]]]]]]]]]]     THE EFFECT OF FUEL ECONOMY STANDARDS     [[[[[[[[[
                      ON AUTOMOBILE SAFETY             (2/2/1990)

[Abridgement  of Robert  W. Crandall  and  John D.  Graham, ``The
Effect of Fuel Economy  Standards on Automobile Safety'', Journal
of Law and Economics 32(1):97-118  (April 1989). Published by The
University of Chicago.]

              [Kindly uploaded by Freeman 10602PANC]


   In 1975,  Congress passed  the Energy  Policy Conservation Act
(EPCA), which  established mandatory  fuel economy  standards for
all new automobiles sold in  the United States beginning with the
1978 model year.   These standards, called  the Corporate Average
Fuel Economy (CAFE) Standards, were then designed to increase the
incentive  for automobile  producers  to improve  fuel efficiency
beyond that dictated by market forces, which were being distorted
by government controls on crude oil and refined products.  By the
1985 model year,  all automobile producers  were to have achieved
at  least  a   27.5  miles-per-gallon  (MPG)   rating  for  their
   There has been a lively  debate about the effectiveness of the
CAFE program  as a conservation  measure and about  its effect on
the domestic  automobile industry,  particularly in  light of the
sharp decline  in real gasoline  prices since  1981.  However, we
know of  no quantitative  investigations of  the effects  of this
policy on other  social goals, such as  motor vehicle safety.  In
this article, we estimate the effects  of the CAFE program on the
average weight  of new  automobiles, the  mix of  large and small
vehicles sold in  the United States, and  the ultimate effects of
this new  fleet size  on vehicle  safety.  In  doing so,  we link
economic models  of the auto  industry with a  rich literature on
the effects of vehicle weight  on the susceptibility of occupants
to injury and death.  Our new empirical results suggest that CAFE
will be  responsible for  several thousand  additional fatalities
over the  life of each  model-year's cars.  We  conclude that the
real  social cost  of  government-mandated fuel  economy  is much
greater than is commonly believed.

                        The CAFE Program

     Under the CAFE program,  all automobile producers with sales
in the  U.S. market must  meet a  minimum average fuel-efficiency
standard, defined as a harmonically  weighted average of the city
and highway EPA  mileage ratings, for  all their cars.  Companies
that produce in the United States and import from other countries
must  satisfy this  standard  separately for  their  imported and
domestic models.
   The fuel-efficiency standard was set  in legislation at 18 MPG
for the  1978 model year,  rising to  27.5 MPG by  the 1985 model
year.  The Department of Transportation (DOT) was responsible for
setting the precise  level of the standard  for the 1981-84 model
years and for 1986  and beyond.  In addition,  DOT may adjust the
standards   for   changing  conditions   (such   as   changes  in
technological  or  economic feasibility).   Failure  to  meet the
standard  results  in civil  penalties  of  $50 per  MPG  per car
produced.  Were General Motors  to fail to meet  the 1987 or 1988
standard  by just  1.0  MPG, for  example,  the company  could be
subject to penalties of $200 million per year or more.
   The sharp rise in gasoline prices after the Iranian revolution
provided automobile  producers with  sufficient market incentives
to meet  and even  exceed the  CAFE standards  through 1981.  All
three  major  U.S. producers  exceeded  the standards  by  a wide
margin (Table 1  [omitted]), building up  credits that they could
carry over  for three years  to cover any  future shortfalls.  As
gasoline  prices began  to fall  after  1981, the  CAFE standards
began to  bind.  By  1983 Ford  and General  Motors began falling
short  of  the  standard.   At   first  they  could  use  credits
accumulated prior to 1983, when  they exceeded the CAFE standard,
to offset  these shortfalls.  By  1985, however,  it was apparent
that their shortfall for 1986  would be very large, inducing them
to petition the Department of  Transportation for a relaxation of
the  standard to  26  MPG, which  was  granted.  In  a subsequent
revision, the 26  MPG standard was extended  to the 1987-88 model
   With real gasoline  prices in 1988  as low as  in the pre-OPEC
era,  pressure has  been mounting  for a  revocation of  the CAFE
program altogether.  Although  the Reagan administration appeared
to support  revocation, resistance  in Congress  was substantial.
Because CAFE is a program  of trade restriction, some Congressmen
from automobile-producing  areas may  be loathe  to eliminate it.
Since CAFE  forces U.S.  manufacturers to  meet a fuel-efficiency
standards for  their domestic production  alone, CAFE discourages
them  from importing  low-cost small  cars  from Asia  or Eastern
Europe even though such a strategy may provide automobiles at the
lowest  cost to  U.S. consumers.   To  meet CAFE  while producing
larger cars, they must produce small cars in the United States.
   CAFE is more  of a burden  to Ford and  General Motors than to
Chrysler, since  Chrysler has moved  away from  the production of
large cars.  This  has lead Chrysler to  support the CAFE program
aggressively while Ford and General  Motors (GM) seek relief from
it.  Further support  comes from those  who fear a  sharp rise in
gasoline prices in the next decade and thus see CAFE as a prudent
conservation policy.
   Unfortunately, little  attention has  been focused  on another
aspect  of  the CAFE  program.   Fuel efficiency  is  most easily
improved by  reducing vehicle  weight, but  lower-weight vehicles
tend to provide  less crash protection  to vehicle occupants than
larger,  heavier cars.   In theory  it may  be possible  to build
lighter cars without compromising safety, but analysts have shown
that the ``downsized'' vehicles of the late 1970s and early 1980s
are less safe in crashes than the heavier cars they replaced.  As
a result, by  inducing U.S. producers to  offer lighter cars, the
CAFE program may be increasing  the number of deaths and injuries
on U.S. highways compared to  the number that would occur without
CAFE.  This  is a  real social  cost of  pursuing fuel efficiency
that policymakers  have been  reluctant to  acknowledge.  Indeed,
the  federal  agency  that  administers  the  CAFE  program,  the
National Highway Traffic Safety  Administration (NHTSA), has done
little to inform legislators and the public about the potentially
adverse safety effects of CAFE.

