In a recent paper, Gerard and Lave critique an analysis by Kleit and Lutter, and contend that there are sound economic reasons for CAFE. In this paper Kleit argues that Gerard and Lave fail to present any new arguments for the implementation of CAFE standards.

Kleit, Andrew N.

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Research Papers in Economics

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The attached material is posted on regulation2point0.org with permission.  
JOINT CENTER  
AEI-BROOKINGS JOINT CENTER FOR REGULATORY STUDIES 
 
 
CAFE Adieu 
 
 
Andrew N. Kleit 
 
Related Publications 04-14 
July 2004 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The author is Andrew N. Kleit of Pennsylvania State University.  The author thanks Randall Lutter, 
without implications, for his comments. Executive Summary 
 
Gerard and Lave (2004) fail to present any new arguments for the implementation of 
CAFE standards. 
   1
CAFE Adieu 
Andrew N. Kleit 
 
Gerard and Lave (GL, 2004) attempt to critique Kleit and Lutter (2004), who the 
interested reader (if there is one at this point) may recall critiqued Gerard and Lave (2003), who 
had critiqued various papers by Kleit, Kleit and Lutter, and Lutter and other coauthors. 
GL (2004) outline three points.  First, they claim (at 1) that Lutter and I (2004) “do not 
comment on the need” for policies to control pollution and other externalities resulting from 
driving.  I direct GL to the Section II of Kleit and Lutter (2004), “External Effects and Corrective 
Taxes”, and statements therein, such as “a better policy might be to focus on congestion pricing”.   
Second, they assert, without attribution, that security concerns add a $5 to $10 per barrel 
(about 12 to 24 cents per gallon) risk premium to the consumption of gasoline.  This is far from 
new territory.  With respect to such arguments, I stated in Kleit (2002 at 3-4, 2004 at 281) 
 
The [National Research Council’s] $0.12 per gallon estimate for oil import 
[externality] is also subject to criticism.  First, this estimate ignores the benefits 
from specialization according to comparative advantage.  Second, the estimate 
assumes that CAFE changes can have a material influence on worldwide energy 
supply and demand.  Because the United States only has about 26 percent of 
world oil consumption [footnote omitted] however, and there seems to be 
significant elasticity to the supply of oil, the U.S. does not appear to have any 
significant monopsony power in this market.  Finally, it is unclear how reducing 
domestic consumption increases “oil security.”  Oil is traded in a world market, 
implying that it is difficult to insulate the U.S. from price shocks originating 
anywhere in the world.  Reviewing such factors Bohi and Toman (1996) conclude 
that there is no discernible oil import or energy security premium, though this 
question is subject to serious debate.   
 
Finally, GL assert that consumers overvalue sticker price with respect to operating costs. 
As Section IV of Kleit and Lutter (2004), “The Impact of the Discount Rate” indicates, this may 
arise due to consumer credit constraints, as well as  the irrevocable commitment aspect of   2
purchasing an automobile.  While recognizing the possibility of credit constraints, GL contend, 
“[t]he best way to deal with these distributional issues is to give the poor more income.”  But if 
this were somehow to be accomplished (no mean feat), the relevant credit constraints would 
disappear, and so would this particular rationale for CAFE standards. 
Gerard and Lave (2004) fail to present any new arguments for the implementation of 
CAFE standards.   Further, they do not say CAFE yields net benefits.  Indeed, there is no 
connection between their bottom line “[w]e find sound economic reasons for CAFE” and the 
arguments they make.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   3
References 
 
Bohi, D.R., and M. A. Toman, The Economics of Energy Security Kluwer (1996) Boston. 
 
Gerard, David and Lester Lave, “The Economics of CAFE Reconsidered: A Response to CAFE 
Critics and A Case for Fuel Economy Standards,” AEI-Brooking Joint Center on 
Regulation Working Paper 03-10, Oct 2003,  
            http://aei-brookings.org/publications/abstract.php?pid=394. 
 
Gerard, David and Lester Lave, “CAFE Increases: Missing the Elephant in the Living Room,” 
AEI-Brooking Joint Center on Regulation Working Paper 04-11. June 2004, http://aei-
brookings.org/publications/abstract.php?pid=801. 
 
Kleit Andrew N., “Impacts of Long-Range Increases in the Corporate Average Fuel Economy 
(CAFE) Standard,” AEI-Brooking Joint Center on Regulation Working Paper 02-10, 
October, 2002, http://www.aei.brookings.org/publications/abstract.php?pid=284. 
 
Kleit, Andrew N.  “Impacts of Long-Range Increases in the Corporate Average Fuel Economy 
(CAFE) Standard,” Economic Inquiry 42:2 (April 2004) 279-294.  
 
Kleit Andrew N. and Randall Lutter, “Increasing CAFE Standards: Still a Very Bad Idea,” AEI-
Brooking Joint Center on Regulation Working Paper 04-04. June 2004,  
            http://aei-brookings.org/admin/authorpdfs/page.php?id=989. 
 
Lutter, Randall and Troy Kravitz, “Do Regulations Requiring Light Trucks To Be More Fuel 
Efficient Make Economic Sense? An Evaluation of NHTSA’s Proposed Standards”, 
Regulatory Analysis 03-2, AEI-Brookings Joint Center for Regulatory Studies, at 
http://aei.brookings.org/admin/pdffiles/phpsa.pdf, February 2003. 
 
 
 
 

Impacts of Long-Range Increases in the Corporate Average Fuel Economy (CAFE)

Increasing CAFE Standards: Still a Very Bad Idea,” AEIBrooking Joint Center on Regulation Working Paper 04-04.

The Economics of Energy Security Kluwer

CAFE Adieu

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