Corporate Average Fuel Economy (CAFE) Standards

In 1975, in response to an energy crisis in the United States, Congress enacted the Energy Policy and Conservation Act, which included the Corporate Average Fuel Economy (CAFE) Standards. Initially, CAFE standards were part of an effort to reduce U.S. dependence on foreign oil. Today, these standards are part of the debate surrounding global climate change, as vehicles are one of the major emitters of greenhouse gases.

CAFE standards require automobile manufacturers to meet certain miles per gallon (mpg) standards for their fleet of vehicles. In 1974, the average U.S. passenger car had an mpg of less than 13, which was less than the average mpg of just a few years earlier. The CAFE standards required all new automobiles to have an average mpg of 27.5 by 1985. Although there have been numerous proposals to raise mpg requirements, as of 2005, the 27.5-mpg standard remains unchanged for passenger cars (although it was temporarily lowered from 1987 to 1989). Light trucks and SUVs, however, are held to a lower standard. Those vehicles must meet a standard of 22.2 mpg by 2007.

A manufacturer's CAFE is the average fuel economy of the manufacturer's fleet of vehicles for that model year weighted by the production volume of each model of car. Passenger cars and light trucks/SUVs are calculated separately. In addition, a manufacturer's fleet of passenger cars is divided into domestics and imports, as determined by the percentage of components manufactured outside the United States and Canada. The manufacturer must meet CAFE standards for both its domestic and import fleets separately. Failure to meet the standard results in a penalty of $5.50 for each one-tenth mpg the manufacturer is below the standard multiplied by the number of vehicles in manufacturer's fleet for that model year. If a manufacturer exceeds the CAFE standard in any year, the manufacturer is granted excess credits that may be used against past or future shortfalls (up to 3 years in either direction). Manufacturers may also receive credits through the use of alternative fuels (e.g., natural gas, ethanol) under the Alternative Motor Fuels Act of 1988. The National Highway Traffic Safety Administration, which is the agency with responsibility for CAFE standards, reports that manufacturers have paid more than $500 million in fines since 1983.

Opponents of raising CAFE standards claim that requiring automobile manufacturers to increase the mpg of their vehicles causes greater harm to society than benefits. The primary concern of opponents is that [Page 456]manufacturers meet mpg standards by reducing the size and weight of their vehicles, which leads directly to more deaths from automobile accidents. Others, however, claim that new lightweight materials can allow manufacturers to build higher fuel economy vehicles without a negative impact on safety. Opponents also argue that a higher fuel economy will lead to higher prices for consumers and to more traffic congestion and automobile accidents due to an increase in driving (assuming that individuals will drive more as the costs of driving a mile will be reduced with a higher automobile mpg). Finally, opponents claim that CAFE standards are unnecessary as technology development, and not regulation, drives improvements in fuel economy. Proponents of CAFE standards argue that those technologies already exist and manufacturers simply need the financial incentive to make the use of those technologies cost-effective.

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