Topic Area: Global Warming

Geographical Area: United States

Focal Question: How successful has the CAFE standard been at curtailing carbon dioxide emitted from automobiles?

Source:

(1) DeCicco, John M., "Steering with prices: Fuel and vehicle taxation as market incentives for a higher fuel economy" in Daniel Sperling, Transportation and Energy: Srategies for a Sustainable Transportation System (Berkely, California: ACEEE, 1995): 177-217.

(2) Thorpe, Steven, 1997. "Fuel economy standards, new vehicle sales, and average fuel efficiency." Journal of Regulatory Economics 11(3): 311-326.

(3) Agras, Jean, *1999. "The Kyoto Protocol, CAFE standards, and gasoline taxes." Contemporary Economic Policy v17 i3: 296.

(4) Bielski, Vince, 1996. "Fuel deficiency. (the popularity of of sport utility vehicles)" Sierra Club v81 n6: 22-25.

(5) http://www.epa.gov/globalwarming/climate/index.html

Reviewer: Christopher Prouty Ix, Colby College ‘00

Since the late 19th century, the global mean surface temperature has been steadily increasing. The temperature acceleration has been especially prominent in recent times. 1998 was the hottest year ever recorded and ten of the warmest years have all occurred within the last 15 years. The impacts have been obvious. Snow cover in the Northern Hemisphere and ice caps in the Arctic Ocean are beginning to deteriorate, the sea level is on the rise, and there has been an increase in the frequency and intensity of storms. At this rate, temperature hikes could permanently alter climate and precipitation levels unique to geographical areas, which could have detrimental effects on valuable socioeconomic and ecological systems such as forests, range lands, bodies of water, and coastlands. Many scientists blame global temperature rises on human activities that have altered the chemical composition of the atmosphere by unleashing excessive amounts of greenhouse gases such as carbon dioxide, methane, and nitrous oxide that augment the heat-trapping abilities of the earth’s atmosphere.

Carbon dioxide is the primary greenhouse gas emitted by human activity. With 1,487.9 million metric tons of carbon dioxide emitted in 1997 alone, the US is the largest emitter of carbon dioxide. Automobiles in the US account for over 20 percent of all carbon dioxide emissions in the US. Carbon dioxide is created when the gasoline is converted into energy during the combustion process. The Corporate Average Fuel Economy (CAFE) standards have played a leading role in the reduction of carbon dioxide emitted by vehicles because it sets minimal standards on the miles per gallon (mpg) performance of an automobile.

In 1975, the Energy Policy and Conservation Act (EPCA) created the CAFE standards in order to control oil consumption. In contrast to uniform standard approach, which requires all vehicles to meet the standards separately, CAFE functions very similar to an internal tax of fuel efficiency. The standards require all vehicles sold by domestic and foreign firms, who sell more than 10,000 vehicles in the US, to meet or exceed a pre-determined annual average fuel economy level, which is measured in miles per gallon (mpg). Each automobile sold in US is divided into four separate fleets: imported passenger cars, domestically produced passenger cars, imported light trucks, and domestically produced light trucks. If a manufacturer’s fleet has an average fuel efficiency level that is below the CAFE standard, it’s fined $5 per vehicle for every .1 mpg below the standard. There is one standard for passenger cars and a much lower standard for light trucks.

Since its introduction in 1978, the CAFE has substantially increased fuel efficiency of cars and light trucks. From 1975 to 1993 the average fuel efficiency of light duty vehicles has increased by 60 percent, from 15.3 miles per gallon (mpg) to 25 mpg. Moreover, most of the efficiency improvements were obtained by improving technology, with little change in vehicle size and a net increase in acceleration performance. One study estimates that these CAFE standards have saved over 2.5 million barrels of oil per day.

Although the average fuel economy increases were impressive, further examination of the data illustrates that most of the fuel efficiency progress occurred from 1975 to 1982. Further momentum was partially inhibited by lack of congressional support to heighten CAFE standards. Since 1985, CAFE standards for passenger cars have not increased and the standard for light trucks has only increased .2 mpg per annum. CAFE standards lacked impetus during this period because its underlying rationale was undergoing monumental reconstruction. CAFE was originally created to decrease the demand for oil imports by enhancing fuel efficiency. Oil is an essential component for economic activity and OPEC’s oil embargo in 1973-74 clearly demonstrated that the US economy was very vulnerable to the actions of foreign oil suppliers. However, after the pricing effects of OPEC’s second oil embargo of 1978-79 began to diminish, many lawmakers felt that the primary mission of CAFE had been made obsolete by the new and different economic environment of the 1980s. The combination of low real oil prices and gradually increases in per capita incomes gave many American the financial ability to ignore fuel efficiency. Furthermore, the automobile industry were aggressively lobbying to decrease CAFE standards, complaining that it gave foreign car makers a significant comparative advantage over the US market because foreign auto manufacturers produce vehicles with much higher fuel efficiency levels than American automobiles. Despite these set backs, CAFE has been kept alive by persistent environmental groups concerned about the negative impacts of global warming. Their determination has helped introduce global warming as the driving mission behind CAFE. In addition, environmental international conferences, like the Kyoto protocol, have provided CAFE with a greater public following and have improved its recognition within the environmental arena.