              The Effects of CAFE on Vehicle Weight

   Since  planning,  designing, engineering,  and  tooling  a new
model require at least  four years, automobile manufacturers must
begin to plan to meet  future CAFE standards based upon extremely
uncertain forecasts of the level  of gasoline prices in the years
in which a model is actually sold.  Moreover, they cannot know in
advance  how  well  any  line of  vehicles  will  survive  in the
marketplace.  Thus, it  is very likely that  the average level of
fuel efficiency realized in an automobile producer's full line of
automobiles in any given year at its expected selling prices will
deviate  substantially  from  its  plan.   If  the  deviation  is
positive, the manufacturer may simply accumulate CAFE credits for
future use  in the event  of shortfalls  -- such as  those GM and
Ford  have  encountered  since 1983.   But  if  the  deviation is
negative at planned  prices, the manufacturer  may elect to raise
large-car  prices or  large-engine  option prices  and  lower the
prices   of  smaller,   less   powerful  (and,   therefore,  more
fuel-efficient) cars.
   In short, it is the manufacturer's expectations of fuel prices
and CAFE  approximately four  years in  advance of  the vehicle's
production   that  is   likely  to   influence  the   engine  and
vehicle-weight choices for individual models.  Once these choices
are locked in, the manufacturer  can only use prices (or nonprice
rationing) to meet  CAFE if he  finds that his  planning has left
him short of the standard, or  he can petition for a reduction in
the CAFE standard.
   Much of  the practical  effect of  CAFE in  vehicle design has
been   upon   the   weight  of   automobiles.    The   design  of
transmissions, the choice of ignition and fuel-injection systems,
tires,  and  engine oils  have  all  been affected  by  CAFE, but
empirical  analysis of  the effect  of  all of  these ``technical
design'' factors  on CAFE  suggests that  they are  only slightly
more   important  than   weight  reduction.    Through  materials
substitutions, improved design, and reduction of interior volume,
manufacturers have  greatly reduced vehicle  weight and increased
fuel efficiency.  As Table  2 [omitted] demonstrates, the average
U.S. automobile  has undergone a  23 percent  reduction in weight
since  1974.   With this  reduction  in weight,  an  even greater
proportional reduction in engine size has occurred.  The combined
effect of these two reductions on  fuel economy has been to raise
MPG by about 24 percent.
[Remainder of  page 101 omitted;  pp 102-109 omitted;  part of p.
110 omitted.   The omitted pages  explain the  author's model and
the ways they estimated the values of the various parameters.]

