listed by CNNMoney. The latter list is comprised almost exclusively of Toyota and Honda models.

In addition, the push for lighter and more fuel-efficient cars could bring immediate benefits to several U.S. companies. Phil LeBeau listed some of the winners yesterday on CNBC. Borg Warner and Honeywell are both working on turbochargers to give engines power and performance while consuming less gasoline. Eaton, an auto parts supplier, sells camshafts and valve trains necessary for peak engine performance. Magna International has developed innovative hydroforming processes that produce far lighter components than previously possible. Alcoa is fashioning less heavy but stronger frames from lightweight steel and aluminum.

Other claims yesterday are less extraordinary than they appear at face value.

It should surprise nobody that Detroit’s support for the President’s decree is more pragmatic than altruistic. Although the estimated $47 billion price tag for compliance is high, a single federal standard will be far less costly than the potpourri of federal and individual state rules previously under consideration.

More to the point, automakers began this year touting fuel efficiency improvements over innovations even more radical. At an industry conference in Houston, BP PLC chief executive Tony Hayward, Royal Dutch Shell chief executive Jeroen Van der Veer, and Chesapeake Energy chief executive Aubrey McClendon all pitched improving existing gasoline-based cars before investing in reengineering to accommodate synthetic fuels or other energy sources.

Facing the destiny of exploiting a limited resource, Big Oil – and by extension the big automakers – want no major changes to automobile engines until they have squeezed blood out of the last turnip and oil out of the last piece of shale.

Cost savings from fuel efficiency improvements are inevitable but it is important to understand from where they truly come. As explained by the website Digerati Life back in July 2008, equal increases in miles per gallon at differing fuel efficiencies do not equate with equal gas savings. The fact is that switching from a gas-guzzling SUV getting only 18 mpg to a sedan getting 28 mpg will save most consumers about twice as much as switching from a compact car getting 34 mpg to a fancy new hybrid getting 54 mpg.

The law of diminishing returns applies. The important implication is that the greatest impact will not be moving to ever more fuel-efficient cars but rather from replacing the most inefficient current models. Thus, the 30 mpg standard set by Obama for light trucks will pay far greater dividends than the more ambitious 39 mpg standard set for cars – and then only if Americans are motivated to buy them.

However, freelance journalist Alec Dubro, writing in The Progressive, outlines the greatest challenge to Obama’s higher mileage standards. Nicknamed the Jevons Paradox, after the English economist who first described it in 1865, alternately known as the Khazoom-Brookes postulate, after two economists/ecologists who resurrected it in the 1980s, or simply called the explicative rebound effect, it is an observation that energy efficiency improvements economically justified at the micro level lead to higher levels of energy consumption at the macro level.

In other words, the more fuel efficient the government mandates automobiles be built and the more efficiently Detroit or anyone else builds them, the more fuel we tend to consume as a result.

The veracity of this concept is obvious to any student of contemporary history. Its reasoning is simple enough, however. The more efficient something is, the cheaper it tends to be. The cheaper something is, the more we tend to use it and feel less guilty about doing so. The Jevons Paradox is observation, not a cause-and-effect law. Thus, its outcome is avoidable but we have shown little inclination to break the pattern to date.

Therefore, Obama is correct and everybody wins in some ways because of the new, higher fuel efficiency standards just announced. Yet everybody loses in a sense too and the atmosphere/environment – concern over which has been so hailed as a catalyst for the new rules – may be the biggest loser of all unless all of us embrace the real discipline required and drive the new models less. Having our cake and eating it too will have to wait for the more innovative technology that Big Oil does not want us to have yet.