Taxes

Energy Efficiency Mandates Are Worse for Poor Americans Than Energy Taxes

Energy taxes are obvious to voters, while the effects of energy efficiency standards are sneakier

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When U.S. automakers met with President Donald Trump this week, they asked him to relax the vehicle fuel efficiency standards imposed by his predecessor. Just before Barack Obama left office, the Environmental Protection Agency issued a final determination that its Corporate Average Fuel Efficiency (CAFE) standard of requiring fleet-wide fuel efficiency of 50.8 miles per gallon on new cars by 2025 was achievable. "At every step in the process the analysis has shown that the greenhouse gas emissions standards for cars and light trucks remain affordable and effective through 2025, and will save American drivers billions of dollars at the pump while protecting our health and the environment," said outgoing EPA head Gina McCarthy.

Ratcheting up the mandatory energy efficiency standards for vehicles and appliances was a major part of Obama's effort to reduce greenhouse gas emissions. The Department of Energy calculated that the Obama administration's energy efficiency standards would save consumers more than $520 billion on electricity costs by 2030.

But not all consumers are alike. In a new study contrasting the effects on consumers of energy efficiency standards versus energy taxes, the Georgetown economist Arik Levinson notes that both energy efficiency standards and energy taxes function as a regressive tax, taking a larger percentage of a lower income and a smaller percentage of a higher income. His analysis aims to find out which is more regressive—in other words, which is worse for poor Americans.

Levinson cites earlier research that estimates a gasoline tax would cost 71 percent less than the comparable CAFE policy per gallon of fuel saved. Meanwhile, a 2013 study calculates that CAFE standards cost more than six times as much as a corresponding gas tax for the same reduction in fuel consumption. In other words, if policy makers want people to use less fuel and drive more fuel-efficient cars, taxing gasoline is a much cheaper way to achieve that goal than mandating automobile fuel efficiency. Levinson concludes that "efficiency standards are, ironically, inefficient."

But would energy taxes be more regressive? Many analysts argue that while both hit low-income Americans, energy efficiency standards whack them less. Levinson disagrees.

Levinson argues that energy efficiency standards can be treated analytically as an equivalent to a tax on inefficient appliances and vehicles. Using data from 2009 National Household Travel Survey, he compares the amount of gasoline consumed by Americans at various income levels. The poorest 5 percent (with annual incomes of under $10,000) consume an average of 247 gallons per year; for the richest 20 percent (over $100,000), the average is 991. Assuming a gasoline tax of 29 cents per gallon, the poor pay $71, compared to $286 per year for the wealthy. Families with 10 times the income pay only four times more in fuel taxes.

At the outset Levinson cites research that rejects the notion that consumers are shortsighted when it comes to purchasing more expensive vehicles and appliances that will save them money in the long run. Levinson compares the consequences of a 29 cent per gallon gas tax with a notional CAFE standard "tax" on inefficient vehicles that would raise the same amount of revenue. Rich folks own more and larger vehicles and drive more miles than do poor Americans, so they would pay more in either gas taxes or CAFE "taxes."

Another wrinkle makes CAFE standards even more regressive. In 2012, the Obama administration set CAFE footprint standards based on vehicle size, determined by multiplying the vehicle's wheelbase by its average track width. Basically, a vehicle with a larger footprint has a lower fuel economy requirement than a vehicle with a smaller footprint. The footprint standard means that gas guzzlers like full-sized Cadillacs now can more easily meet their footprint standard than can smaller Sonics.

Recall that under a 29-cent gas tax, the richest Americans pay an average of $286 a year and the poorest pay $71. Under the earlier CAFE standard, Levinson calculates that the richest would pay $259 annually and the poorest would pay $91. That's not paying four times more; it's paying less than three times more. And what happens when you take the higher costs of the new footprint standards into account? The poor pay an implicit CAFE tax of $175 per year, compared to $237 for American households with annual incomes greater than $100,000. Over time CAFE standards are becoming ever more regressive.

Levinson then turns his attention to appliance and building standards. The average incomes of households that have adopted energy efficiency features—double- and triple-paned windows, compact fluorescent light bulbs, and Energy Star washers, refrigerators, dishwashers, and air conditioners—are about 30 percent higher than those that have not. Because Levinson cannot find data on household energy use relative income, he can't calculate the implicit energy efficiency tax on each household, but he suggests that appliance and building code standards would be as similarly regressive as vehicle standards.

Perhaps outgoing EPA chief McCarthy is right that energy efficiency standards will save Americans billions more in fuel costs than they have to pay for more expensive vehicles, although that conclusion is contested. What Levinson has shown is that a far greater share of whatever benefits those mandates yield will go to the richest households. Given the lopsided effect on poor households, Levinson has made a strong case that straight up energy taxes would hurt them less than energy efficiency mandates.

Levinson does not speculate on why politicians and advocates tend to favor energy efficiency mandates over energy taxes, but I will. Energy taxes are obvious to voters, while the effects of energy efficiency standards are sneakier. The latter allow cowardly politicians to avoid telling their fellow citizens that they'll pay more for the privilege of consuming energy.