CAFE Overview - Frequently Asked Questions

• What is CAFE?

  Corporate Average Fuel Economy (CAFE) is the sales weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 lbs. or less, manufactured for sale in the United States, for any given model year. Fuel economy is defined as the average mileage traveled by an automobile per gallon of gasoline (or equivalent amount of other fuel) consumed as measured in accordance with the testing and evaluation protocol set forth by the Environmental Protection Agency (EPA).
  

• What is the origin of CAFE?

  The “Energy Policy Conservation Act,” enacted into law by Congress in 1975, added Title V, “Improving Automotive Efficiency,” to the Motor Vehicle Information and Cost Savings Act and established CAFE standards for passenger cars and light trucks. The Act was passed in response to the 1973-74 Arab oil embargo. The near-term goal was to double new car fuel economy by model year 1985.
  

• Who has executive responsibility for CAFE?

  The Secretary of Transportation has delegated authority to establish CAFE standards to the Administrator of the National Highway Traffic Safety Administration (NHTSA). NHTSA is responsible for establishing and amending the CAFE standards; promulgating regulations concerning CAFE procedures, definitions and reports; considering petitions for exemption from standards for low volume manufacturers and establishing unique standards for them; enforcing fuel economy standards and regulations; responding to petitions concerning domestic production by foreign manufacturers and all other aspects of CAFE, including the classification of vehicle lines as either cars or trucks; collecting, recording and cataloging Pre- and Mid-model year reports; adjudicating carry back credit plans; and providing program incentives such as credits for alternative fueled vehicle lines.

EPA is responsible for calculating the average fuel economy for each manufacturer. CAFE certification is done either one of two ways: 1) The manufacturer provides its own fuel economy test data, or 2) the EPA will obtain a vehicle and test it in its Office of Transportation & Air Quality facility in Ann Arbor, MI. EPA will do actual tests on typically about 30% of the existing vehicle lines, using the same laboratory test that they use to measure exhaust emissions. The entire certification test procedure, including the vehicle test preparation, the actual running of the test on the dynamometer, the recording of the data, etc., is specified in Title 40 of the Code of Federal Regulations.

• Do NHTSA’s CAFE values differ from EPA’s fuel economy data?

  Three different sets of fuel economy values- NHTSA’s CAFE values, EPA’s unadjusted dynamometer values, and EPA’s adjusted on-road values exist. NHTSA’s CAFE values are used to determine manufacturers’ compliance with the applicable average fuel economy standards and to develop its annual report, the Automotive Fuel Economy Program Annual Update. The EPA’s unadjusted dynamometer values are calculated from the emissions generated during the testing using a carbon balance equation. EPA knows the amount of carbon in the fuel, so by measuring the carbon compounds expelled in the exhaust they can calculate the fuel economy. EPA’s adjusted on-road values are those values listed in the Fuel Economy Guide and on new vehicle labels, adjusted to account for the in-use shortfall of EPA dynamometer test values.
  

• What is meant by “maximum feasible fuel economy standards?”

  Congress specified that CAFE standards must be set at the “maximum feasible level.” Congress provided that the Department’s determinations of maximum feasible level be made in consideration of four factors:

  (1) Technological feasibility;
  (2) Economic practicability;
  (3) Effect of other standards on fuel economy; and
  (4) Need of the nation to conserve energy
  

• For what years and at what levels have the passenger car CAFE standards been set?

  To meet the goal of doubling the 1974 passenger car fuel economy average by 1985 (to 27.5 mpg), Congress set fuel economy standards for some of the intervening years. Passenger car standards were established for MY 1978 (18 mpg); MY 1979 (19 mpg); MY 1980 (20 mpg); and for MY 1985 and thereafter (27.5 mpg). Congress left the level of 1981-84 standards to the Department to establish administratively. Subsequently, standards of 22, 24, 26, and 27 mpg were established. For the post-1985 period, Congress provided for the continued application of the 27.5 mpg standard for passenger cars, but gave the Department the authority to set higher or lower standards. From MY 1986 through 1989, the passenger car standards were lowered. Thereafter, in MY 1990, the passenger car standard was amended to 27.5 mpg, which it has remained at this level.

