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]]]]]]]]]] THE EFFECT OF FUEL ECONOMY STANDARDS [[[[[[[[[
ON AUTOMOBILE SAFETY (2/2/1990)
[Abridgement of Robert W. Crandall and John D. Graham, ``The
Effect of Fuel Economy Standards on Automobile Safety'', Journal
of Law and Economics 32(1):97-118 (April 1989). Published by The
University of Chicago.]
[Kindly uploaded by Freeman 10602PANC]
Introduction
In 1975, Congress passed the Energy Policy Conservation Act
(EPCA), which established mandatory fuel economy standards for
all new automobiles sold in the United States beginning with the
1978 model year. These standards, called the Corporate Average
Fuel Economy (CAFE) Standards, were then designed to increase the
incentive for automobile producers to improve fuel efficiency
beyond that dictated by market forces, which were being distorted
by government controls on crude oil and refined products. By the
1985 model year, all automobile producers were to have achieved
at least a 27.5 miles-per-gallon (MPG) rating for their
automobiles.
There has been a lively debate about the effectiveness of the
CAFE program as a conservation measure and about its effect on
the domestic automobile industry, particularly in light of the
sharp decline in real gasoline prices since 1981. However, we
know of no quantitative investigations of the effects of this
policy on other social goals, such as motor vehicle safety. In
this article, we estimate the effects of the CAFE program on the
average weight of new automobiles, the mix of large and small
vehicles sold in the United States, and the ultimate effects of
this new fleet size on vehicle safety. In doing so, we link
economic models of the auto industry with a rich literature on
the effects of vehicle weight on the susceptibility of occupants
to injury and death. Our new empirical results suggest that CAFE
will be responsible for several thousand additional fatalities
over the life of each model-year's cars. We conclude that the
real social cost of government-mandated fuel economy is much
greater than is commonly believed.
The CAFE Program
Under the CAFE program, all automobile producers with sales
in the U.S. market must meet a minimum average fuel-efficiency
standard, defined as a harmonically weighted average of the city
and highway EPA mileage ratings, for all their cars. Companies
that produce in the United States and import from other countries
must satisfy this standard separately for their imported and
domestic models.
The fuel-efficiency standard was set in legislation at 18 MPG
for the 1978 model year, rising to 27.5 MPG by the 1985 model
year. The Department of Transportation (DOT) was responsible for
setting the precise level of the standard for the 1981-84 model
years and for 1986 and beyond. In addition, DOT may adjust the
standards for changing conditions (such as changes in
technological or economic feasibility). Failure to meet the
standard results in civil penalties of $50 per MPG per car
produced. Were General Motors to fail to meet the 1987 or 1988
standard by just 1.0 MPG, for example, the company could be
subject to penalties of $200 million per year or more.
The sharp rise in gasoline prices after the Iranian revolution
provided automobile producers with sufficient market incentives
to meet and even exceed the CAFE standards through 1981. All
three major U.S. producers exceeded the standards by a wide
margin (Table 1 [omitted]), building up credits that they could
carry over for three years to cover any future shortfalls. As
gasoline prices began to fall after 1981, the CAFE standards
began to bind. By 1983 Ford and General Motors began falling
short of the standard. At first they could use credits
accumulated prior to 1983, when they exceeded the CAFE standard,
to offset these shortfalls. By 1985, however, it was apparent
that their shortfall for 1986 would be very large, inducing them
to petition the Department of Transportation for a relaxation of
the standard to 26 MPG, which was granted. In a subsequent
revision, the 26 MPG standard was extended to the 1987-88 model
years.
With real gasoline prices in 1988 as low as in the pre-OPEC
era, pressure has been mounting for a revocation of the CAFE
program altogether. Although the Reagan administration appeared
to support revocation, resistance in Congress was substantial.
Because CAFE is a program of trade restriction, some Congressmen
from automobile-producing areas may be loathe to eliminate it.
Since CAFE forces U.S. manufacturers to meet a fuel-efficiency
standards for their domestic production alone, CAFE discourages
them from importing low-cost small cars from Asia or Eastern
Europe even though such a strategy may provide automobiles at the
lowest cost to U.S. consumers. To meet CAFE while producing
larger cars, they must produce small cars in the United States.
CAFE is more of a burden to Ford and General Motors than to
Chrysler, since Chrysler has moved away from the production of
large cars. This has lead Chrysler to support the CAFE program
aggressively while Ford and General Motors (GM) seek relief from
it. Further support comes from those who fear a sharp rise in
gasoline prices in the next decade and thus see CAFE as a prudent
conservation policy.
