Automotive Fuel Economy: How Far Can We Go?

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Automotive Fuel Economy: How Far Should We Go?

Impact of Fuel Prices

Traditional American-built cars have been disadvantaged in major foreign markets, such as Japan and Europe, that have used high gasoline taxes to accomplish energy-conservation goals and to raise tax revenues. Because they have evolved under a regime of low fuel prices, American cars have been too large and inefficient to compete, even if the official barriers to their sale in some countries were eliminated. As a result, the European subsidiaries of Ford, General Motors, and (formerly) Chrysler, developed families of automobiles that conformed to the requirements of their host countries. Even though American cars have improved significantly in terms of fuel economy over the past 15 years, they still carry the reputation in foreign markets of being gas guzzlers. In effect, cheap energy has been one factor that has confined American cars to the North American market.

In contrast, Japanese and European manufacturers have exported their vehicles, developed in markets with high fuel prices, to markets throughout the world. Their highly fuel-efficient cars were salable in all countries, whether fuel was expensive or cheap. For example, foreign brands account for about 35 percent of the U.S. market. Whereas American manufacturers have developed separate product lines for domestic and foreign customers, the Japanese and Europeans have been able to sell the same models worldwide, which gives them a significant economic advantage.

Because gasoline prices are higher overseas, it could be easier for Japanese and European companies to introduce costly fuel-saving technologies more quickly throughout the world than for American companies. For example, Toyota has established a policy of reimbursing suppliers 1,000 yen per part or component for every kilogram of weight saved (about $3 a pound). This "bounty" is cost-effective for the Japanese consumer because, at the cost of fuel in Japan, a consumer can recover the resulting increase in the vehicle price through lower expenditures on fuel (U.S. Department of Commerce and Motor Equipment Manufacturers Association, 1990).

Canada has had higher gasoline prices than the United States for more than a decade and currently has gasoline prices about 60 percent higher than in the United States. Canadian fuel economy standards rose from about 19.7 mpg in 1978 to 29 mpg in 1990, compared with 19.9 to 27.8 mpg in the United States over the same period. On August 1, 1991, Canada also enacted the Tax for Fuel Conservation to encourage the purchase of fuel-efficient cars.¹⁸

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Consumers will be paid $100 (Canadian) for vehicles purchased with fuel economy better than 6.0 liters per 100 kilometers (about 39 mpg). The legislation imposes a tax ranging from $75 for cars using 6.0 to 9.0 liters per 100 kilometers (about 39 to 26 mpg) to $7,000 on cars consuming 18.1 liters per 100 kilometers (13 mpg). Sport-utility vehicles are also covered under this law; the taxes range from $75 for vehicles using 8.0 to 9.0 liters per 100 kilometers (about 29.4 to 26 mpg) to $3,200 for vehicles using more than 18.1 liters of fuel per 100 kilometers. The Canadian approach to energy conservation will result in a mix shift through direct encouragement of the public to purchase higher fuel economy vehicles.

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