6.10. CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS
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The Energy Policy and Conservation Act of 1975 established corporate average fuel economy (CAFE) standards for all manufacturers that sell vehicles in the United States. The standards were first imposed in 1978 and are now 27.5 miles per gallon (mpg) for production passenger cars and 20.7 mpg for production light-duty vehicles. (Light-duty vehicles include sport utility vehicles, minivans, and pickup trucks with gross vehicle weight ratings less than 8500 pounds.)
Corporate average fuel economy and compliance with the CAFE standard is determined as the harmonic mean of the fuel economy of automobiles produced by each manufacturer. The harmonic mean is computed as the mean obtained by taking the reciprocal of the arithmetic mean of the reciprocals. Harmonic average fuel economy is more difficult to achieve than is 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 $5.50 per automobile for every 0.1-mpg shortfall. Carry back and carry forward provisions akin to banking do exist, and they allow shortfalls in one year to be met with credits from another year.
CAFE standards have been the primary national policy instrument for improving personal vehicle fuel economy and for reducing gasoline and oil consumption in the transportation sector. From the late 1970s through the mid-1980s, CAFE standardsworking in concert with higher gasoline prices through most of that periodnearly doubled the average fuel economy of new personal vehicles. Throughout the 1990s, with oil and gasoline prices recording historic lows on an inflation-adjusted basis, CAFE standards provided a floor for automotive fuel economy. Fuel economy was higher than it would have been absent the standards. Therefore, compliance with these standards reduced gasoline consumption.
Since fuel economy is inversely proportional to carbon dioxide emissions, the primary greenhouse gas from motor vehicles, CAFE has yielded reductions in carbon dioxide emissions and overall greenhouse gas emissions. (Fuel economy is largely unrelated to emissions of criteria pollutants such as particulate matter, CO, and NOx). In this regard, CAFE can be viewed as an intra-firm trading system to meet a de facto standard to reduce the carbon dioxide emissions from personal vehicles.
As a policy instrument, CAFE has both advantages and disadvantages. Some of CAFE’s advantages follow.
· CAFE is in place, it has proven to be a workable program, and lessons have been learned about how it could be improved.
· CAFE has yielded significant reductions in gasoline consumption and carbon dioxide emissions, which would not have been the case without these standards.
· The general public strongly supports CAFE relative to other alternatives to increase fuel economy and reduce carbon dioxide emissions, such as higher gasoline taxes.
· CAFE includes many market elements, such as
· sales-weighted averaging (as opposed to a floor that every vehicle must meet),
· a 7-year rolling average for compliance (and credits can be carried back or forward for 3 years), and
· the option of paying monetary fines in lieu of meeting the standard, a choice that is left to the discretion of the manufacturer. (Several non-U.S. firms pay these fines. All U.S. automakers have chosen to meet CAFE standards in the past.)
Like any policy instrument, CAFE also has disadvantages. Some of them follow.
· CAFE is inconsistent with low fuel prices. That is, when gasoline prices are relatively low, there is less demand for high-fuel economy cars, and manufacturers must sell higher fuel economy than the market demands. (Green.1990).
· CAFE does nothing to reduce vehicle miles traveled (VMT). (Some analysts argue that CAFE increases VMT and emissions by lowering the cost of driving, i.e., raising the fuel economy of vehicles means, in theory, that less gasoline is needed to travel a certain number of miles. Other analysts assert that these effects are negligible.)
· CAFE does have a cost, either in terms of the higher prices of vehicles or the tradeoffs that must be made with other vehicle attributes such as utility, weight, or acceleration.
· CAFE is strongly opposed by automakers, whose objections include higher vehicle cost and the potential reduction in safety for passengers in these lighter weight vehicles.
Alternatives to CAFE standards would include higher gasoline taxes and “feebates,” which would assess fees to the sale of vehicles with low-fuel economy and rebates for the purchase of high-fuel economy vehicles. Like CAFE, each of these options has advantages and disadvantages. The relative merits of these options relative to CAFE are debated, as is the magnitude required for such policies to provide the same benefits as CAFE.