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The CAFE Standard Shell Game

I've made my punch line the title of this piece. I was never good at telling jokes. This joke, however, isn't really funny anyway because it is a boondoggle being played on the American people.

The Corporate Average Fuel Economy (CAFE) standards were created by Congress in 1975 as part of the Energy Policy and Conservation Act. Over the first nine years of its existence the CAFE standard — and powerful market forces — led to 62% improved vehicle fuel economy. Over the next twenty years or so, better vehicle technologies were used to increase power instead of to increase fuel economy. The end result: average fuel economy for cars in the U.S. is only about 26 miles per gallon in 2008.

In the era of skyrocketing oil, gas and diesel prices, however, Congress took bold action, passing the Energy Independence and Security Act in December of 2007. The key feature of this law was a re-vamping of the CAFE standard for the first time in a generation, setting a new standard of 35 mpg by 2020.

Or so the story goes.

Upon examination, the CAFE standard "improvements" are revealed as little more than a loophole-ridden shell game.

The National Highway Traffic Safety Administration issued the proposed CAFE regulations in March of this year. The regulations cover model years 2011-2015 and "require" all cars and trucks to achieve 31.8 mpg by 2015.

The major changes in the new regulations are a new tradable credit system and a new way of calculating required vehicle improvements based on the size of each vehicle model sold instead of a fleet-wide requirement.

The tradable credit system makes the CAFE "standard" a cap-and-trade system instead of an actual standard. Standards are the prototypical example of a command and control regulatory approach, which, while generally effective in achieving outcomes also generate strong resistance from the regulated businesses. Cap and trade is more market friendly because it sets a limit on the activity at issue but also gives some choices to the regulated businesses as to how they meet that limit. In this case, each size class is "limited" in terms of the gas mileage it must achieve. The "trade" part of this cap and trade allows each manufacturer to trade credits with other manufacturers who are exceeding their requirements, and to trade between size classes within each fleet — and to buy credits from the U.S. government at a set price ceiling.

It is this last part that is most disturbing. By allowing manufacturers to avoid actually improving gas mileage by simply buying credits from the government at a set price, the cap itself may be completely destroyed because there is no limit on how many credits the government may sell. So it's not really a cap and trade system either. It's just a trade system with huge potential to be gamed without any guaranteed benefits for consumers or the environment.

The size class system also has many troubling effects. The NHTSA regulations themselves state the most disturbing outcome: "We were particularly encouraged that Reformed CAFE will eliminate the incentive to downsize some of their fleet as a CAFE compliance strategy, thereby reducing the adverse safety risks associated with the Unreformed CAFE program." (p. 34, emphasis added) NHTSA is here stating that they don't want manufacturers to build smaller cars and are removing, with these regulations, any incentive to do so! Building smaller, more efficient, cars is the most obvious and most environmentally friendly way to achieve better fuel economy throughout a fleet. NHTSA, however, believes that the safety tradeoffs from smaller cars strongly outweigh the benefits of smaller car fuel economy. (The jury is very much out on whether a shift to smaller cars, with today's improved safety features, will in fact lead to more injuries or fatalities).

The size class system also places different burdens on U.S. and foreign manufacturers. An LA Times review of the CAFE standard update calculated that U.S. manufacturers would have to achieve about 33.2 mpg by 2020, whereas foreign manufacturers would have to achieve 39.2 mpg by 2020. Trade policy implications aside, this outcome shows perhaps why U.S. auto manufacturers ended up supporting this CAFE update. My interpretation: because it doesn't really require them to do anything they're not already going to do.

The NHTSA regulations also continue the current compliance credit for ethanol vehicles (flex fuel vehicles), though this credit is phased out by 2020. This system allows manufacturers to earn credits against the CAFE requirements for flex-fuel vehicles they sell — even if those vehicles never use a drop of ethanol.

Regarding cost-benefit analysis, the NHTSA regulations assume that gasoline prices will "rise" to $2.51 per gallon by 2030. With U.S. gas prices already at $3.60 a gallon in 2007 and set to rise much higher over the coming years, the absurdity of this projection is made clear. If real world prices were used, the feasible improvements to vehicles — that would save consumers money over the first five years of ownership on a net basis — would be far higher than the targeted 31.8 mpg by 2020.

The CAFE standard law also prohibits NHTSA from considering the cost of tradable credits and the flex-fuel vehicle credit in its cost-benefit analysis. A more clear admission of boondogglery has never been found.

Last, the proposed NHTSA regulations would explicitly preempt all state efforts to regulate greenhouse gas emissions. California and other states have already threatened lawsuits if this provision is approved because of state efforts to regulate greenhouse gas emissions under their own state authority.

The NHTSA regulations should be exposed for the fraud they are and not approved.

After all of this bad news, the good news is this: market forces will very likely achieve far more than the 35 mpg by 2020 the CAFE standard "requires." SUV and light truck sales fell 28% in the first quarter of 2008 versus 2007. California's gasoline demand fell last year for the first time in 14 years and will probably fall even further this year due to even higher prices. Gas mileage now tops the list of concerns for new car buyers. Maybe markets can work after all?

Tam Hunt is Energy Program Director and Attorney for the Community Environmental Council in Santa Barbara. More information on our programs can be found at www.fossilfreeby33.org. He is also a Lecturer in renewable energy law and policy at the Bren School of Environmental Science & Management at UC Santa Barbara.

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