  
  
• For what years and at what levels have the light truck CAFE standards been set?

  Congress did not specify a target for the improvement of light truck fuel economy. Instead, it provided that light truck standards be set at the maximum feasible level for model year 1979 and each model year thereafter. Unlike for the passenger car fleet, there is no default standard established for light trucks. NHTSA must set the standard for each model future model year. Light truck fuel economy standards have been established by NHTSA for MY 1979 through MY 2007.

  Light truck fuel economy requirements were first established for MY 1979 (17.2 mpg for 2-wheel drive models; 15.8 mpg for 4-wheel drive). Standards for MY 1979 light trucks were established for vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less. Standards for MY 1980 and beyond are for light trucks with a GVWR of 8,500 pounds or less. The light truck standard progressively increased from MY 1979 to 20.7 mpg and 19.1 mpg, respectively, by MY 1991. From MY 1982 through 1991, manufacturers were allowed to comply by either combining 2- and 4-wheel drive fleets or calculating their fuel economy separately. In MY 1992, the 2- and 4-wheel drive fleet distinction was eliminated, and fleets were required to meet a standard of 20.2 mpg. The standard progressively increased until 1996, when the Appropriations prohibition froze the requirement at 20.7 mpg. The freeze was lifted by Congress on December 18, 2001. On March 31, 2003, NHTSA issued new light truck standards, setting a standard of 21.0 mpg for MY 2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007.
  

• What is the penalty for not meeting CAFE requirements for any given model year (MY)?

  The penalty for failing to meet CAFE standards recently increased from $5.00 to $5.50 per tenth of a mile per gallon for each tenth under the target value times the total volume of those vehicles manufactured for a given model year.
  
  Since 1983, manufacturers have paid more than $500 million in civil penalties. Most European manufacturers regularly pay CAFE civil penalties ranging from less than $1 million to more than $20 million annually. Asian and domestic manufacturers have never paid a civil penalty.
  
  
  For MY 2002, five passenger car fleets including BMW, DaimlerChrysler import, Fiat, Lotus, and Porsche are projected to fail to meet 27.5 mpg passenger car CAFE standard.  In addition, two light truck fleets including BMW and Volkswagen will likely fail to meet the light truck CAFE standard of 20.7 mpg.  Final Reports for MY 2002 provided by the EPA to NHTSA in mid-calendar year of 2003 may adjust these projections favorably.
  

• What are CAFE credits?

  Manufacturers can earn CAFE “credits” to offset deficiencies in their CAFE performances. Specifically, when the average fuel economy of either the passenger car or light truck fleet for a particular model year exceeds the established standard, the manufacturer earns credits. The amount of credit a manufacturer earns is determined by multiplying the tenths of a mile per gallon that the manufacturer exceeded the CAFE standard in that model year by the amount of vehicles they manufactured in that model year. These credits can be applied to any three consecutive model years immediately prior to or subsequent to the model year in which the credits are earned. The credits earned and applied to the model years prior to the model year for which the credits are earned are termed “carry back” credits, while those applied to model years subsequent to the model year in which the credits are earned are known as “carry forward” credits. Failure to exercise carry forward credits within the three years immediately following the year in which they are earned will result in the forfeiture of those credits. Credits cannot be passed between manufacturers or between fleets, e.g., from domestic passenger cars to light trucks.

• How is the actual Average Fuel Economy reported by manufacturers to the Government?

  Manufacturers are required to submit three reports: 1) Pre-model year; 2) Mid-model year; and 3) Final Report. The pre- and mid-model year reports are submitted to NHTSA, while the final report is submitted to and validated by the EPA.

• Who classifies vehicles for the purposes of CAFE and how is it done?

  Authority to establish vehicle classifications for the purposes of calculating CAFE was delegated to NHTSA. Specifically, the definitions are as follows:

  1) Passenger Car – any 4-wheel vehicle not designed for off-road use that is manufactured primarily for use in transporting 10 people or less.

