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The EPA just proposed a huge crackdown on carbon emissions from trucks

Time to diet.
Time to diet.

On Friday, the Environmental Protection Agency proposed sweeping new regulations to slash greenhouse-gas emissions from all new heavy trucks, buses, and vans. This is a major piece of President Obama's broader plan to tackle global warming.

The rationale sounds simple enough: Even though trucks make up just 5 percent of vehicles on the road, they account for 20 percent of greenhouse-gas emissions from transportation (since they're constantly in use). So... we should clean 'em up.

To that end, the EPA is proposing a second round of stricter fuel-economy standards for new medium- and heavy-duty vehicles between 2021 and 2027 — a move, it says, that will reduce US oil consumption by 1.8 billion barrels. Truck owners will have to pay a higher price upfront for more-efficient vehicles (about $12,000 more, on average). But, the EPA says, they'll actually save money over the long run through lower fuel costs. Everybody wins.

This does raise a tricky question, though: Do we really EPA regulations to persuade truckers to save money? Trucking companies, after all, were already well aware that they could reap savings by paying more upfront for efficient trucks. So why weren't they doing this in the first place? Why does the government need to step in at all? The answer here is a bit complex — but it's key to understanding these new rules.

Do trucking companies need more incentive to save fuel?

I realize fuel is expensive, thanks. (Shutterstock)

I realize fuel is expensive, thanks. (Shutterstock)

In its proposal, the EPA says there are all sorts of technologies available — engine-friction reduction, turbochargers, etc. — that would enable trucks to use less fuel per mile. But these technologies don't seem to be as widely adopted as one might expect. What's going on?

One possibility is that these fuel-saving technologies actually have serious drawbacks. Perhaps they make truck engines less reliable and hence raise repair costs — in which case truck owners have rational reasons not to adopt them, even if they do save fuel.

But a second possibility is that there are inefficient market barriers that prevent truck owners from investing in fuel-saving technologies. If that's true, then government regulations could potentially help overcome these problems and add real value. The EPA's core contention is that, yes, these market failures do indeed exist — and that's why regulations are needed. (See page 652 of the rule for an extended discussion.)

For example, the EPA says, trucking companies might not always adopt the latest fuel-saving technologies because of misaligned incentives. Consider a shipping company that buys tractor trailers and then leases them to operators. The company is buying the trucks, but the operators are paying the fuel costs — so the company has less incentive to invest in fuel economy. (One 2012 study found that such "principal-agent problems" apply to some 23 percent of tractor trailers in the US.)

In other cases, trucking firms might not have good information about the value or reliability of new fuel-saving technology. What's more, trucking companies are often reluctant to be the first to adopt a new technology, especially if there's a risk it might make their operations less reliable. They'd prefer to wait and see what other their competitors do. This, in turn, leads to a suboptimal level of investment in fuel-efficiency.

There's a fair bit of empirical evidence that these market barriers do exist, although there's still some debate among economists over how important they actually are. But the EPA, for its part, ultimately concluded that "some combination of uncertainty about future cost savings, transactions costs, and imperfectly functioning markets" was impeding the adoption of fuel-saving technology.

Market failures are key to the case for stricter efficiency rules

A rolling market failure. (Shutterstock)

A rolling market failure. (Shutterstock)

This question about market barriers turns out to be critical. If the EPA is right, and there really are coordination problems that hinder the adoption of new fuel-saving technology, then government regulations can conceivably help overcome these barriers. The air gets cleaner, truck companies save money — everyone wins.

On the flip side, if truck owners had good reasons for not adopting these technologies in the first place — say, because they make engines less reliable — then these new truck regulations could turn out to be more costly, economically, than the EPA thinks. (The agency concedes as much on page 835 of the rule.) In this case, the rules would still reduce greenhouse gas emissions, curb air pollution, and benefit the environment. But they'd be more expensive than expected.

For what it's worth, the trucking industry appears to agree with the EPA that market failures do exist in principle — and well-designed regulations can help companies save money. "In 2014, trucking spent nearly $150 billion on diesel fuel alone," said Glen Kedzie, vice president of the American Trucking Association, in a statement today. "So the potential for real cost savings and associated environmental benefits of this rule are there."

But that still leaves plenty of haggling over the fine details of the rule. Kedzie expressed concern that the truck rule, if poorly structured, could force companies to adopt still-unproven technologies. This rule is only a proposal for now — the EPA will now hold a 60-day comment period, allowing people around the country to submit comments and suggests tweaks.

Further reading:

-- Note that these new standards are basically a stronger extension of an initial round of fuel-economy rules for trucks passed back in 2011. Jason Plautz of National Journal takes a look at how the trucking industry has complied with those.

--This report from the Union of Concerned Scientists makes a detailed case in favor of this second round of more stringent standards. They argue that market barriers are real — and EPA regulations can overcome them.

--This paper by Winston Harrington and Alan Krupnick of Resources for the Future, by contrast, highlights some of the potential pitfalls with truck regulations. For example, the EPA's regulations will only apply to new trucks. Because that means new trucks will be relatively more expensive, truck operators may have more incentive to keep their older, dirtier trucks around for longer.

--Also bear in mind that, in the future, we may see driverless trucks take to the roads. That technology has enormous potential for saving fuel and reducing greenhouse-gas emissions. But it could also put the nation's 1.7 million truck drivers out of work.

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