The Obama administration recently reversed a Bush era policy that prevented states from imposing some of their own environmental policies with respect to Corporate Average Fuel Efficiency (or CAFÉ) standards. This ruling permits California to establish its own separate CAFÉ rules for fleets sold within their state. This was a wise move.

Effective public policy in the United States has long depended upon state level experimentation. Perhaps the best example of this is the 1996 Welfare Reform Act. This legislation adopted most of the best practices from a decade of state trials. It also allowed the nation to sidestep the mistakes made by individual states. The result was a balanced, effective and ultimately very good piece of federal legislation.

Environmental policy is a superb place for state level experiments. The Federal government is too unwieldy to enforce most environmental standards, and states face very different priorities. As a result, we get a pretty diverse set of standards on seemingly arcane issues such as water standards for chlorides. These are tested in courts and before Federal regulatory hearings. Of course these are maddening to businesses and residents, but far less so than a failure of a uniform Federal policy.

I applaud President Obama for this decision, and hope it heralds experimentation in lieu of Federal mandates on health care. That being said, CAFÉ standards represent cowardly and weak public policy. Here’s why.

Vehicle emissions both damage the environment and impose morbidity and mortality costs on humans. These costs most likely run into the hundreds of dollars annually per car. Since individual car makers, and car buyers do not pay these costs there is too much auto emissions produced. CAFÉ standards purport to remedy this by setting standards that companies have to meet for their fleet. But the rules cannot do so as efficiently (low cost) or as effectively (as quickly) as gasoline taxes. But taxes are unpopular and to change them requires an understanding of how markets work. That is an anathema to many in the environmental movement.

Auto companies easily dodged the CAFÉ bullet, and will do so again. The last time they did so by creating the SUV, a vehicle that was immune to CAFÉ since it was a truck. Car companies will always be able to dodge purely regulatory restrictions on emissions – their living depends on it. They cannot dodge an increased tax on gasoline, something that even President Bush’s chief economist endorsed. 

It is ironic, of course, that the environmental movement created the SUV by their unwillingness to tackle the hard task of explaining the costs of vehicle emissions, and embracing a truly economic solution. It was easier to claim a victory with CAFÉ standards than achieve one with an environmental tax. The environmental movement is full of soft hearted folks. Far too many are also soft headed – culturally afraid of the hard, but effective math of a benefit cost analysis. But then again, maybe that is why the CAFÉ standards are all the rage in California.