             The Effect of Vehicle Weight on Safety

   In research  performed  over the past  fifteen years,  traffic
safety analysts have  found that occupants  of lighter cars incur
an elevated risk of serious  injury and death in crashes compared
to occupants of  heavier cars.  This  statistical association has
been  demonstrated  for   both  single-vehicle  and  multivehicle
crashes.   ``Weight'' is  chosen as  the independent  variable in
these  investigations  because  it is  both  easily  measured and
strongly  correlated  with  other   vehicle  attributes  such  as
wheel-base, track, ``size'' in  general, hood length, trunk size,
and   engine   displacement.   Although   the   precise  physical
mechanisms by which weight (or  its correlates) affect safety are
not fully  understood, the  negative relationship  between weight
and occupant fatality risk is one  of the most secure findings in
the safety literature.
   The   most   sophisticated  research   on   the  weight-safety
relationship  has  been  performed by  Leonard  Evans  at General
Motor's Research Laboratories.   Based on a  statistical model of
car mass and real-world fatal  crashes that holds driver behavior
constant, Evans reports an empirical relationship of the form
                  L(m) = a * exp(-0.00106 * m),               (4)
where L(m)  is the  relative likelihood of  fatality in  a car of
mass m (in  kilograms).  Using this  equation, we calculated that
the 500-pound reduction  in the average weight  of 1989 cars that
is attributable to  CAFE is associated with  roughly a 27 percent
increase in occupant fatality risk.
   This  estimate should  be regarded  as an  upper bound  on the
adverse safety effects of CAFE because it assumes that drivers of
lighter  cars  do not  realize  the additional  dangers  and take
precautionary responses.   Some evidence reported  by the Opinion
Research Corporation  and Winston  et al.  suggests, for example,
that occupants  of lighter  cars are  more likely  to wear safety
belts  than  occupants  of  heavier  cars.   To  account  for the
possibility of behavioral response,  Evans reported results of an
alternate statistical model that predicts  the net effect of both
vehicle  size and  behavioral  responses  on fatality  risk.  His
estimated equation is of the form
                  L(m) = a * exp(-0.00058 * m).               (5)
Using this equation, we calculated that CAFE is responsible for a
14 percent increase  in occupant fatality risk  in 1989 cars.  In
other words, drivers (and passengers) appear to offset about half
of  the physical  disadvantages of  lighter cars  through various
types   of   behavioral    responses   (for   example,   enhanced
maneuverability and increased use of seat belts).
   Our  rough  estimate is  therefore  that the  500-pound  or 14
percent reduction  in the average  weight of 1989  cars caused by
CAFE  is associated  with a  14-27  percent increase  in occupant
fatality  risk.  This  range does  not account  for a  variety of
second-order effects of CAFE on  safety.  First, if CAFE curtails
overall car sales  (as some evidence suggests  is the case), that
means that the older and  predominantly heavier cars will stay on
the  road  longer.  Although  that  outcome might  seem  good for
safety, one must also consider that  the oldest cars in the fleet
are not equipped with a variety of safety features (some mandated
by NHTSA) that  were initiated in  the 1965-1975 period.  Several
studies  have  found  that   these  safety  features  were  quite
effective.  We assume  that these two  effects cancel each other.
Second,  our  rough   estimates  are  based   on  models  of  the
weight-safety  relationship for  single-vehicle crashes  -- which
NHTSA reports account for  about one-half of occupant fatalities.
We have  not performed  separate calculations  of the  effects of
lighter cars  on fatalities  in multivehicle  crashes.  Since the
``weight  effect''  estimated  by Evans  is  somewhat  larger for
multivehicle   crashes,   this   omission   will   cause   us  to
underestimate the overall adverse safety effects of CAFE.
   We  are aware  of only  one  line of  reasoning that  has been
advanced that might undermine our result that CAFE is responsible
for a substantial  increase in occupant  fatality risk.  In their
regulatory analysis  of CAFE,  NHTSA reports  that the  number of
passenger  car  occupant deaths  in  the United  States  has been
declining since 1980,  even though the average  weight of cars on
the road  has been declining.   They infer that  the CAFE program
must not be a significant  detriment to safety.  We question this
line of  reasoning.  First,  NHTSA analysts  have shown  that the
number of passenger car  occupant fatalities declined during this
period because of  the 1980 and 1982  recessions and the national
campaign against drunk  driving.  Second, the  mere retirement of
older,  less  safe cars  should  have reduced  the  fatality rate
substantially.   We  submit  that  the  decline  in  car occupant
fatalities from  1980 to 1985  might have been  more dramatic had
CAFE not  been in effect.   Finally, the NHTSA  analysis fails to
address  the fact  that other  variables --  such as  rising real
incomes -- tend  to depress fatality rates  over time.  The motor
vehicle fatality  rate has  been declining  for decades  for just
this reason.  [remainder of p. 112 omitted.]
[pp.  113-114 omitted.   Part of  pp.  115 omitted.   The omitted
pages describe certain checks on the model.]

