February 14, 2003

Light Truck Average Fuel Economy Standards Model Years 2005-2007

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Light Truck Average Fuel Economy Standards Model Years 2005 – 2007

Stated Purpose:

"Establishment of corporate average fuel economy standards for light trucks, pursuant to 49 U.S.C. chapter 329, manufactured in model years (MY) 2005 through 2007"

Summary of RSP Comment:

The National Highway Traffic Safety Administration proposes to establish corporate average fuel economy standards for light trucks at higher miles per gallon than the market would offer, or consumers would choose, in the absence of the regulation.

NHTSA’s economic model shows large net benefits to consumers even if markets are assumed to operate perfectly, i.e., without counting any externalities. We know this must be false, because the fundamental premise of benefit-cost analysis is that all benefits and costs must be valued according to the consumers’ own preferences. Any regulatory constraint that forces consumers away from their preferred choices must have negative net benefits. NHTSA’s results prove that its model must be wrong.

The most obvious flaw is NHTSA’s use of a 7 percent discount rate, which simply substitutes the government’s preferences for consumers’. An honest benefit-cost analysis cannot just set aside individual preferences, such as the discount rate; nor can it ignore them, as NHTSA’s analysis does with other vehicle attributes that consumers value.

Instead, NHTSA should validate its model by demonstrating that any binding level of fuel economy standards will produce negative net benefits. Once it has done that, it can introduce market failures-the alleged external benefits of increased energy security and reduced fuel use-and try to determine if these external benefits might be of sufficient magnitude to overcome the net loss to consumers and justify mandatory standards. Our analysis suggests that this is unlikely, however. The premiums NHTSA has identified for "energy security" are small, and it is questionable whether they really represent externalities.