Setting the Standards

How subjective choices in a quantitative analysis can radically change policy choices

By Molly Kendall

Most policy makers recognize the inherent flaws associated with cost benefit analyses; they require all costs and benefits to be monetized, they can be incredibly sensitive to small changes in data, and they are often used out of context to justify a wide variety of proposals. However, they remain the primary tool of policy evaluation. Even if estimates are biased, attempting to quantify costs and benefits is critical to understanding whether policies should be enacted and these analyses should be reviewed with a critical lens.

In August of 2018, the Trump Administration announced their plan to freeze the Corporate Average Fuel Economy Standards (CAFE standards) at their current level, halting the Obama Administration plan to ramp up standards over time. The announcement was the result of a new analysis that predicted a high social cost of increasing the standards. The discrepancy between the two analyses illustrates how relatively subjective decisions can vastly alter research conclusions. Prudent policy makers must be able to dig into these analyses and critique every choice made by the researchers. Thorough analysts must provide robust sensitivity analyses to reveal how different approaches and assumptions affect outcomes.

Obama Era: Aggressive Goals with a Long Timeline

A key component of all Obama-era environmental policies was the social cost of carbon. For fuel economy standards, the cost of carbon defines the benefit of reducing carbon emissions from vehicles use in the U.S. The use of Integrated Assessment Models (IAM) led the Obama administration to calculate carbon’s social cost as $40/ton. This means each ton of carbon abated would be worth $40 in benefit to society. The administration then evaluated the marginal costs of improving fuel efficiency for car manufacturers based on available technology, as well as the capacity for new technology to be developed in the coming years.

The result of Obama-era calculations was a relatively aggressive standards timeline with the goal of a fuel efficiency of 54.5 miles per gallon or greater by 2025 for all cars and small-load trucks. For context, when the plan was announced in 2011 the passenger car standard was about 30 miles per gallon. Thirteen major automakers stated their support for the standards, which considered firms’ costs and provided a reliable, long-view timeline around which firms could plan. Environmentalists and economists who analyzed the true impact on carbon emissions noted that the reduction would be modest. The greater achievement, many argued, was initiating momentum in the automotive industry to encourage the development of new technologies that would reduce pollution and prime the regulatory space for more dramatic environmental policies in the future.

Conservative critics of the Obama-era standards voiced three main concerns which would later inform the Trump-Era adjustments. First, they claimed that the social cost of carbon was set too high, and forced undue costs on the auto industry. Second, many argued that the Obama-era calculations underestimated the rebound effect — the phenomenon that when consumers have more fuel efficient cars they will drive them more frequently — and its impact on emissions. The size of the rebound effect is a predicted value that would mitigate the benefits of a fuel efficiency policy. Finally, strict free-market advocates expressed fears that the standards would make new cars more expensive for consumers and decrease profits for firms. These concerns highlighted relatively subjective choices the Obama administration had made throughout the analysis, and foreshadowed how a conservative administration would adjust certain figures.

Trump-Era: Lax Standards to Minimize Costs

In contrast to the Obama-era rules, the Trump administration’s proposal would freeze the standards at the 2021 level (around 46 miles per gallon), rolling back the 2025 deadline for dramatic changes. One of the most important differences between the Obama-era standards and the Trump Administration’s plan is the calculated social cost of carbon. In contrast to Obama’s $40/ton estimate, the Trump administration has priced carbon at just $5/ton.This discrepancy is due in large part to the higher discount rate employed by the EPA under the new administration. By increasing the discount rate, the Trump administration reduced the value of benefits accrued in the future and, by extension, reduced the value of implementing aggressive environmental policies today.

The Department of Transportation also made major shifts in its calculations of the marginal costs of a fuel efficiency standard. First, it nearly doubled the estimated rebound effect from the Obama-era rules, reducing the predicted benefits of the fuel economy mandate by assuming that drivers would drive more in response to the policy. Additionally, they made a bold claim that the Obama-era rules would make cars so expensive for consumers, that they would continue to use older, less safe cars. They drew a direct connection between this predicted average increase in the age of cars on the road to an increase in traffic fatalities. These additional costs led to a definitive conclusion: the cost of the Obama-era rules far outweighed the benefits.

Environmentalists and economists alike were quick to disparage the new proposal. While the Obama-era numbers could be disputed on the margins, many agreed the Trump Administration’s calculations contained serious errors. One of the economists cited throughout the Trump administration’s analysis later claimed his data was “cherry-picked”. He stated that the administration’s $2,000/vehicle cost of compliance was inaccurate, and the direct translation of older cars to higher fatalities was a sloppy interpretation of his research. Indeed, many economists claimed that the analysis bore tell-tale signs of calculations designed to reach a desired policy conclusion. An independent analysis by Resources for the Future estimated that the updated rules would increase emissions by about 538 million tons of CO2 equivalent during the lifetime of vehicles produced between 2021 and 2025. This figure is dwarfed by overall emissions in the transportation sector, but the authors of the analysis note that perhaps the more important impact will be the slowing momentum for environmental policies and diminished interest in developing more fuel efficient technologies.

Looking Forward: Trust the Experts

The stark contrast between Obama-era and Trump-era standards for fuel efficiency demonstrate the challenges for policy makers when it comes to environmental policy. While both administrations have used economic calculations to find the most beneficial standard, the resulting proposals are dramatically different. The discrepancy highlights the importance of independent and diverse analysis of regulatory proposals. Policy makers must be prepared to critique economic analysis based on their assumptions and priorities. Furthermore, researchers must do their due diligence to provide consumers of their analyses with a robust investigation of alternative assumptions. Revealing how sensitive these analyses are to certain choices can weaken the conclusions, but it is an important part of research transparency.

Photo by John Dusseault on Flickr

Molly Kendall is a second year masters student at the Gerald R. Ford School of Public Policy. Molly studied psychology and government at Colby College in Maine. She is particularly interested in the overlap between behavioral science, economics and public policy.