CAFE vs. Pigou

An interesting issue brief written by the Congressional Budget Office was brought to my attention by the great Harvard economist, Greg Mankiw. This article compares the costs and benefits of both CAFE standards and Pigovian taxes.

This issue brief focuses on the economic costs of corporate average fuel economy (CAFE) standards and compares them with the costs of a gasoline tax that would reduce gasoline consumption by the same amount. The Congressional Budget Office (CBO) estimates that a 10 percent reduction in gasoline consumption could be achieved at a lower cost by an increase in the gasoline tax than by an increase in CAFE standards. Furthermore, an increase in the gasoline tax would reduce driving, leading to less traffic congestion and fewer accidents. This analysis stops short of estimating the value of less congestion and fewer accidents and, therefore, does not draw any conclusions about whether an increase in the gasoline tax would be warranted. However, CBO does find that, given current estimates of the value of decreasing dependence on oil and reducing carbon emissions, increasing CAFE standards would not pass a benefit-cost test.