Ironically, CAFE regulations have unintentionally created perverse market incentives to purchase and create vehicles that are relatively less efficient. It is much more expensive to maintain CAFE standards for larger and mid-size passenger cars than it is for smaller cars. Manufacturers most allocate more of their financial resources on the research and development needed to make station wagons as fuel efficient as smaller cars, which weigh considerably less. This additional R&D spending is represented in the ultimate price of the larger size cars, and acts as a major deterrent for potential buyers. Meanwhile, compliance for light trucks is much easier than passenger cars because CAFE standards are much lower. This especially true for large sports utility vehicles like the GMC Suburban who are entirely excluded from CAFE standard because their weight exceeds the 8,500 lbs. limit. The low compliance cost on these light trucks makes them relatively less expensive than cars. Consequently, the increase in price of cars, the decrease in the price of light trucks, demand for more cargo space and passenger room, and the added benefits of four-wheel drive have caused automobile consumers to substitute cars for trucks. Constituting over 40 percent of the automobile market, light trucks have gained a substantial share within the last decade. Although their fuel efficiency is much lower than passenger cars, 80 percent of these light trucks are only used for personnel transportation. This shift in consumer purchases toward less fuel-efficient vehicles has caused the average fuel economy to drop since 1988.

The architects of CAFE intended automobile manufacturers to pursue strategies that relied upon technological changes in regards to vehicle engine modification or physical design adjustment, pertaining to shape, size, and weight, to improve the fuel efficiency of their models. These types of technological changes take considerable time, usually three to five years. To provide firms ample time to prepare for standard increases, CAFE implicitly subsidizes manufacturers through a credit system. When a standard has been exceeded, manufactures can avoid penalties temporarily or permanently by applying credits earned from previous CAFE surplus, expected future CAFE surpluses, or production of alternative-fueled vehicles. However, CAFE was not entirely prepared for some of the more devious strategies performed by firms. For instance, some of the manufacturers who produce both domestically and abroad can evade penalties by moving models between domestic and import fleets in order to accommodate a fleet fuel economy averages that is below CAFE standards. This can be accomplished by altering the origin of parts or the location of production. Furthermore, some light truck producers have increased the weight of their truck lines above the gross vehicle weights limits governed by the CAFE standards in order to remain abstained from its troublesome legislation. These larger trucks include Dodge Rams, Ford Econolines, Ford F and C/K series pickups, GMC, Sierra pickups, GMC Suburbans, and GMC Vanduras.

Although cars are much more fuel efficient today then they were twenty-four years ago, gasoline consumption and carbon dioxide have been on the rise. One reason for this phenomenon, is CAFE’s inability to directly control petrol consumption through fuel use. Since 1975, the number of vehicle miles traveled has doubled and the number of cars on the road has increased by 50 half. Relatively low prices of gasoline permitted individuals to drive fuel inefficient cars without paying the environmental costs of their actions.

The effectiveness of CAFE standards on carbon dioxide emissions depends on how significant the global warming issue becomes in the political agenda. Once global warming becomes highly prioritized by voters, law makers must reverse CAFE’s past policies that have generated vehicle substitution away from more efficient vehicles, by increasing CAFE standard on light trucks. It would also be beneficial to include a separate lower standard for larger cars so that people that desire more space in a vehicle don’t have to purchase a light truck. On the other hand, CAFE’s failure to receive congressional approval could indicate that the political process couldn’t adequately measure the cost and benefits incurred by decreasing greenhouse gasses because it’s easy manipulated by the auto industry’s ulterior motives. Vehicle and fuel taxation are two other market based policy alternatives to the CAFE standard. Vehicle taxes, such as the US gas guzzler tax, imposes an excise tax on passenger cars sold below a certain fuel economy thresh hold and is currently considering offering rebates to vehicles that are more fuel efficient than average. Information pertaining to effectiveness of the gas guzzler tax is inadequate because it only applies to a small portion of cars and it does not pertain to light trucks. Although fuel taxes play only a limited role on gasoline consumption in the short-run, it is the much more cost-effective than CAFE and as indicated from abroad, it has a major effect on gasoline consumption in the long run. An industry-based study sponsored Charles River Associates that evaluated the relative cost of various approaches to reducing petroleum use and greenhouse gas emissions, concluded that higher gasoline taxes are roughly 40 percent less costly than a CAFE standard that achieves comparable petroleum savings.