Unfortunately, little attention has been focused on another
aspect of the CAFE program. Fuel efficiency is most easily
improved by reducing vehicle weight, but lower-weight vehicles
tend to provide less crash protection to vehicle occupants than
larger, heavier cars. In theory it may be possible to build
lighter cars without compromising safety, but analysts have shown
that the ``downsized'' vehicles of the late 1970s and early 1980s
are less safe in crashes than the heavier cars they replaced. As
a result, by inducing U.S. producers to offer lighter cars, the
CAFE program may be increasing the number of deaths and injuries
on U.S. highways compared to the number that would occur without
CAFE. This is a real social cost of pursuing fuel efficiency
that policymakers have been reluctant to acknowledge. Indeed,
the federal agency that administers the CAFE program, the
National Highway Traffic Safety Administration (NHTSA), has done
little to inform legislators and the public about the potentially
adverse safety effects of CAFE.
The Effects of CAFE on Vehicle Weight
Since planning, designing, engineering, and tooling a new
model require at least four years, automobile manufacturers must
begin to plan to meet future CAFE standards based upon extremely
uncertain forecasts of the level of gasoline prices in the years
in which a model is actually sold. Moreover, they cannot know in
advance how well any line of vehicles will survive in the
marketplace. Thus, it is very likely that the average level of
fuel efficiency realized in an automobile producer's full line of
automobiles in any given year at its expected selling prices will
deviate substantially from its plan. If the deviation is
positive, the manufacturer may simply accumulate CAFE credits for
future use in the event of shortfalls -- such as those GM and
Ford have encountered since 1983. But if the deviation is
negative at planned prices, the manufacturer may elect to raise
large-car prices or large-engine option prices and lower the
prices of smaller, less powerful (and, therefore, more
fuel-efficient) cars.
In short, it is the manufacturer's expectations of fuel prices
and CAFE approximately four years in advance of the vehicle's
production that is likely to influence the engine and
vehicle-weight choices for individual models. Once these choices
are locked in, the manufacturer can only use prices (or nonprice
rationing) to meet CAFE if he finds that his planning has left
him short of the standard, or he can petition for a reduction in
the CAFE standard.
Much of the practical effect of CAFE in vehicle design has
been upon the weight of automobiles. The design of
transmissions, the choice of ignition and fuel-injection systems,
tires, and engine oils have all been affected by CAFE, but
empirical analysis of the effect of all of these ``technical
design'' factors on CAFE suggests that they are only slightly
more important than weight reduction. Through materials
substitutions, improved design, and reduction of interior volume,
manufacturers have greatly reduced vehicle weight and increased
fuel efficiency. As Table 2 [omitted] demonstrates, the average
U.S. automobile has undergone a 23 percent reduction in weight
since 1974. With this reduction in weight, an even greater
proportional reduction in engine size has occurred. The combined
effect of these two reductions on fuel economy has been to raise
MPG by about 24 percent.
[Remainder of page 101 omitted; pp 102-109 omitted; part of p.
110 omitted. The omitted pages explain the author's model and
the ways they estimated the values of the various parameters.]
The Effect of Vehicle Weight on Safety
In research performed over the past fifteen years, traffic
safety analysts have found that occupants of lighter cars incur
an elevated risk of serious injury and death in crashes compared
to occupants of heavier cars. This statistical association has
been demonstrated for both single-vehicle and multivehicle
crashes. ``Weight'' is chosen as the independent variable in
these investigations because it is both easily measured and
strongly correlated with other vehicle attributes such as
wheel-base, track, ``size'' in general, hood length, trunk size,
and engine displacement. Although the precise physical
mechanisms by which weight (or its correlates) affect safety are
not fully understood, the negative relationship between weight
and occupant fatality risk is one of the most secure findings in
the safety literature.
The most sophisticated research on the weight-safety
relationship has been performed by Leonard Evans at General
Motor's Research Laboratories. Based on a statistical model of
car mass and real-world fatal crashes that holds driver behavior
constant, Evans reports an empirical relationship of the form
L(m) = a * exp(-0.00106 * m), (4)
where L(m) is the relative likelihood of fatality in a car of
mass m (in kilograms). Using this equation, we calculated that
the 500-pound reduction in the average weight of 1989 cars that
is attributable to CAFE is associated with roughly a 27 percent
increase in occupant fatality risk.
