What is a Car?
The regulatory history of automobiles is a cautionary tale for today’s energy regulators.
In February the US Treasury announced that the Tesla Model Y would be eligible for a $7,500 electric vehicle tax credit, this after having previously ruled it ineligible. (Tesla promptly increased prices in response, in order to claim some of the credit for itself.)
This is but one example of the vast number of rulings necessary to determine eligibility for the legion of subsidies unleashed by the Inflation Reduction Act. Most of these decisions now reside with the Treasury Department, which must quickly decide things like what makes hydrogen green, how to decide if a power plant component is “primarily” made of iron or steel, and how to measure whether an “energy community” will receive a specified percentage of the benefits of a project. Eligibility for electric vehicle tax credits continues to change.
In the case of the Tesla Model Y, the issue at stake was whether the Model Y was a car or a light truck, which have different eligibility price caps. The regulatory distinction between cars and trucks is not new. It has a winding history that connects Ayatollah Khomeini to Elon Musk by way of the Chrysler minivan and the PT Cruiser, and it has been a spark for major industry trends with global consequences for the environment and safety. A quick tour of this history serves as a useful reminder that seemingly obvious, and innocent, regulatory distinctions can have large and lasting unexpected effects.
If it looks like a car and acts like a car…it might still be a truck
The legal distinction between light-duty trucks and cars stretches back to the oil crises of the 1970s (hence the reference to the Iranian Revolution). To cut oil consumption, the US introduced a Gas Guzzler Tax and Corporate Average Fuel Economy (CAFE) standards. The Gas Guzzler Tax, which levied an excise tax up to $7,700 on vehicles with low fuel economy, applied only to cars, not trucks. CAFE standards were separate for cars and trucks, with trucks required to meet much lower fuel efficiency targets.
The share of light trucks in the US fleet has changed dramatically over time (Source: US EPA Fuel Economy Trends Report 2022). The EPA report source for this figure is a great resource, which Max previously utilized here.
At the time, trucks accounted for around 15% of the personal vehicle market, and almost all trucks were pickups. Setting a lower fuel-economy bar for trucks appealed to common sense because trucks are bigger and have to haul cargo. But it created an incentive for automakers to find a way to design and market vehicles that were legally trucks, but could serve the consumer needs of people who usually bought a car, rather than a pickup.
A wave of innovation followed. In the 1980’s, the minivan, pioneered by Chrysler, qualified as a light truck but competed with large sedans and family station wagons, which were cars. During the low gas price era of the 1990’s, fuel-economy standards were restrictive, and the industry wrestled itself free by refashioning and rebranding SUVs (trucks) that could replace larger luxury sedans. Pickups were stretched out and fancied up so that they comfortably sat five (sometimes six!) and functioned as family vehicles. More recently, cars have increasingly morphed into cross-overs, most of which are legally trucks, even when they just look like a car wearing platform shoes.
An all-time great example of a “light truck” is the Chrysler PT Cruiser, which Lucas previously discussed here. Magritte would have been proud.
In 2021, the regulatory truck had risen to a staggering 63% of the personal vehicle market in the US. In the twentieth century, America fell in love with the car. By the early twenty-first century, America’s eye had wandered. It had fallen in love with the truck.
Who cares about the distinction between cars and trucks?
The story of the ever evolving truck has real consequences. We cannot say for sure how much policy incentives drove the rise of the light-duty truck, but economic reasoning and received wisdom in the industry suggests it was an important factor.
Shifting drivers towards trucks and away from cars has environmental and safety consequences. The shift means that CAFE and other policies have less impact than expected—during the 1990s and early 2000s, both car and truck fuel economy rose, but fleetwide fuel consumption flatlined because the compositional shift towards less efficient trucks canceled out those gains.
Trucks tend to be heavier, and this makes them more dangerous. Even at the same weight, trucks tend to be higher which makes them more dangerous for pedestrians and cyclists.
What’s more, the rise of the truck is becoming the latest American cultural export. Having designed and marketed SUVs to the American consumer for the last several decades, global automakers are increasingly pushing related models into global markets, where the SUV share is steadily rising.
Source: IEA
Special regulatory treatment of light trucks is what economists call attribute-based regulation, which is generally inefficient when it enables actors to comply by manipulating product characteristics (qualifying for the truck category) rather than the environmental target (improving fuel consumption). We would likely be better off not making a distinction between cars and trucks—it erodes environmental regulations, gives automakers a reason to tweak cars for compliance benefits, and has the unintended consequence of making automobiles less safe.
