Bigger, Heavier, Riskier: The Hidden Cost of Auto-Regulation
From the music to the lights, it is very clear that we are in the thick of the most wonderful time of the year. I am of course referring to Toyotathon 2025 (Toyotas annual car sales event), which has been running since mid-November and will continue into early January. While deals like these can be exciting, there is more at play than just price that determines what car we ultimately end up purchasing or even have the option to buy. A primary example of this is fuel efficiency, which has been a large target of regulation for the auto industry. These regulations have shaped what cars end up in dealerships and on the road. They are yet another example of how even well-intended regulation can lead to unintended results. The Trump administration recently rolled back some of these standards, which some see as problematic. However, this could lead to much safer and more fuel-efficient outcomes in the long run.
The purpose of the Corporate Fuel Economy Standards (Often just referred to as the CAFE standards) is to encourage environmental consciousness and innovation. This happens by placing minimum standards on how efficient a fleet of cars must be. These requirements get stricter over time. Under the previous administration, the cars were supposed to get at least two percent more efficient per year. At first glance, it is difficult to identify what the issue would be here. With an impending climate crisis, mandating more fuel-efficient vehicles seems to be a natural step to help reduce this issue. In addition, isn’t it much better for the consumer if our cars have these built-in standards?
The issue is in the details of the standard. Under CAFE fleets, large vehicles (trucks and SUVs) with larger footprints face looser targets than passenger cars. Smaller cars have much more demanding goals than larger-less fuel-efficient vehicles. From a manufacturing point of view, this creates an incentive to put more large vehicles on the market, as it is much easier to meet the requirements. To illustrate this point, let’s create a hypothetical smaller car titled “Santa’s Sleigh.” This car gets 35 miles per gallon compared to the Ford F-150, which gets 23 miles per gallon. In objective terms, Santa’s Sleigh is more fuel-efficient than the F-150. However, under our previous set of rules, Santa’s Sleigh would be less likely to be put on the market because the targeted average for this company’s fleet (in 2025) for cars of its size would be 45-60 MPG. Meanwhile, the fleet of larger vehicles with larger footprints, like the F-150, faces a much lower average needed to meet the targets, allowing this truck to be sold.
These regulations gave an advantage to larger vehicles, which does have real consequences for drivers and the environment. In terms of driver safety, a negative externality begins to develop, the larger quantity of these larger vehicles is on the road. While in the event of an accident, being a driver or passenger in one of these large cars would make you safer, the same could not be said if you are the one struck by one of these vehicles. In a country that has four times the number of car accidents of any other country in the world, an arms race begins to develop. In order to feel like you and your family are safe in the event of an accident, you justify having a larger vehicle. With all of these large cars on the road, it seems rational to purchase even bigger cars in the name of safety. After all, if you do not end up participating in the arms race and get into an accident, then you run a much larger risk of death in the case of a collision.
The environment ends up being another victim in all of this, with there being more gas guzzlers on the road than if the regulation were not in place. Americans drive significantly more than people from other countries. The vehicle they chose to do this additional driving is a significant factor in how large their carbon footprint will be by the end of the year. Additionally, larger cars also reduce the lifespan of roads, leading to more construction and maintenance, which has its own negative environmental effects.
The clearest illustration of these unintended consequences comes when you look at the cars on the streets of other countries. New vehicles in America weigh about 1,100 pounds more than those in Japan. Without CAFE standards providing incentives to focus on the production of larger cars, a more fuel-efficient outcome is reached. These effects are not exclusive to Japan, with many countries in Europe also having lighter, more fuel-efficient cars. This seems to be more in line with the spirit of the regulation than the end result it actually produces. While it is true that the roads are smaller outside of America, which could act as a constraint on vehicle size, it is important to acknowledge that one contributing factor to the size of American roads is the expanding size and weight of our vehicles. Larger roads also do not restrict the use of small cars in the same way that smaller roads can restrict large cars, meaning we could still see these more fuel-efficient outcomes in America.
There is little doubt that the intentions behind policy like this came from a good place. Unfortunately, the outcome of regulation is independent of both policy design and intent. Firms will always act in their own self-interest, so if regulation must be made, regulators mustn’t make the route of self-interest a less efficient outcome. Deregulation is often villainized, but it is important to acknowledge that engaging in it would lead to better results, as in this case with the Trump Administration. We should not allow ourselves to suffer because of the unintentional problems with the rules we created.
Michael del Hierro | Research Assistant | mdelhierro@miners.utep.edu
The views represented here are those of the author and do not represent the position of The University of Texas at El Paso or the Center for Free Enterprise.
