A Senate panel has approved a bill reforming the federal standard for passenger vehicle fuel economy. The bill aims to increase vehicle fuel efficiency over the next 25 years, but a proposal to mandate cost-benefit analysis could undermine meaningful regulation. The bill raises questions as to the limits of cost-benefit analysis in the federal regulatory process.

In 1975, in response to national oil shortages, Congress enacted corporate average fuel economy (CAFE) standards for passenger cars and light trucks. The CAFE program sets a mandatory fuel efficiency rate (measured in miles per gallon) and fines manufacturers who are not in compliance. Manufacturers are evaluated based upon the fuel economy of their entire fleet as opposed to individual vehicles. CAFE standards were widely credited with improving automotive fuel economy in the years immediately following enactment, but progress has since leveled off.

Neither Congress nor the National Highway Traffic Safety Administration (NHTSA), the agency charged with setting standards, has raised the standard of 27.5 miles per gallon since the program's inception more than 30 years ago. As OMB Watch reported in March, legislators from both parties introduced a number of fuel economy reform bills in the 110th Congress's early days.

The first of these bills to move toward a full chamber vote is the Senate's Ten-in-Ten Fuel Economy Act (S. 357), which the Senate Committee on Commerce, Science, and Transportation approved on May 8. The bill's primary aim is to increase the minimum fuel efficiency rate for all passenger vehicles to 35 miles per gallon by model year 2020. The legislation would then require NHTSA to raise the fuel efficiency rate by four percent each year from model year 2020 through model year 2030. The Senate has not yet scheduled a floor debate on the bill.

However, unlike the original CAFE legislation, this legislation would introduce mandatory cost-benefit analysis into NHTSA's standard-setting process. The original CAFE legislation requires federal regulators promulgate the "maximum feasible standard" and instructs NHTSA to consider "economic practicability." The law does not require any formal analysis.

As proposed, the legislation would instruct NHTSA to consider "cost-effectiveness." The bill states "the term 'cost-effective' means that the total value to the United States of reduced fuel use from a proposed fuel economy standard is greater than or equal to the total cost to the United States of such standard." The proposed legislation uses the term "cost-effective" and "cost-effectiveness" repeatedly, but actually would mandate a cost-benefit analysis. The legislation would require NHTSA to prove a new standard's benefits outweigh its costs before regulating.

The introduction of a mandatory cost-benefit analysis raises two concerns. First, the legislation would mark a departure from the status quo. Currently, the national minimum rate for fuel efficiency is a static 27.5 miles per gallon and remains as such regardless of monetized costs or benefits.

Second, the often criticized requirements of cost-benefit analysis are particularly suspect with regard to fuel economy. The legislation would instruct NHTSA to consider a variety of factors in determining "cost-effectiveness," including national security and greenhouse gas emissions. However, the bill does not provide any indication as to how an intangible benefit such as national security should be monetized. Similarly, monetizing "the resulting costs to human health, the economy, and the environment" from greenhouse gas emissions would prove difficult. Subsequently, NHTSA's decision on whether to raise the CAFE standard may be based on inherently flawed estimates.

Critics of cost-benefit analysis point out the results of an analysis often understate benefits due to the difficulty of monetizing intangibles, as is the case with this proposed legislation. In testimony before Congress in February, OMB Watch's Director of Regulatory Policy Rick Melberth stated, "There are certain values we hold dear that cannot be adequately monetized." He went on, "A decision making process that doesn't provide for the expression of these nonquantifiable benefits is critically flawed."

The Senate legislation would still have to wait until a House proposal emerges. It would also have to be reconciled with President Bush's May 14 directive instructing the U.S. Environmental Protection Agency (EPA) and Departments of Energy, Transportation and Agriculture to collaborate on a regulatory plan for cutting automotive greenhouse gas emissions.

The White House issued the directive in response to an April U.S. Supreme Court decision that determined EPA could regulate greenhouse gas emissions under the Clean Air Act. Though Bush claims to prefer a legislative solution, he is proceeding with the regulatory approach, which may allow the White House to pursue its proposal on its own terms. Bush has instructed agencies to complete regulatory actions by the end of the administration, which may allow the White House to combat congressional initiatives and set less stringent standards.