Last week, President Trump and the state of California made the headlines. The Trump administration wanted to scrap California’s rules on vehicle emissions. Some are arguing that this is a petty move by the President, whilst others suggest that California’s economic policy is disastrous and should not be allowed to continue. This article aims to explain the fundamental economics behind this bizarre turn of events.
California, home of beautiful weather, beautiful people and arguably a huge chunk of western culture exported to the World, throughout the 20th Century. Silicon Valley, Hollywood and global brands such as McDonalds, are all widely associated with the state of California. If California was a country, its economy would be greater than that of the United Kingdom. The state is also larger in land mass than the entire country of Japan. Even to the state’s deepest critics, California’s influence is undeniable.
However, last week California became embroiled in an argument with President Donald Trump. In recent years California has been increasingly associated with progressive/liberal politics. Gone are the days of Regan and Schwarzenegger, hello to the home of the so called ‘resistance’. Surprisingly, the president doesn’t seem too keen on a state, where less than 1 in 3 voters, voted for him at the 2016 election. Have a look at his more than famous twitter feed and there are numerous examples of him directing his disapproval at California’s various policies.
So what on earth does this have to do with transportation, you ask? One area where California is demonstrating its progressive politics, is with regards to vehicle emissions. This refers to a range of standards but a main aspect of the standards, refer to greenhouse gas emissions such as CO2. Other aspects of the standards, refer to specific harmful air pollutants such as Nitrogen Dioxide NO2. In setting these standards, California has established the strictest emissions standards in the entire nation.
At this point, you may be thinking that California’s policy seems like a common sense approach. Specifically, it is a clear step forward in the fight against climate change and poor-quality air. However, many Republicans, including the president disagree, claiming that the standards cost jobs and produce cars which people simply don’t want. Trump as well many other Americans, believe that California’s policies can only be interpreted, as a challenge to the success of free market capitalism within the United States.
However, surely this is an individual state’s matter and what California does, is its own prerogative? Other states can carry on how they please, right? Well, not exactly. California’s population stands at 40 million. Almost 1 in 8 Americans live in California. Additionally, thirteen other states have also adopted California’s regulations on vehicle emissions. A similar number of states have adopted California’s specific vehicle standards, for greenhouse gas emissions. Due to the sheer market size made up by combining California and these other states, it is easier for manufactures to build their vehicle range to meet California’s stricter standards. Designing and building specific vehicles for each state based on emission standards, would be extremely expensive for manufacturers. Therefore, California’s laws are clearly impacting upon other states.
However, California can claim that these standards are vital in the fight against climate change and improving air quality. So, who’s correct? Trump and the argument that the regulations are bureaucratic and ineffective? Or California and the belief that regulations are a vital tool to prevent inefficient, polluting vehicles?
Firstly, it must be stated that a key reason behind California implementing the standards, is due to California’s geography. In particular Los Angeles has a real issue with smog. LA’s geography and climate mean that it is highly susceptible to smog, caused by emissions from vehicles. This smog results in a huge negative impact upon people’s health. Therefore, there is a real need to protect California’s air. Smog became so bad in the post-war period, that it was actually California who initially campaigned to have a waiver for states, to set their own emission standards. Consequently, the Trump administration’s actions could be interpreted by some as a heartless move, given the number of Californians whose health could suffer as a result.
On the other hand, supporters of the president, would state that this is a preposterous interpretation of the policy. The Trump administration’s main issue with California’s emissions standards, centres around how efficient regulations actually are. On this point, the U.S. president may actually have a valid argument. From a general point of view, it is easy to see the general appeal of regulation. High polluting vehicles are obviously doing the most damage. They use the most fuel and thus produce the most greenhouse emissions and other pollutants. So why not take the obvious step and pass legislation which outlaws or regulates the damaging aspects of these vehicles? However, it is important to ask whether this regulation is actually an efficient solution?
Let us take the example of banning vehicles which cannot meet a certain CO2 emissions standard and compare it to alternative market-based solutions, such as taxation. Firstly, consider the taxation approach. Suppose the government decides to introduce additional taxation on gasoline. Those who drive uneconomical low mileage vehicles will have to pay the most taxation, due to their vehicles using greater quantities of fuel. This discourages people from buying less fuel-efficient vehicles. The tax also pushes manufactures towards producing vehicles, which can produce greater miles per gallon. Furthermore, this increase in miles per gallon, will lead to the desired outcome. The quantity of CO2 emissions being produced by vehicles, will decline. The taxation approach, also promotes innovation. This is because it pressurises manufactures to find new ways to further improve the fuel efficiency of vehicles, in order to make sure that they can sell vehicles which consumers can actually afford to run. Additionally, this approach could be also be taken with regards to specific air pollutants. For example, a sales tax could be placed in relation to the quantity of particulates (e.g. NO2), produced by vehicles. This sales tax would discourage consumers from buying vehicles, which produce high quantities of emissions and additionally encourage vehicle producers, to produce vehicles which emit less emissions.