           Quantifying the Omitted Social Cost of CAFE

   To provide a national estimate  of the safety-related costs of
CAFE,  we  forecasted  the  fatality  toll  for  just  one year's
production over  an expected ten-year  life of  these cars.  This
provides a clean analysis that ignores  the effect of CAFE on the
mix of older cars on the  road.  If CAFE induces manufacturers to
offer smaller cards and greater  fuel economy than an unregulated
industry  would   offer,  it   will  undoubtedly   lead  to  some
postponement  of the  replacement of  older, larger  cars.  These
older cars are less safe than newer models of the same weight but
may be more crashworthy than the prospectively smaller 1989 cars.
We simply ignore these second-order transitional effects of CAFE.
   In calendar  year 1985  there were  about 25,000  car occupant
fatalities in a  fleet of 130  million vehicles, which translates
into 1.9 fatalities per  10,000 cars.  If we  assume that a model
year of car sales averages about  11.2 million, and if these cars
experience this fatality rate through their ten-year life, and if
4 percent  of the remaining  1989 models are  scrapped each year,
there  will  be  a  total of  17,800  fatalities  in  these cars.
Without CAFE  we estimate  that the  fatality toll  would be much
smaller,  13,900-15,600.   In  sum,   CAFE  is  estimated  to  be
responsible for  2,200-3,900 excess occupant  fatalities over ten
years of a given model years' use.
   It  is  plausible  to believe  that  the  inverse relationship
between car  weight and  safety also  holds for  serious nonfatal
injuries.  NHTSA (1985) estimates that the frequency of ``serious
nonfatal  injuries''  among  car occupants  is  about  five times
larger  that  the  frequency  of  fatalities.  Hence  we estimate
that   CAFE  will   also   be  responsible   for   an  additional
11,000-19,500  serious  nonfatal  injuries  to  occupants  of the
prospective 1989 model cars.  A  ``serious'' injury is defined as
a score of 3 or greater on the American Association of Automotive
Medicine's   (six-point)  Abbreviated   Injury   Scale.   Typical
``serious'' cases  include compound fractures  and internal organ
   These adverse safety  outcomes can be  converted to dollars by
using market estimates of the value of safety.  At a conservative
value  of  $1  million  per  statistical  life  and  $20,000  per
statistical injury, the adverse  safety effects of CAFE translate
into a social cost of $2.4 to  $4.3 billion over the life of 1989
cars.  Assuming  a real discount  rate of 5  percent, the present
value of CAFE's safety costs equals  $1.9 to $3.4 billion for the
assumed ten-year life of 1989 model-year automobiles.