  2) Truck – a 4-wheel vehicle which is designed for off-road operation (has 4-wheel drive or is more than 6,000 lbs. GVWR and has physical features consistent with those of a truck); or which is designed to perform at least one of the following functions: (1) transport more than 10 people; (2) provide temporary living quarters; (3) transport property in an open bed; (4) permit greater cargo-carrying capacity than passenger-carrying volume; or (5) can be converted to an open bed vehicle by removal of rear seats to form a flat continuous floor with the use of simple tools.
  

• Are import vehicles treated the same as domestics when it comes to CAFE?

  The rules are different for passenger cars and trucks. There is a statutory “two-fleet rule” for passenger cars. Manufacturers’ domestic and import fleets must separately meet the 27.5 mpg CAFE standard. For passenger cars, a vehicle, irrespective of who makes it, is considered as part of the “domestic fleet” if 75% or more of the cost of the content is either U.S. or Canadian in origin. If not, it is considered an import.

  Beginning in 1980, light trucks were administratively subjected to a similar two-fleet rule. However, given changes in market conditions (the “captive import” sector of the fleet had become insignificant), NHTSA eliminated the two-fleet rule for light trucks beginning with MY 1996. Therefore, there are no fleet distinctions, and trucks are simply counted and CAFE calculated as one distinct fleet of a given manufacturer.

• How are alternative fuel vehicles treated under CAFE?

  The CAFE law provides for special treatment of vehicle fuel economy calculations for dedicated alternative fuel vehicles and dual-fuel vehicles. The fuel economy of a dedicated alternative fuel vehicle is determined by dividing its fuel economy in equivalent miles per gallon of gasoline or diesel fuel by 0.15. Thus a 15 mpg dedicated alternative fuel vehicle would be rated as 100 mpg. For dual-fuel vehicles (vehicles that can use the alternative fuel and gasoline or diesel interchangeably), the rating is the average of the fuel economy on gasoline or diesel and the fuel economy on the alternative fuel vehicle divided by .15. For example, this calculation procedure turns a dual fuel vehicle that averages 25 mpg on gasoline or diesel with the above 100 mpg alternative fuel to attain the 40 mpg value for CAFE purposes. Several limitations are established for CAFE credits for dual fuel vehicles. For MYs 1993-2004, the maximum CAFE increase attributable to dual fueled vehicles in a manufacturer’s passenger car or light truck fleet is 1.2 mpg.

  The Alternative Motor Fuels Act (AMFA) directed the Secretary of Transportation, in consultation with the EPA Administrator and the Secretary of Energy, to conduct a study and submit a report to Congress evaluating the success of the policy decision to offer CAFE credit calculation incentives for dual-fuel and gaseous dual-fuel vehicles. The report was transmitted to Congress in March 2002.

  The statutory language also requires that the Department of Transportation either extend the incentive program for dual-fuel vehicles beyond MY 2004 for up to four more years with a maximum allowable increase in average fuel economy for a manufacturer of 0.9 miles per gallon; or issue a Federal Register notice that justifies termination of the incentive program. In March 2002, NHTSA issued an NPRM proposing to extend the availability of the CAFE credit incentive for dual-fueled vehicles for four years, through the end of the 2008 model year. A final rule will be issued in 2003.

• Are any vehicles exempted from CAFE standards?

  Light trucks that exceed 8,500 lbs gross vehicle weight rating (GVWR) do not have to comply with CAFE standards. These vehicles include pickup trucks, sport utility vehicles and large vans.

  A study prepared for the Department of Energy, in February 2002, by the Oak Ridge National Laboratory found that 521,000 trucks with GVWR from 8,500 to 10,000 lbs were sold in calendar year 1999. The vast majority (82%) of these trucks are pickups and a significant number (24%) were diesel. At the end of 1999, there were 5.8 million of these trucks on the road accounting for 8% of the annual miles driven by light trucks, and 9% of light truck fuel use.

• How is a manufacturer’s CAFE determined for a given model year?
  
