How CAFE Hurts Alternative Energy Development

CAFE standards are a favorite of the alt energy crowd, but my former colleague Marlo Lewis explains at NRO today exactly how the two drives could be incompatible:

Tough new fuel economy standards could backfire in a more fundamental way. With oil selling at close to $100 a barrel, a bonanza awaits the first automaker to develop affordable, high-performance vehicles that run on rechargeable batteries, fuel cells, or some other low-emitting or non-emitting propulsion system. But only prosperous companies can afford to plow billions into R&D. Capital spent complying with arbitrary fuel economy mandates is capital unavailable for investment in breakthrough technologies.

Got that? Innovation of the kind that alternative energy advocates are agitating for happens as a result of incentives. But companies aren’t likely to drop as much money into R&D if they’re 1) spending money complying with onerous regulations elsewhere and 2) less likely to see profits off those innovations.

This is true all over the economy. AEI’s John Calfee has done some great research on the effects of price controls on drug development, for example. He looked back at the Clinton era and found that even mere proposals — not bills that actually passed — correlate with massive drops in R&D spending increased.

In 1994 and 1995, for example, the Clinton administration tried to set price controls on certain classes of innovative drugs, and R&D increases dropped more than 60% from previous levels. And sure enough, as soon as those proposals failed, R&D budgets went right back on track.

So don’t be surprised if, as transportation and energy regulations become more stringent, we see a concurrent drop in innovation and competitive position from U.S. automakers.

Update: Changed a typo in the sentence after the blockquote — innovation happens as a result of incentives.