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Aggregating Energy Since 2006

Raise CAFE?

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For those unfamiliar: CAFE = Corporate Average Fuel Economy standards.

The San Francisco Chronicle ran an article encouraging an increased fuel tax rather than increasing the CAFE standards. The point is to reduce greenhouse gas emissions.

Germany found that one way to do that was to impose an "ecotax." To improve fuel economy, Germany simply raised the price of gas with this surcharge.

Countries like France, the Netherlands and Germany already charged around $6 per gallon, but Germany raised the price by an additional 10 cents a year from 1999 to 2003. Germans now pay nearly $6.50 per gallon. The increase was not steep (less than 2 percent per year), but it sent a signal to the market that gas would not be getting any cheaper.

I really like the idea of slowly raising the tax. Schedule it a ways into the future to send messages to the market. Are there major downsides to this approach? The biggest downside may be that the government can always alter the schedule in the future and the market will count on that. Are there other downsides?

By 2004, fuel consumption had dropped by around 7 percent from 1999 levels; 6 percent more Germans were riding public transport; and cars with nearly 80 miles per gallon fuel efficiency hit the market. Yes, 80 mpg. That's not a typo; it's a Volkswagen Lupo. And unlike the two-seater Smart, with 69 mpg, the Lupo (like Audi's classy A2 with 78 mpg) is a four-seater.

Wow. The Lupo seems great. And check out that great green hue.

Of course, many Americans are calling for higher fuel-efficiency standards -- but that's the bad news. These standards are by their very design doomed to failure because efficiency can ironically undercut itself by making consumption cheaper. Think about it: if you could suddenly drive 100 miles longer on one tank of gas, would you drive less or more? When efficiency lowers consumption, demand for energy drops, lowering prices, which in turn undercuts investments in efficiency -- a catch-22 without price mechanisms.

People really don't want to hear about higher prices though. Is there any way to move forward with these policies? I wonder how they did it in Europe ... there can't be an enthusiasm for higher prices there, can there be?