Back in 1975, the users most closely associated with trucks were two of the sacred cows of the American political psyche, the farmer and the small business owner. Today, that link is weaker, but by now the light truck constituency is deep and wide, suggesting little appetite for a reversal of the fifty-year trend.
What lessons does this hold for today’s energy regulator?
The history of the light truck reminds us that apparently simple concepts and choices today can lead in unexpected directions tomorrow by creating incentives for what I like to call creative compliance. Reports this weekend suggested that the EPA is poised to dramatically tighten CAFE, which will create more pressure on automakers to comply in creative ways.
As (the other) Jim pointed out last week, if you want to reward market actors for doing “good stuff,” you have to “define what the ‘good stuff’ is.” This is often harder than it seems, and it frequently opens the door to unintended consequences.
In the wake of the Inflation Reduction Act, a lot of “good stuff” needs defining. Prevailing wage requirements, which determine eligibility for some bonuses, apply to “laborers and mechanics,” but not other classes of workers. Developers might be able to relax restrictions by employing more “apprentices,” who can be paid less, or shifting tasks between categories. Domestic content requirements for batteries hinge on whether “critical minerals” (the definition of which can change) come from the US or a country with a “free trade agreement” (which itself turns out not to have a statutory definition). Qualifying an “area” as an “energy community” can create bonus credits, but this requires Treasury to figure out consistent ways to define the fraction of “direct employment” or tax revenue, both of which fluctuate, that are “related to [emphasis added] extraction, processing, transport, or storage of coal, oil, or natural gas.”
The subsidies contained in the IRA are massive. We may not be able to say for sure whether creative compliance with the associated regulatory distinctions will create important distortions or lead to trends as grand as the rise of the truck, but we can be certain that market actors will look for every opportunity to qualify for maximal benefits, even if it leads them in unexpected directions.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Sallee, James, “What is a Car?” Energy Institute Blog, UC Berkeley, April 10, 2023, https://energyathaas.wordpress.com/2023/04/10/what-is-a-car/
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James Sallee View All
James M. Sallee is an Associate Professor in the Department of Agricultural and Resource Economics at UC Berkeley, a Research Associate of the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. He is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles.
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Great post. One little nit to pick: Ayatollah Khomeini had little to do with it; the Iranian Revolution was in 1979, after the 1975 passage of the Energy Policy and Conservation Act (EPCA) that established the CAFE standards with the carve-out for light trucks. That law was part of the policy response to the oil embargo declared by King Faisal (Faisal bin Abdulaziz Al Saud) of Saudi Arabia , which was triggered by U.S. arms shipments to Israel to bolster its strength in an Arab-Israeli war then underway.
Under EPCA, the Department of Transportation has a great deal of discretion in how it sets light truck CAFE standards. So does EPA for how it sets the parallel, Clean-Air-Act-authorized GHG emission standards, the next round of which were just proposed. I’ve not yet had a chance to study the new proposal, but haven’t heard anything about a plan to phase out the car-truck distinction. The agencies could do that if they justified it, which wouldn’t be hard to do under the governing statutes. Getting rid of this dated regulatory difference would be a good thing, as would phasing out the footprint-based adjustments that also probably contribute to the ongoing supersizing of U.S. personal vehicles.
An alternative view is that large EVs present an opportunity to distribute storage resources where they are most useful. A personal car or truck is parked 95% of the time. Even a smaller EV holds several days of average household use. A truck might hold a week’s worth. That can provide both flexibility to use onsite renewables but also local reliability and household (and if allowed by law, neighborhood) resiliency. Our storage solution likely is “driving down the street.”
As is often the case, the wealthy get the tax breaks, indirectly in the shoulders of the less wealthy. Buyers should pay whatever the manufacturers ‘selling price’ is WITHOUT any govt incentives. Govt agencies, including the military could switch to EVs to build up a production rate to drive down unit costs [experience curve].
This is pretty much how the semiconductor industry grew in its early years.
Ultimately, the greatest incentive for “creative compliance” is profit maximization. Automakers spend a little more money to make bigger vehicles and reap outsized returns in the retail market. As you note, “there’s little appetitive for reversal” of the SUV/pickup trend. The auto industry both nurtures and responds to consumer demand, and most government policies in that regard just nibble around the edges of production and purchase trends because there’s not enough of the “good stuff” — ill-defined or otherwise — to significantly change those trends.
I absolutely agree with your conclusion that “we can be certain that market actors will look for every opportunity to qualify for maximal benefits.” But achieving maximal outcomes for public benefits, as you note, are another matter.