This estimate should be regarded as an upper bound on the
adverse safety effects of CAFE because it assumes that drivers of
lighter cars do not realize the additional dangers and take
precautionary responses. Some evidence reported by the Opinion
Research Corporation and Winston et al. suggests, for example,
that occupants of lighter cars are more likely to wear safety
belts than occupants of heavier cars. To account for the
possibility of behavioral response, Evans reported results of an
alternate statistical model that predicts the net effect of both
vehicle size and behavioral responses on fatality risk. His
estimated equation is of the form
L(m) = a * exp(-0.00058 * m). (5)
Using this equation, we calculated that CAFE is responsible for a
14 percent increase in occupant fatality risk in 1989 cars. In
other words, drivers (and passengers) appear to offset about half
of the physical disadvantages of lighter cars through various
types of behavioral responses (for example, enhanced
maneuverability and increased use of seat belts).
Our rough estimate is therefore that the 500-pound or 14
percent reduction in the average weight of 1989 cars caused by
CAFE is associated with a 14-27 percent increase in occupant
fatality risk. This range does not account for a variety of
second-order effects of CAFE on safety. First, if CAFE curtails
overall car sales (as some evidence suggests is the case), that
means that the older and predominantly heavier cars will stay on
the road longer. Although that outcome might seem good for
safety, one must also consider that the oldest cars in the fleet
are not equipped with a variety of safety features (some mandated
by NHTSA) that were initiated in the 1965-1975 period. Several
studies have found that these safety features were quite
effective. We assume that these two effects cancel each other.
Second, our rough estimates are based on models of the
weight-safety relationship for single-vehicle crashes -- which
NHTSA reports account for about one-half of occupant fatalities.
We have not performed separate calculations of the effects of
lighter cars on fatalities in multivehicle crashes. Since the
``weight effect'' estimated by Evans is somewhat larger for
multivehicle crashes, this omission will cause us to
underestimate the overall adverse safety effects of CAFE.
We are aware of only one line of reasoning that has been
advanced that might undermine our result that CAFE is responsible
for a substantial increase in occupant fatality risk. In their
regulatory analysis of CAFE, NHTSA reports that the number of
passenger car occupant deaths in the United States has been
declining since 1980, even though the average weight of cars on
the road has been declining. They infer that the CAFE program
must not be a significant detriment to safety. We question this
line of reasoning. First, NHTSA analysts have shown that the
number of passenger car occupant fatalities declined during this
period because of the 1980 and 1982 recessions and the national
campaign against drunk driving. Second, the mere retirement of
older, less safe cars should have reduced the fatality rate
substantially. We submit that the decline in car occupant
fatalities from 1980 to 1985 might have been more dramatic had
CAFE not been in effect. Finally, the NHTSA analysis fails to
address the fact that other variables -- such as rising real
incomes -- tend to depress fatality rates over time. The motor
vehicle fatality rate has been declining for decades for just
this reason. [remainder of p. 112 omitted.]
[pp. 113-114 omitted. Part of pp. 115 omitted. The omitted
pages describe certain checks on the model.]
Quantifying the Omitted Social Cost of CAFE
To provide a national estimate of the safety-related costs of
CAFE, we forecasted the fatality toll for just one year's
production over an expected ten-year life of these cars. This
provides a clean analysis that ignores the effect of CAFE on the
mix of older cars on the road. If CAFE induces manufacturers to
offer smaller cards and greater fuel economy than an unregulated
industry would offer, it will undoubtedly lead to some
postponement of the replacement of older, larger cars. These
older cars are less safe than newer models of the same weight but
may be more crashworthy than the prospectively smaller 1989 cars.
We simply ignore these second-order transitional effects of CAFE.
In calendar year 1985 there were about 25,000 car occupant
fatalities in a fleet of 130 million vehicles, which translates
into 1.9 fatalities per 10,000 cars. If we assume that a model
year of car sales averages about 11.2 million, and if these cars
experience this fatality rate through their ten-year life, and if
4 percent of the remaining 1989 models are scrapped each year,
there will be a total of 17,800 fatalities in these cars.
Without CAFE we estimate that the fatality toll would be much
smaller, 13,900-15,600. In sum, CAFE is estimated to be
responsible for 2,200-3,900 excess occupant fatalities over ten
years of a given model years' use.
It is plausible to believe that the inverse relationship
between car weight and safety also holds for serious nonfatal
injuries. NHTSA (1985) estimates that the frequency of ``serious
nonfatal injuries'' among car occupants is about five times
larger that the frequency of fatalities. Hence we estimate
that CAFE will also be responsible for an additional
11,000-19,500 serious nonfatal injuries to occupants of the
prospective 1989 model cars. A ``serious'' injury is defined as
a score of 3 or greater on the American Association of Automotive
Medicine's (six-point) Abbreviated Injury Scale. Typical
``serious'' cases include compound fractures and internal organ
injuries.
