The US Congress approved stricter standards for fuel efficiency in cars, the so-called CAFE standards, and President Bush signed this law. The European Union is also working towards stricter requirements. So there seems to be broad agreement that cars should become more efficient. But is this the best way to reach this goal?
Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase. In economic terms and for households, this means the fix cost of owning a car increases. As cars are more efficient, the marginal cost of driving then decreases: same cost of gas, more mileage out of a gallon. Thus, conditional on owning a car, people will be driving more. But will there be fewer cars on the road? Allow me to doubt that in the US, where it seems to be a God-given right and duty to own a car. And if a multi-car family decides to downsize, the remaining car(s) will be driven more. Things may be a bit different in Europe, where car loans are not as widespread to pay for the fix cost and alternatives to driving are well developed, even in rural areas.
All in all, I seriously doubt that this will reduce pollution and I am sure this will increase traffic. Just what we need. So what is the (better) solution? You guessed it, tax gas. This increases the marginal cost of driving, internalizes the relevant externalities, increases, whether you like it or not, the revenue of governments, and pushes manufacturers to provide more fuel efficient vehicles as they are demanded by drivers. No need for complex regulation and coercion to achieve those higher standards. All the incentives are right.