CAFE: What Is It and How Has It Worked?
What Is CAFE?
The Energy Policy and Conservation Act of 1975 established a new federal scheme for regulating the average fleet fuel economy of cars and light trucks (i.e., pickups, vans and sport utility vehicles) sold in the United States. Today, the Corporate Average Fuel Economy (CAFE) standards remain the only such program in the world.
CAFE standards require each automaker to meet a sales-weighted average fuel economy level for the fleets of new cars and light trucks it sells each year. Meeting the standard generally requires selling several higher-mileage vehicles to offset the sales of each vehicle with moderate fuel economy. One standard governs passenger cars, and another governs light trucks. The standards, which took effect in 1978 at 18 miles per gallon (mpg) for cars, increased gradually each year until 1985, when they reached a level of 27.5 mpg. Light truck standards which are set periodically by DOT are currently 20.7 in MY 1996-97. Failure to meet the CAFE standard results in a fine based on the total number of cars (or trucks) produced by the company in that model year.
Fuel Prices Drive Demand For Small Cars
The CAFE system was conceived as a response to the 1970s Arab oil embargos to help reduce American demand for imported oil and promote energy conservation.
The oil shocks sent gasoline prices sky-rocketing and pushed consumer demand for more fuel-efficient vehicles throughout the late 1970s. This allowed automakers to build and sell enough of these models to exceed the government standards.
By the mid-1980s, however, gasoline prices had begun to fall significantly, an event not foreseen in 1975. In fact, Congress had assumed gas prices would be $2.50 a gallon by 1985. When gasoline prices dropped, consumer demand for more fuel-efficient cars and light trucks declined as well. The growing demand for larger family-size vehicles has also been reflected in the CAFE levels of the Japanese automakers, which have been falling steadily since the mid-1980s.
As this chart shows, fuel prices play the greatest role in determining the fuel economy of the new car fleet. As gas prices fall, consumers tend to buy larger, family-size vehicles.
Thus, while automakers can be required to build more fuel-efficient cars and light trucks, consumers cannot be forced to buy them. Because CAFE levels are based on the annual average fuel economy of the vehicles actually sold, automakers cannot meet the standards if the consumer demand for fuel economy is not present.
Nonetheless, automakers have achieved impressive gains in fleet fuel economy: 100% for passenger cars and 50% for light trucks. Some models achieve levels of over 40 mpg. But they account for less than 2 percent of U.S. car sales and less than 1% of car and truck sales combined.
CAFE and Regulatory Reform: Did CAFE Meet Its Goals?
Despite the impressive fuel economy gains, CAFE has not lived up to expectations. Oil savings have been less than one-tenth of what was predicted. And oil imports have increased from 35% of the oil we used in the mid-1970s to 50% today.
Why were predicted benefits not achieved? Many motorists drive more miles when the per-mile cost of driving is cut by better fuel economy; others hold onto older vehicles longer, rather than pay higher vehicle prices for fuel economy improvements and accept smaller, lighter vehicles. And U.S. oil imports depend largely on world oil prices, not on U.S. auto mileage ratings.
Another result of CAFE has been a marked increase in the sales of light trucks including pickups, vans, minivans and sport utility vehicles. As cars became smaller and lighter, some models (like large station wagons) became harder to find. Since some consumers could no longer find the utility and performance they desired in cars, many switched to light trucks. In the mid-1970s, light trucks made up 20% of light-duty vehicle sales; today, they make up about 40% of new vehicle sales.
A 1992 landmark study by the independent National Academy of Sciences (NAS) found that the CAFE system distorts the market for new cars and light trucks. Because automakers must improve fuel economy at the expense of other attributes that consumers value more (safety, utility, price, and performance), they are in essence forced to sell a product that is at odds with consumer demand. According to the NAS report: "The existing [CAFE] system...has serious flaws that warrant careful examination. Chief among these defects is the fact that the system is increasingly at odds with market signals, which serves to mute and diminish the system's effectiveness, and to increase its costs."
Despite the evidence, some special interest groups continue to press for drastic increases in CAFE standards. This hardly squares with the need for regulatory reform, especially in light of the fact that such increases would reduce safety, result in higher costs, and compromise vehicle utility and performance.
Congress and the Administration recognize the need for regulatory reform and have called for the re-examination of existing regulations. The CAFE program deserves serious re-evaluation. Ironically, the average fuel economy for all vehicles on the road today will continue to improve regardless of the CAFE standards. As older, less-efficient vehicles are retired and replaced with newer vehicles, the fleet average will gradually improve. Also, automakers will continue to invest billions in research and development of new technologies, which can be expected to improve fuel economy of new models in modest increments in coming years.
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updated: 8/24/97 |