  A manufacturer’s CAFE is the fleet wide average fuel economy. Separate CAFE calculations are made for up to three potential fleets: domestic passenger cars, imported passenger cars and light trucks. The averaging method used is referred to as a “harmonic mean”. The regulatory language describes the calculation as: “the number of passenger automobiles manufactured by the manufacturer in a model year; divided by the sum of the fractions obtained by dividing the number of passenger automobiles of each model manufactured by the manufacturer in that model year by the fuel economy measured for that model.” The numerical example below illustrates the process. Assume that a hypothetical manufacturer produces four light truck models in 2004, where MPG means miles per gallon and GVWR means gross vehicle weight rating measured in lbs:

  Model	MPG	GVWR	Production Volume
  Vehicle A	22	3000	130,000
  Vehicle B	20	3500	120,000
  Vehicle C	16	4000	100,000
  Vehicle D	10	8900	40,000

  Because the Vehicle D exceeds 8,500 GVWR, it is excluded from the calculation. Therefore, the manufacturer’s light truck CAFE is calculated as:

  =Average Light Truck Fleet Fuel Economy
  
  
  
  The 2004 model year light truck CAFE standard is 20.7 mpg therefore the manufacturer is not in compliance.
  
  
  

• What is the penalty for noncompliance for a given MY and how is it calculated?

  The current penalty for failing to meet CAFE standards is $5.50 per tenth of a MPG under the target value times the total volume of those vehicles manufactured for a given model year.
  
  Since 1983, manufacturers have paid more than $590 million in CAFE civil penalties. Most European manufacturers regularly pay CAFE civil penalties ranging from less than $1 million to more than $20 million annually. Asian and most of the big domestic manufacturers have never paid a civil penalty.
  
  For MY 2002, five imported passenger car fleets, including BMW, Daimler Chrysler, Fiat, Lotus and Porsche are projected to fail to meet the 27.5 mpg passenger car CAFE standard. In addition, two light truck fleets, including BMW and Volkswagen are projected to fail to meet the light truck CAFE standard of 20.7 mpg.
  
  When NHTSA finds that a manufacturer is not in compliance, it notifies the manufacturer. Surplus credits generated from the three previous years can be used to make up the deficit. Using the example from above, the manufacturer may use credits from any of the previous three model years (2001, 2002, or 2003). Credits generated in the furthest out model year (2001) would be used first, followed by any generated in 2002 and finally 2003. If there are no (or not enough) credits available, then the manufacturer can either pay the fine, or submit a carry back plan to the agency. In the example, the hypothetical manufacturer’s CAFE was 19.27 mpg for model year 2004. In that year, the standard was 20.7 mpg. The fine is calculated as:
  
  (20.7 - Average Fuel Economy)*10.0 * $5.50* Production Volume = Total Fine
  (20.7- 19.27) *10.0* $5.50 * 350,000 = $27,527,500
  
  If the manufacturer decides to make up the difference in the following three years instead, they must file a carry back plan with NHTSA. A carry back plan describes what the manufacturer plans to do in the following three model years (2005, 2006 and 2007) to make up the deficit credits. NHTSA must examine and approve the plan. The total number of credits that must be made up are:
  
  (20.7 – Average Fuel Economy)*10.0 * Production Volume = Total Credits
  (20.7 – 19.27) *10.0* 350,000 = 5,005,000
  
  The manufacturer can make up deficit credits by producing a fleet of vehicles that exceeds the standard at that time. For example, suppose the manufacturer submits plans to build the following light trucks in 2005 model year:
  

  Model	MPG	GVWR	Production Volume
  Vehicle A	22	3000	100,000
  Vehicle B	20	3500	80,000
  Vehicle D	10	8900	55,000
  Vehicle E	25	2800	150,000

  
  In this model year, the manufacturer has quit making one model (Vehicle C) and introduced a new model (Vehicle E). Because Vehicle D has a GVWR in excess of 8,500 lbs, it is excluded from the calculation. Therefore, the manufacturer’s CAFE is calculated as:
  

  = Average Fuel Economy

  Since the light truck standard is 21.0 mpg in 2005, the manufacturer has exceeded the standard and generated excess credits:
  
  (Average Fuel Economy –21.0) *10.0* Production Volume = Total Excess Credits
  (22.69-21.0) *10.0* 330,000 = 5,577,000.
  
  These excess credits generated in 2005 model year cover the deficit from the 2004 model year with a surplus of 572,000 that can be used in later model years.