Never before has the American auto industry witnessed such a myriad of harmful factors that came about with the swiftness and magnitude of the present situation. The credit crunch, soaring gas prices, and an unprecedented collapse in demand for large trucks and SUVs all tangled together to create a perfect storm. The already ailing automakers are now struggling to cope with an 11% slide in U.S. sales so far this year. In the rest of the world, auto sales are either growing or experiencing a much more modest drop. Yet the financial collapse and rising oil costs are worldwide phenomena. So what makes the U.S. so much different?

Let’s look at Europe (the land of gas-sipping scooters and lunch-box-sized cars) as an example. Fuel taxes in Europe can have an effective rate of over 100% in some cases, which serves not only to increase demand for fuel efficient vehicles, but also creates a buffer against oil prices. So when the price of oil skyrockets (as it did when the financial system began to crumble) the consumer sees a less dramatic rise at the pump.

The United States also has legislation in place to combat gas-guzzlers. The Corporate Average Fuel Economy (CAFE) standards require automakers to gradually improve the average fuel economy of their respective fleets. By 2020 these standards will require the average of all passenger vehicles to meet or exceed 35 miles per gallon. Significant gains in fuel economy have been seen since the legislation was introduced in 1975, and automakers are developing more fuel efficient vehicles now to be sure they are in compliance for the tighter standards to come.

Both approaches decrease oil consumption, so why is the U.S. still so far behind in fuel economy? Could we raise the CAFE standards even higher to get to Europe’s level of efficiency? The question basically comes down to whether the consumer should have the burden of higher gas prices or whether car companies should be required to produce more efficient cars.

Excuse me for showing my love for economics here, but let’s look at the incentives both approaches place on relevant parties. The comparatively cheap gas in America’s system has created a “pay-for-power” mindset where producers can garner more money for a vehicle by throwing in a bigger engine. Hence the SUVs. The average European consumer on the other hand is more willing to pay an upfront premium for a vehicle that will use less fuel. Hence the lunch boxes. The problem with addressing producers rather than consumers is that it doesn’t allow automakers the freedom to match their product line directly with consumer demand. As one industry bigwig wittingly noted, imposing CAFE standards on producers is like trying to combat obesity by requiring clothing manufacturers to sell smaller sizes.

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