10 July 2007

Against CAFE Standards

The Corporate Average Fuel Economy (CAFE) regulations are the primary governmental means used in the United States designed to encourage fuel efficiency. I’m all for fuel efficient vehicles, but I don’t like the CAFE standards.

What is it?
The Corporate Average Fuel Economy (CAFE) . . . is the sales-weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer's fleet of current model year passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 pounds (3,856 kg) or less, manufactured for sale in the United States. This system will change with the introduction of "Footprint" regulations for light trucks binding in 2011. Light trucks that exceed 8,500 lbs gross vehicle weight rating (GVWR) do not have to comply with CAFE standards; SUVs and passenger vans are exempt up to 10,000 lbs. In 1999, over half a million vehicles exceeded the GVWR and the CAFE standard did not apply to them. In 2011, the standard will change to include many larger vehicles. . . . If the average fuel economy of a manufacturer's annual fleet of car and/or truck production falls below the defined standard, the manufacturer must pay a penalty, currently $5.50 per 0.1 mpg under the standard, multiplied by the manufacturer's total production for the U.S. domestic market, a fine which not all car makers avoid. . . . .

For the purposes of CAFE, a manufacturer's car output is divided into a domestic fleet (vehicles with more than 75% U.S., Canadian or (after the passage of NAFTA) Mexican content) and a foreign fleet (everything else). Each of these fleets must separately meet the requirements. . . .The two fleet rule for light trucks was removed in 1996.

Fuel economy calculation for alternative fuel vehicles multiplies the actual fuel used by a "Fuel Content" Factor of 0.15 as an incentive to develop alternative fuel vehicles. Dual-fuel vehicles, such as E85 capable models, are taken as the average of this alternative fuel rating and its gasoline rate. Thus a 15 mpg dual-fuel E85 capable vehicle would be rated as 40 mpg for CAFE purposes, in spite of the fact that less than 1% of the fuel used in E85 capable vehicles is actually E85.

Manufacturers are also allowed to earn CAFE "credits" in any year they exceed CAFE requirements, which they may use to offset deficiencies in other years. CAFE credits can be applied to the three years previous or three years subsequent to the year in which they are earned. The reason for this requirement is so that manufacturers are not penalized for occasionally (due to market conditions, for example) failing the targets, but only for persistent failure to meet them. . . .

Cars and light trucks are considered separately for CAFE and are held to different standards. As of early 2004, the average for cars must exceed 27.5 mpg and the light truck average must exceed 20.7 mpg. Trucks under 8500 lb must average 22.5 mpg in 2008, 23.1 mpg in 2009, and 23.5 mpg in 2010. After this, new rules set varying targets based on truck size "footprint". . . . As of model year 2002, BMW, DaimlerChrysler (import fleet only), Ferrari, Lotus and Porsche failed the automobile CAFE requirement, while BMW and Volkswagen failed to meet the light truck requirement. . . .

Under the new final light truck CAFE standard 2008-2011, fuel economy standards are restructured so that they are based on a measure of vehicle size called "footprint," the product of multiplying a vehicle's wheelbase by its track width. A target level of fuel economy is established for each increment in footprint using a continuous mathematical formula. Smaller footprint light trucks have higher fuel economy targets and larger trucks lower targets. Manufacturers who make more large trucks are allowed to meet a lower overall CAFE target, manufacturers who make more small trucks must meet a higher standard. Unlike previous CAFE standards there is no requirement for a manufacturer or the industry as a whole to meet any particular overall actual MPG target.

The principal problem with CAFE standards, other than the new footprint standards, is the fleet orientation. Simply put, fuel efficiency should be an individual vehicle based regulation, and not based upon the mix of vehicles that a company happens to sell. For example, while General Motors can meet CAFE standards by lumping fuel guzzling Cadillac sales, with sales of compact cars in its Chevy line, were it to spin off Cadillac, the separate luxury car company would struggle to meet the standards.

The Case For A Predicted Lifetime Fuel Consumption Excise Tax

One possible alternative would be an upfront tax on anticipated fuel useage. First, the EPA fuel ratings would be modified to make them more accurate (something already scheduled to happen in 2008). Second, a predicted fuel consumption over some approximation of the lifetime of the vehicle, say 100,000 miles, would be calculated. Third, a tax rate, perhaps $1 per gallon, would be applied to this lifetime consumption. Fourth, a flat, per vehicle purchase tax rate would be applied to against this tax.

For example, suppose that you had a 25 mpg vehicle. The predicted fuel consumption (prominently displayed along with a predicted lifetime fuel purchase cost based upon current prices – more if the vehicle needed premium fuel) would be 4,000 gallons. The basic tax would be $4,000. A credit might be based on say 33.3 mpg, or 3,000 gallons over the life of the car. So, maybe the credit would be $3,000 and the car purchaser would pay a $1,000 tax on the car.

Now, suppose that you buy a 50 mpg hybrid vehicle. The predicted fuel consumption would be 2,000 gallons. The basic tax would be $2,000. But, after applying a $3,000 credit, maybe you would receive a $1,000 fuel efficiency tax refund with the purchase.


1. It puts the incentives and information in place at the time when the economic decision is made, when the vehicle is purchased, unlike a gas tax which comes up at a time when vehicle owners have only a limited ability to change their gasoline use – fuel consumption is very inelastic due to the demands of work and home and shopping locations.

2. The tax is collected at a time when the buyer can’t afford it, when a new car is purchased. Unlike gas tax increases, it doesn’t burden people based on economic decisions made before the tax was enacted, which simply burden the poor.

3. It simultaneously encourages buyers to purchase smaller vehicles and to purchase more fuel efficient vehicles. To the extent that lower income people tend to purchase smaller, more fuel efficient cars anyway, because they are cheaper, the tax will be less regressive than gas taxes. Likewise, taxes will tend to be high on fuel inefficient big SUVs and luxury cars, which tend to be purchased by the affluent.

4. The tax is indifferent to fleet mix. If you want to sell exclusively luxury cars, exclusively small cars, or a mix of both, the law doesn’t car.

5. The tax recognizes that secondary market sales of vehicles have only a modest impact on the environment. Once a new vehicle has been sold, somebody is going to drive it until it breaks down and has to be scrapped. An individual’s trade up to a more fuel efficient new vehicle is only good for the environment at the macro-level only if the vehicle is not resold to someone else. The problem of removing fuel inefficient vehicles from the national fleet of vehicles before they are mechanically exhausted is a problem that will have to be solved separately.

6. The tax is closely linked to the impact that the tax seeks to influence. It is closely linked to fuel consumption.

7. The tax subtly favors conservation. Those who conserve simply by driving less will still pay less in the long run, because they will pay the tax on fewer vehicles over time. If you drive 5,000 miles a year, you may buy 1 vehicle every twenty years, rather than 1 vehicle every ten years, and so you will pay the tax once instead of twice. Likewise, a business that is given a choice between an eight passenger vehicle with less fuel efficiency and a four passenger vehicle with more fuel efficiency will have an incentive to choose the larger vehicle only if the business really needs the eight passenger capacity.

8. The tax encourages economically sensible fuel efficiency innovation in a non-arbitrary way. If a technology that costs less than $1 per gallon of lifetime fuel savings, there is an economic incentive to include it, and the cheaper the technology, the stronger the incentive is to use it. If the technology costs more than $1 per gallon of lifetime fuel savings, it is subsidized, but not strongly encouraged, and the subsidy is weaker as the cost/benefit ratio falls. Rather than amend CAFE standards on a regular basis as new technologies make fuel efficiency technologies feasible, falling technology prices encourage their use.

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