These adverse safety outcomes can be converted to dollars by
using market estimates of the value of safety. At a conservative
value of $1 million per statistical life and $20,000 per
statistical injury, the adverse safety effects of CAFE translate
into a social cost of $2.4 to $4.3 billion over the life of 1989
cars. Assuming a real discount rate of 5 percent, the present
value of CAFE's safety costs equals $1.9 to $3.4 billion for the
assumed ten-year life of 1989 model-year automobiles.
A Cost-Benefit Calculation
We have estimated that abolition of the CAFE program (with
sufficient lead time) would have led to a 500-pound increase in
the average weight of a 1989 model-year automobile and a
reduction of 2,200-3,900 fatalities over a ten-year life of these
cars. These lighter cars would, however, consume less fuel over
this ten-year period, thereby offsetting some of the welfare loss
of the higher vehicle fatality rate.
A 500-pound increase in average vehicle weight represents a
16.1 percent increase in weight of 1989 model year cars.
Crandall et al. found that the elasticity of MPG with respect to
weight is between 0.7 and 0.8; therefore, MPG would have been
11.3 to 12.9 percent lower and the cost per mile would have been
12.7 to 14.8 percent higher without CAFE for 1989 automobiles.
Most estimates of the long-run elasticity of demand for
vehicle-miles traveled are clustered around -0.50. As a result,
we may conclude that total travel in 1989 automobiles would have
been about 6.4-7.4 percent less without CAFE, all other things
being equal. The effect on annual gasoline consumption would be
equal to 1.076-1.087 times the consumption with CAFE in place.
In short, CAFE saved 5.5-6.3 percent of gasoline consumed by 1989
models.
Assuming a 5 percent real social discount rate, an annual
consumption of 500 gallons per 1989 model per year with CAFE, and
a price of gasoline equal to $1 per gallon in 1989, the present
value of the gasoline saved by CAFE over ten years (assuming
constant real gasoline prices) would be $2.4-$2.8 billion for all
11.2 million cars sold or $1.8-$2.2 billion for all 1989
automobiles except the Japanese imports that are presently not
affected by CAFE. In short, the savings of gasoline are not
significantly larger than our estimate of the lost value due to
increased highway injuries and fatalities.
Further Considerations
It is not our purpose to provide a full cost-benefit analysis
of the CAFE program, but we cannot leave the reader with the
impression that the appropriate measure of the social value of
CAFE is the difference between fuel saved and the added costs of
reduced highway safety. Obviously, the CAFE program forced
vehicle manufacturers to invest more resources in developing fuel
efficiency than 1985 gasoline prices warranted. Indeed, we have
shown that it was CAFE, not the price of gasoline that drove
average MPG in the 1978-1985 period.
The excessive investment in fuel efficiency added
substantially to the social cost of CAFE. In Crandall et al.,
the elasticity of vehicle cost with respect to MPG was estimated
to be approximately 0.35. In a 1977 analysis of the prospective
compliance costs of CAFE, the Department of Transportation
estimated that raising average fuel economy from 20.5 to 27.6
would cost between $362 and $407 (1977 dollars) per car, or about
6.0-6.6 percent of the average price of a car in 1977. This
suggests a cost elasticity with respect to MPG of between 0.16
and 0.18. Even using this lower ex ante estimate, the excess
compliance costs of CAFE may be estimated to be 0.6-0.7 [percent]
of the cost of a passenger car for each additional MPG. At a
price of $15,000 per car, the cost of each MPG for a given model
year's cars is $1 billion. In short, the search for technologies
to meet CAFE can be very expensive and easily swamp the fuel
savings generated by CAFE.
The CAFE program also resultults in a mix of cars that is less
desirable than that which would be produced for 1985 gasoline
prices, thereby reducing the number of vehicles sold. This, in
turn, translates into a deadweight loss since society foregoes
the additional output that is valued above the incremental costs
of production. And this reduction in new vehicles creates
another social cost -- the extension of the useful life of older
cars that are less safe and create more pollution than newer
models. In short, the full costs of the CAFE program are likely
to be considerable even if one excludes the direct safety effect.
Conclusion
Earlier analyses of the effects of fuel-economy regulation
have missed an important point. Fuel economy regulation
inevitably leads to smaller, lighter cars that are inherently
less safe than the cars that would be produced without a binding
fuel economy constraint. We have shown that even if the pursuit
of fuel economy were costless to producers the cost of the added
loss of life and serious injury from traffic fatalities would
more than offset its benefits in reduction of gasoline
consumption for 1989 model year cars. We estimate that these
1989 model year cars will be responsible for 2,200-3,900
additional fatalities over the next ten years because of CAFE.
Thus, when any discussion of energy conservation focuses on the
externalities in energy consumption, we would suggest that all
such externalities be included. When safety considerations are
included, CAFE appears to be a very costly social policy.
* * *
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