6.1.13. Corporate Average Fuel Economy Standards (CAFE)

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The Energy Policy and Conservation Act set standards for domestic automobile manufacturers, beginning at 18 miles per gallon (mpg) in 1978 and rising to 27.5 mpg by 1985. The original standards were modified on two occasions, now standing at 27.5 mpg for 1990 and later production vehicles.

Corporate average fuel economy and compliance with the CAFE standard is determined as the harmonic average of the fuel economy of automobiles produced by each manufacturer. Harmonic average fuel economy is more difficult to achieve than would be simple averaging. For example, to achieve a CAFE standard of 27.5 mpg, two 35 mpg vehicles must be sold for every 20 mpg vehicle sold. The penalty for failing to meet the CAFE standard is $5 per automobile for every 0.1 mpg shortfall. There are carry back and carry forward provisions akin to banking that allow shortfalls in one year to be met with credits from another year.

While CAFE standards are directed at fuel economy, they do have a pollution consequence. CO₂ emissions rise and fall inversely with fuel economy (R2 = .99), while emissions of CO, NOx and hydrocarbons are largely unrelated to fuel economy. Khazzoom (1995). Thus, the CAFE standard can be viewed as an intra-firm trading system to meet a de facto CO₂ reduction goal. It is only fair to point out that higher gasoline taxes would be a less costly means of reducing fuel use (and, implicitly, CO₂ reductions) since fuel taxes do not distort the selection of vehicles available to consumers as does a CAFE standard (under which smaller, less safe vehicles tend to replace larger, safer vehicles).Further, a gasoline tax affects vehicle use as well as which vehicle is purchased, whereas higher CAFE standards have the perverse effect of stimulating more use of a vehicle (the so-called "rebound effect").

6.1.13. Corporate Average Fuel Economy Standards (CAFE)

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