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#2. Varun Sivaram: Stay the Course on CAFE & Reap the Benefits

09.26.16 | Podcast | By:

Recently I talked to Varun Sivaram, Douglas Dillon Fellow and Acting Director of the Program on Energy Security and Climate Change for the Council on Foreign Relations. Sivaram, an expert in clean energy technology, and his colleague, Michael A. Levi modeled the costs and benefits of the CAFE program as proposed in a paper released earlier this year.

They modeled the costs and benefits of the regulation under lower oil prices than Barack Obama’s administration assumed when, in 2011, it enacted rising standards through 2025.  What they found was that the stringency of the standards, as currently planned, can maximize net benefits to society even under lower oil prices, assuming that U.S. government estimates of the costs of efficient technologies are correct.

Moreover, Sivaram and Levi identified three benefits that federal agencies did not previously consider that make stringent CAFE standards attractive even under low oil prices and found that climate change risks are more significant in justifying strong CAFE standards than they were in 2011. These benefits were identified in the paper as:

  • Insurance from reducing uncertainty: People dislike uncertainty and are typically willing to pay to reduce it. By reducing fuel consumption, CAFE standards reduce uncertainty of fuel expenditures, and the average, risk-averse consumer may value this benefit at around 20 percent of the distinct fuel savings benefit.
  • Option of further standard escalation: Because fleet-wide fuel economy hikes must be paced, higher standards create an “option” to escalate standards to an even higher level if higher fuel price s justify higher standards. Option value can be roughly 10 percent of the fuel savings benefit of CAFE standards.
  • Fuel savings through monopsony power: Lower domestic fuel consumption can decrease the world oil price because the United States is a major oil consumer. In addition to consuming fewer gallons of fuel and saving money on those gallons, then, CAFE helps Americans save money on the gallons of fuel they still do consume. This could increase the net benefits of CAFE standards by nearly 10 percent.

CAFE Standards Suffer from “Policy Inertia”

I talked to Sivaram recently about the paper and among other questions, I asked whether he thought the standards could be relaxed, maintained or even strengthened.  He said, referencing the finding in the paper about further standard escalation, that:

“CAFE standards suffer from a kind of policy inertia. Once you set them, they kind of continue in that direction for a long time. For example, in the 1980s when oil prices fell, Congress actually decreased the standards and they stayed at a depressed level for the next two decades.  Moving forward, we don’t want to make that same mistake. Relax the standards now and they’ll continue to drift for decades.”

But he acknowledged that relaxing the standards could be a possible outcome, depending on the election:

“I do think that relaxing the standards is a possible outcome, especially depending on the outcome of this election. The Midterm Review is going to be concluded under the next Administration. So depending on who is the president, we may or may not see relaxation of the standards. But the second question is, could the program design be modified so that in fact, there is a mandated fleet-wide average fuel economy. That is going to be something that is going to have to be carefully discussed with all the stakeholders because the current formulation that allows carmakers to only meet certain mileage targets within a particular footprint, and that is designed to protect consumers who want to buy larger cars.”

Reaction to the Paper

I asked him what the reaction has been by government and industry to the paper:

“It’s been widely read within the government and by the industry. I hope that this paper can help catalyze a conversation about changing the methodology for including a more expansive set of benefits because this policy does in fact deserve serious consideration. Moving forward, I just want to continue having conversations to help make sure this has policy impact.”

Listen to the podcast and learn more about the paper and what Sivaram thinks about the future of fuel economy in the U.S.

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