Now, how about taking a regulatory approach? As stated, regulation could be introduced banning the sale of high polluting vehicles. However, people will still be able to use less polluting vehicles not covered by the regulation. The drivers of these vehicles will still be contributing to emissions. Consequently, regulation does not have any impact on people who drive these lower emission vehicles. It is also important to note, that the regulation provides no incentive to alter this behaviour further. Therefore, consumers will still drive these types of vehicles and manufacturers can carry on making them, without any further need to reduce emissions. This is clearly not an efficient solution, in comparison to the tax alternative. The tax alternative, instead impacts upon all drivers of polluting vehicles, but imposes the highest cost on those which pollute the most. Thus, the tax provides a proportional response, rather than a less effective, one size fits all response, resulting from regulations.
So, if limited regulation is not effective, why not impose a blanket ban for all polluting vehicles? Well, efficient alternatives may not be presently available. Take electric cars, which could be used instead of petrol and diesel cars; if a complete ban on these types of vehicles was introduced. Are these electric cars a viable solution currently, or in the very new future? These vehicles may be useful for shorter trips, but at present there are still a number of problems. This includes their range, producing new electrical power for millions of electric vehicles and problems in sourcing materials for electric car batteries. Hence a total ban could lead to many serious problems and therefore have a negative impact upon huge swathes of economic activity. Additionally, despite this article admittedly criticising polluting vehicles, there are obvious economic benefits to vehicle ownership. The benefits that arise through vehicle usage to both vehicle owners and manufactures, would be removed through a total ban. Although a total ban gets rid of the negative aspects of these types of vehicles, it also removes the positive economic benefits as well. Hence, regulating or completely banning particular vehicles, cannot be considered to be an efficient economic policy.
One example, which clearly highlights the merits of using taxation over regulation, actually involves the state of California. The study involved comparing attempts to prevent overconsumption of water in Denmark and California. Denmark favoured a system of taxation whereas California favoured a number of regulations. The results indicated that Denmark’s system of taxation, was far more effective than California’s regulatory approach. The study suggests that the higher price of water in Denmark, due to taxation, has forced a reaction from both consumers and water companies. Furthermore, there was evidence that innovation occurred as a result of the taxation. This has resulted in Denmark’s water consumption per person, being far less than that of California’s. This is despite the obvious fact, that Denmark has far less of a water issue than California. Most of California is subjected to a Mediterranean climate. Clearly, this highlights the efficiency of market-based solutions.
From a theoretical perspective, Republicans and free marketeers should be more receptive to using policies such as taxes, in comparison to regulation. Policies such as taxation utilise fundamental market mechanisms, in order to achieve efficient results. Additionally, in comparison to regulation, there is no need to increase the size of the government, through increased administration. Raising taxation, is not accompanied by a giant increase in bureaucracy. Furthermore, the revenue gained from taxation could be used to cut taxation in other areas, such as income tax. Cutting income tax has been a campaign policy for Republican candidates, for decades.
So, given the potential to cut taxes on income and various other areas, surely President Trump will be encouraging petrol taxation? Well not exactly. Despite market solutions being available to combat emission issues, the president is opposed to using taxation. The Trump administration has cut a huge amount of tax, during its first term. Additionally, it appears only a tiny proportion of Republican politicians seem committed to using taxation, in order to combat environmental issues.
So, despite an economical solution being clearly available, there is no willingness to actually enforce the policy. However, it’s not fair to solely blame Trump for the refusal to raise gasoline taxation. George Bush, was sceptical of gasoline taxes. The Obama Administration was also unsuccessful in their suggestions, to pass tax increases. The last time the federal tax on gasoline was increased, was way back in the early nineties. Furthermore, the current U.S. federal tax level is far below that of almost all other countries in the world.
However, the fact of the matter is that despite wanting to remove regulation, the Trump administration appears to have no desire to do anything to tackle uneconomical, polluting vehicles. California’s regulation may be bureaucratic and inefficient; however, it does at least attempt to tackle the problems associated with polluting vehicles. Additionally, it is probably harsh to unequivocally criticise the State’s efforts. This is because, California actually ranks number one in the nation, for taxing gasoline at the state level. Consequently, the state has clearly shown a desire to use efficient market-based solutions, alongside traditional regulation.
Overall, there are worrying signs that the Trump administration, does not have any significant plans to tackle the issues of air pollution, or greenhouse gases. Consequently, it seems that Trump has picked a fight with California, without proposing or desiring any effective alternatives. The refusal to adapt efficient market solutions to tackle environmental issues, is an extremely concerning stance; from a nation which continues to contribute a significant proportion of the world’s greenhouse gases.
Transportation Contemplation 