Hidden taxes and even more hidden subsidies

BusinessWeek has a recent article about the new law requiring improvement in automobile and small truck fuel efficiency (“The Road to a Stronger CAFE Standard“). Among other things, the article describes how the law changes the way that the CAFE (Corporate Average Fuel Economy) measurement is calculated. Under the old CAFE calculation, fuel economy is measured separately for each auto manufacturer. Under the new calculation, all manufacturers will be measured together, and a trading scheme is established so that companies beneath the industry-wide average must buy credits from companies that are above the average. Since American auto manufacturers produce a disproportionate share of minivans, pickup trucks, and SUVs (all lumped together as “light trucks”), the American companies are more likely to be on the buyer side of the credit buying while companies like Toyota and Honda will be more likely to be on the seller side of the scheme. Says one guy from the American company perspective,

it’s SUV and pickup buyers who will be stuck with the tab, suggests Chrysler Vice-Chairman Tom LaSorda. “It’s likely to be another big hidden tax on the consumer, as well as small businesses and building trades.”

What BusinessWeek’s writer fails to mention is the other side of the equation: this system also results in a hidden subsidy for buyers of efficient cars. If Honda is selling lots of relatively efficient cars, and therefore is able to sell credits to Ford (which is selling more in the way of trucks), then Honda can hold down the price of the cars while still making the same overall profit. The pressure on Ford that pushes up the price of trucks will be an “equal and opposite” pressure on Honda to hold down the price of their small cars. All in all, it could be a completely neutral system in terms of the overall effect on consumers. Of course, lots of details and corporate decisions might end up making it either more or less than perfectly neutral in the end, but BW’s article is misleading when it only highlights the one side of the equation. On this general concept, see more about “feebate” proposals.

Oh, and by the way, all of Detroit’s (and Toyota’s, the Prius notwithstanding) hemming and hawing about how hard it is to make more fuel efficient is pretty obviously a load of bunk, even if the people doing the hemming and hawing believe their own bunk.