                   A Cost-Benefit Calculation

   We have  estimated that  abolition of  the CAFE  program (with
sufficient lead time)  would have led to  a 500-pound increase in
the  average  weight  of  a  1989  model-year  automobile  and  a
reduction of 2,200-3,900 fatalities over a ten-year life of these
cars.  These lighter cars would,  however, consume less fuel over
this ten-year period, thereby offsetting some of the welfare loss
of the higher vehicle fatality rate.
   A 500-pound  increase in  average vehicle  weight represents a
16.1  percent  increase  in  weight  of  1989  model  year  cars.
Crandall et al. found that the  elasticity of MPG with respect to
weight is  between  0.7 and 0.8;  therefore,  MPG would have been
11.3 to 12.9 percent lower and  the cost per mile would have been
12.7 to  14.8 percent higher  without CAFE  for 1989 automobiles.
Most  estimates  of   the  long-run  elasticity   of  demand  for
vehicle-miles traveled are clustered  around -0.50.  As a result,
we may conclude that total  travel in 1989 automobiles would have
been about  6.4-7.4 percent less  without CAFE,  all other things
being equal.  The  effect on annual gasoline consumption would be
equal to  1.076-1.087 times the  consumption with  CAFE in place.
In short, CAFE saved 5.5-6.3 percent of gasoline consumed by 1989
   Assuming  a 5  percent real  social  discount rate,  an annual
consumption of 500 gallons per 1989 model per year with CAFE, and
a price of gasoline  equal to $1 per  gallon in 1989, the present
value  of the  gasoline saved  by CAFE  over ten  years (assuming
constant real gasoline prices) would be $2.4-$2.8 billion for all
11.2  million  cars  sold  or  $1.8-$2.2  billion  for  all  1989
automobiles except  the Japanese  imports that  are presently not
affected  by CAFE.   In short,  the savings  of gasoline  are not
significantly larger than  our estimate of the  lost value due to
increased highway injuries and fatalities.

                     Further Considerations

   It is not our purpose  to provide a full cost-benefit analysis
of the  CAFE program,  but we  cannot leave  the reader  with the
impression that  the appropriate measure  of the  social value of
CAFE is the difference between fuel  saved and the added costs of
reduced  highway  safety.   Obviously,  the  CAFE  program forced
vehicle manufacturers to invest more resources in developing fuel
efficiency than 1985 gasoline  prices warranted.  Indeed, we have
shown that  it was  CAFE, not  the price  of gasoline  that drove
average MPG in the 1978-1985 period.
   The   excessive   investment    in   fuel   efficiency   added
substantially to  the social cost  of CAFE.  In  Crandall et al.,
the elasticity of vehicle cost  with respect to MPG was estimated
to be approximately 0.35.  In  a 1977 analysis of the prospective
compliance  costs  of  CAFE,  the  Department  of  Transportation
estimated that  raising average  fuel economy  from 20.5  to 27.6
would cost between $362 and $407 (1977 dollars) per car, or about
6.0-6.6 percent  of the  average price  of a  car in  1977.  This
suggests a  cost elasticity with  respect to MPG  of between 0.16
and 0.18.   Even using  this lower  ex ante  estimate, the excess
compliance costs of CAFE may be estimated to be 0.6-0.7 [percent]
of the  cost of a  passenger car  for each additional  MPG.  At a
price of $15,000 per car, the cost  of each MPG for a given model
year's cars is $1 billion.  In short, the search for technologies
to meet  CAFE can  be very  expensive and  easily swamp  the fuel
savings generated by CAFE.
   The CAFE program  also resultults in  a mix of  cars that is less
desirable than  that which  would be  produced for  1985 gasoline
prices, thereby reducing  the number of  vehicles sold.  This, in
turn, translates  into a  deadweight loss  since society foregoes
the additional output that is  valued above the incremental costs
of  production.   And  this  reduction  in  new  vehicles creates
another social cost -- the extension  of the useful life of older
cars  that are  less safe  and create  more pollution  than newer
models.  In short, the full costs  of the CAFE program are likely
to be considerable even if one excludes the direct safety effect.


   Earlier  analyses of  the  effects of  fuel-economy regulation
have  missed   an  important  point.    Fuel  economy  regulation
inevitably  leads to  smaller, lighter  cars that  are inherently

less safe than the cars that  would be produced without a binding
fuel economy constraint.  We have  shown that even if the pursuit
of fuel economy were costless to  producers the cost of the added
loss of  life and  serious injury  from traffic  fatalities would
more  than   offset  its   benefits  in   reduction  of  gasoline
consumption for  1989 model  year cars.   We estimate  that these
1989  model  year  cars   will  be  responsible  for  2,200-3,900
additional fatalities  over the next  ten years  because of CAFE.
Thus, when any  discussion of energy  conservation focuses on the
externalities in  energy consumption,  we would  suggest that all
such externalities  be included.  When  safety considerations are
included, CAFE appears to be a very costly social policy.

                     *      *      *

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