Just as Ford announced that it would not meet its self-imposed goal of improving the fuel economy of its sport utility vehicles by 25 percent by 2005, General Motors announces that it will incorporate fuel-saving technology into its V8- and V6-powered vehicles. GM plans to spread its "displacement on demand" (DOD) technology to most of its SUVs and pickup trucks, and to many cars, by 2008. DOD shuts down some cylinders when peak power is not needed, reducing overall fuel consumption by about 8 percent.

Automotive News was not surprised that Ford backed away from its fuel-economy pledge. In an April 28 editorial, Automotive News pointed out that if Ford used a fuel-saving technology to improve miles per gallon by X percent and a competitor used such a technology to improve performance by X percent with fuel economy unchanged, Ford would lose sales to the competitor because most vehicle buyers want power, not fuel economy.

Thus, automakers cannot afford to beat the Corporate Average Fuel Economy (CAFE) standards. While Honda and Toyota have been able to sell thousands of fuel-efficient hybrid cars, millions of other vehicle buyers have chosen not to pay the substantial premium for this technology, because the fuel savings come nowhere near covering the higher purchase price.

Regulatory Requirements versus Economic Incentives

Vehicle buyers' preference for power over fuel economy results from low fuel prices. Attempts by CAFE to overcome this market reality have been a victim of the law of unintended consequences ˆ since CAFE standards are less stringent for light trucks than for cars, the market has shifted from cars to light trucks, offsetting the effect that CAFE standards would have had if they had worked as intended.

Gasoline is cheap in the United States, compared to most of the rest of the world, and miles per gallon is not a concern for most vehicle buyers. The impact of regulations on fuel economy will be undermined as long as gasoline remains cheap. We can require automakers to offer vehicles with better fuel economy, but if those vehicles cost more or offer less performance, the market for them will be limited ˆ we cannot force people to buy fuel-efficient vehicles if that is not what they want.

Instead of writing regulations, lawmakers must address market realities. By significantly raising the tax on motor vehicle fuels, lawmakers can promote a market shift to less-thirsty vehicles, and also reduce the number of miles driven. This would bring about the following societal benefits:

• Less road congestion and less pollution
• Less wear on roads, reducing maintenance costs
• Lower oil imports for greater energy independence and an improved balance of trade
• Lower government budget deficits
• Fewer older, fuel-inefficient (and polluting) vehicles in use

  Lawmakers' fear of public opposition to higher taxes prevents them from using economic rather than regulatory means to the goal that they seek ˆ reduced total fuel consumption. To make higher fuel taxes palatable to voters, lawmakers might cut another tax, since the above benefits could be realized even through a revenue-neutral policy.

  A Modest Proposal

  Another alternative would be to offer a consumer benefit in return for the higher cost of fuel. Suppose we increased the fuel tax sufficiently to pay for automobile liability insurance. By increasing the variable (per-mile) cost of driving while lowering the fixed (annual insurance) cost, this strategy could be revenue neutral to both the government and to drivers, while still incentivizing fuel conservation.

  Additionally, by bundling insurance into the cost of fuel, we would eliminate the problem of uninsured and underinsured motorists, and possibly lower the administrative costs associated with auto insurance. People who drive more and people who drive big vehicles would automatically pay more into the insurance fund ˆ and quite properly so. Insurance companies might object, but they could still sell collision and comprehensive policies, and the government could contract with them to administer the liability fund.

  This proposal, for which I don't claim authorship, would simultaneously advance a number of worthy objectives, with essentially no downside. It is well worth considering.