Vehicle Fuel Economy

Vehicle Fuel Economy

Congress has approved the first increase in corporate average fuel economy in thirty years, propelled by worries over rising oil prices.

Last updated December 19, 2007 7:00 am (EST)

Current political and economic issues succinctly explained.

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The U.S. Congress in December 2007 took the first major steps to improve the fuel efficiency of U.S.-made vehicles in more than thirty years. The mandates to boost fuel efficiency by 40 percent over ten years followed a decline in the average fuel economy of new vehicles since the early 1990s, as U.S. consumers increasingly opted for larger trucks and sport utility vehicles. Public concern over growing dependence on imported oil sources, as well as issues such as the impact of carbon emissions on climate change, spurred the legislative changes. While legislators focused on boosting efficiency through the Corporate Average Fuel Economy (CAFE) program introduced after the Arab oil embargo of the early 1970s, President Bush has proposed replacing the existing system of fleet averages with a standard-setting mechanism for each vehicle based on size.

What does the new legislation do?

The legislation passed by Congress and signed by President Bush on December 19, 2007 calls for boosting CAFE standards from an average of twenty-five miles per gallon to thirty-five miles per gallon by 2020. The new standards would take effect for cars beginning with the 2011 model year.

Why are there concerns about U.S. oil consumption?

The government’s Energy Information Agency forecasts that U.S. energy demand will increase by nearly one-third by the year 2030, with a large part of the increase in the transportation sector. That sector is already heavily dependent on oil, most of which the United States imports. The rise of oil-rich, anti-U.S. regimes in Iran and Venezuela and the increasing unpredictability of energy-rich countries like Russia raise concern about the vulnerability of the U.S. economy as well as the increasing geopolitical leverage of oil-producing states. President Bush cited this vulnerability in his State of the Union speech, echoing increasing warnings from other quarters. "Without dramatic change, the United States is likely to become ever more reliant on imported oil and natural gas with all the attendant threats to the U.S. economy and national security,” said the Government Accountability Office, a congressional watchdog group, in a December 2006 report (PDF). A recent CFR Independent Task Force report warned that Washington’s lack of focus on energy issues was undermining the country’s national security. Jason Grumet, who directs the bipartisan National Commission on Energy Policy, said new CAFE standards are a signal of the unease in Congress over oil prices. “A symbol of national dysfunction on energy policy is being improved for the first time in thirty years,” he said, “and to do that in a Congress that is pretty [divided] is an impressive achievement.”

A number of presidential candidates are calling for CAFE standards up to fifty-five miles per gallon. But Alex Kaplun, a reporter for Environment and Energy Daily, doubts Congress will attempt another bill with tougher standards. “Unless something incredibly dramatic happens—oil goes to an absurd amount—they would let this legislation run its course before they think of doing another bill,” he says.

What are CAFE standards?

CAFE standards were introduced by Congress following the Arab oil embargo of 1973-1974. They called for more than doubling new fleet fuel economy in passenger cars. The standard for cars has remained at 27.5 miles per gallon for twenty years. Under the authority of the government’s National Highway Traffic Safety Administration, the standard for light trucks under 8,500 pounds, which constitute a major part of the new vehicle market in the United States, rose from 20.7 miles per gallon for models from the year 2000 to 24 miles per gallon for new models in 2011.

What vehicles are not covered under the standards?

Currently, vehicles over 8,500 pounds do not have to comply. These include light trucks, large sport utility vehicles (SUVs), and large vans. But starting in 2011, new models between 8,500 pounds and 10,000 pounds such as large SUVs and passenger vans will be subject to CAFE standards for the first time.

What happens to vehicle makers that fail to comply?

They pay a penalty calculated to the falloff in miles per gallon times the total volume of those vehicles made in a given model year. The National Highway Transportation Safety Administration says most European manufacturers pay penalties ranging from $1 million to $20 million per year, which is mainly because of the larger proportion of higher-performance models they have on the U.S. market. Asian carmakers have never paid a fine and make a number of models exceeding the U.S. benchmark standards. Most big U.S. manufacturers have never paid a fine, due in part to their ability to “bank” credits from their years when they exceeded CAFE standards. Since 1983, carmakers have paid nearly $600 million in CAFE penalties.

Have CAFE standards been an effective conservation tool?

There have been mixed views over the effectiveness of mandatory fuel economy measures. A widely cited 2001 National Academy of Sciences report found the CAFE program had clearly improved fuel economy in cars over the previous two decades. It concluded that improvements of more than 40 percent in light truck and SUV fuel economy were possible over a ten-year to fifteen-year period at manageable costs.

But some dispute the impact of CAFE, saying the economies achieved would likely have resulted regardless of federally imposed standards because of the sharply rising oil prices in the 1970s and 1980s. The Congressional Research Service says: “The fact that overall passenger-car-fleet fuel economy remained comparatively flat during a period of declining real prices for gasoline also suggested that the CAFE regulations have contributed to placing some sort of floor (PDF) under new-car fuel economy." Another nonpartisan congressionally funded group—the Congressional Budget Office—found that raising CAFE standards by 3.8 miles per gallon, or enough to reduce the amount of gasoline consumed by new cars by 10 percent, would cost the U.S. economy a total of $3.6 billion per year but suggests ways of softening the impact.

What does the Bush administration propose?

The administration favors what it calls a “size-based standard” for regulating fuel efficiency. Under the system it has introduced for the light-truck category, the standard for each vehicle is based on its “footprint,” or width and distance between the wheels. In his State of the Union speech, Bush proposed changes to fuel economy standards for cars and an extension of the current rule on light trucks. The White House projects the change would reduce annual gasoline use by as much as 8.5 billion gallons by the year 2017. The administration believes that setting different minimum efficiency levels for small and large vehicles, rather than the current fleet-wide standard for cars, will improve safety by removing the incentive for carmakers to downsize vehicles and increasing incentives for technological improvements. “It would also level the playing field for U.S. manufacturers, who are competing with foreign manufacturers that sell many more mini and subcompact cars than U.S. manufacturers,” says the White House.

Is it possible to trade CAFE credits?

Under the December 2007 legislation, vehicle producers that exceed the fuel economy standards for cars or trucks would get credits. The carmaker can save those credits to use in case it fails to reach its miles-per-gallon goals in the following five years, or credits can be used to eliminate a target that was missed in the three preceding years. Until 2020, makers of flex-fuel vehicles that run on ethanol or biodiesel can get fuel economy credits.

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