American fuel economy standards have a bunch of offsetting effects. If you’re going to be in an accident, you’re safer in a bigger vehicle, but you’re also increasing the risk for everyone else. Tightening the fuel economy regulations then have ambiguous effects: do they save more lives by reducing deaths caused by those in SUVs, or do they kill more people by ensuring that more who are involved in accidents are in smaller vehicles?
I estimate the fleet-wide impact of historical CAFE rules to be 149 additional annual fatalities per mile-per-gallon (MPG) increment in stringency. In this case, the shift to smaller vehicles within the car and light truck categories prescribed under CAFE causes deterioration in safety that is only partially offset by reductions in poorly matched accidents. The safety effect translates to a welfare cost of approximately 33 cents per gallon of gasoline saved.5 In the context of related environmental externalities, damages of $25 per ton CO2 amount to 22 cents per gallon of gasoline, and Parry and Small (2005) report costs from local air pollution of about 16 cents per gallon.
So tightening the regs by one mile-per-gallon costs $0.33 in lives lost for every gallon saved while providing $0.38 in reduced pollution for every gallon saved. Pretty close to a wash if we think that the regulations themselves are costly.
He estimates the effects of an alternative policy bringing all vehicles under a single unified standard and reckons that tightened fuel economy standards under that form of regulation come with approximately zero cost in terms of lives lost: drivers of light trucks substitute into safer cars.
Even better could be abolishing CAFE entirely in favour of a petrol tax. CAFE standards only make sense relative to a petrol tax where consumers are particularly myopic and ignore the future petrol costs when buying a thirsty car. They aren’t.