How Green Regulations Helped Create the SUV: Well-intentioned regulations can create adverse unintended consequences

Ben Eisen, Commentary, Environment, Uncategorized

 

In light of the new vehicle fuel efficiency standards set by U.S. President Barack Obama (and matched here in Canada), and the volatile fuel prices of recent years, some automobile market observers have declared the imminent death of the SUV. “It’s about time,” said a representative of the Sierra Club back in 2005 when SUV sales first began to decline “you wonder what people were thinking.” For the Sierra Club and like-minded groups, SUV sales can’t decline quickly enough.
 
Instead of popping corks and celebrating the possible end of the SUV boom, it would be more constructive for groups like the Sierra Club to consider the origins of the SUV boom, in which, ironically, they played an important role. Because what “people were thinking,” when they bought SUV‘s was partly the result of the unintended consequences of fuel economy standards supported by the environmentalists themselves.
 
In the 1970s the United States began enacting “Corporate Average Fuel Economy” (CAFE) standards for new vehicles. These laws effectively applied to Canada as well, where the government harmonized Canadian efficiency standards with U.S. regulations.
 
The CAFE standards had a perverse effect: they made certain kinds of cars, such as the family station-wagon, uneconomic for automakers to produce within the constraints of the fuel economy standards. But many people – especially those with children- still wanted large vehicles. So they bought vans or light trucks subject to looser fuel standards. Over time, those choices led to the development of environmentalist nightmares: the minivan and the SUV. Because they were required to be very big in order to qualify as light trucks, the new minivans and SUVs generally had substantially worse mileage than the station wagons that they replaced.
 
This story has important lessons for policymakers.  The social, economic and environmental systems into which regulators intervene when they pass laws like CAFE standards are incredibly complex. That means it is often impossible to predict all of the the consequences of the intervention. Often, actors in complex systems will respond to the new constraints in unpredictable ways that thwartthe intentions of the regulators.
 
Of course, the regulators could have drafted “smarter” regulations that prevented the development of “light trucks” designed to circumvent the law. However, a series of other undesirable, unintended consequences would still have occurred. For example, it is now well-documented that improvements in fuelefficiency have generally led to a “rebound effect” in which consumers took advantage of the fact that driving was suddenly made cheaper by doing more of it. Some of the fuel-saving effects of better gas mileage were therefore offset by increased driving. Additional traffic congestion is another unintended consequence that results from this “rebound” effect.
 
Still more seriously, carefully analyses performed by economists at Harvard University and the National Academy of Sciences showed that in an effort to meet the new regulations, manufacturers built lighter cars in which passengers were less likely to survive a crash.  The regulations had effectively forced manufacturers to build less safe cars, leading to more than 1,000 additional highway deaths per year in the United States (no estimates were given for Canada).
 
The SUV boom was just one unintended consequence of fuel economy regulations (but there were others). In general, it is unreasonable to expect that a “smarter” regulatory approach will allow governments to identify and address all problems. That reality is why the law of unintended consequences, like death and taxes, will always be with us: the systems into which governments interject are complicated. They are so complex that it is beyond the capacity of human intelligence to fully understand their workings and predict the consequences of an intervention.
 
Many of the people most excited about the possible demise of SUVs are also the greatest proponents of aggressive government regulation and tight controls over economic activity to ensure positive environmental outcomes. But heavy-handed interventions often backfire. The SUV may never have risen to popularity if not for the actions of the same hyper-regulation proponents who now celebrate its decline.
 
Environmentalists would do well to learn a bit of humility, and perhaps some ancient wisdom from the Chinese philosopher Lao Tsu: “Govern a great nation as you would cook a small fish. Do not overdo it.”