Vehicle Fuel Economy
Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards Gao ID: GAO-07-921 August 2, 2007Concerns over national security, environmental stresses, and high fuel prices have raised interest in reducing oil consumption. Through the Corporate Average Fuel Economy (CAFE) program, the National Highway Traffic Safety Administration (NHTSA) requires cars and light trucks to meet certain fuel economy standards. As requested, GAO discusses (1) how CAFE standards are designed to reduce fuel consumption, (2) strengths and weaknesses of the CAFE program and NHTSA's capabilities, and (3) market-based policies that could complement or replace CAFE. To do this work, GAO reviewed recent studies and interviewed leading experts and agency officials.
NHTSA, an administration within the Department of Transportation(DOT), is primarily responsible for setting and enforcing CAFE standards for cars and light trucks, although the Environmental Protection Agency (EPA) and the Department of Energy (DOE) are also involved. NHTSA raised the light truck CAFE standards from 20.7 miles per gallon (mpg) in 2004 to 22.2 mpg in 2007. Subsequently, NHTSA, which has authority to restructure the light truck program, set different standards for light trucks of different sizes. The new approach takes full effect in 2011. However, NHTSA has not raised the CAFE standard for cars above 27.5 mpg since 1990 due, in part, to provisions in DOT's annual appropriations acts for fiscal years 1996 through 2001 and, more recently, to NHTSA's desire to restructure the car CAFE program before raising the standard to avoid potential negative safety impacts. Many experts believe CAFE has helped save oil--for example, a study by the National Academy of Sciences estimated that in 2002 CAFE contributed to saving 2.8 million barrels of fuel a day in passenger vehicles, or 14 percent of consumption in that year. CAFE would help the nation work toward fuel-saving goals if standards are increased, and GAO's evaluation of NHTSA's capabilities suggests the agency could act quickly to implement new standards and restructure the program. However, GAO identified several characteristics that limit CAFE's potential to save fuel. Several refinements to the CAFE program could improve its effectiveness and reduce costs, such as setting different standards for cars of different sizes as the restructured light truck program does and instituting a broader CAFE credit trading program. The Senate recently passed a bill modifying the CAFE program that includes these refinements. Meeting the nation's goals to reduce oil consumption over time will require more than CAFE alone, and GAO identified several market-based incentives involving passenger vehicles that could complement and strengthen CAFE's fuel-saving effects or that potentially could serve as alternatives to CAFE. Some market incentives, such as a tax credit for hybrid vehicles and the Gas Guzzler Tax on fuel-inefficient cars, currently exist to encourage consumers to buy fuel-efficient vehicles. However, GAO identified other vehicle purchasing incentives that may work at cross purposes to those intended to reduce fuel consumption. For example, market incentives have been used to increase the availability and use of alternative fuels; however, GAO's recent report on one of these efforts identified several limitations. Several additional policy options, including a tax on fuel or a carbon cap-and-trade program, would affect a broader range of fuel-saving behaviors among consumers and would likely be more cost-effective than CAFE. Such options could help the nation reach larger, long-term fuel-saving goals at a lower cost than CAFE, but time would be needed to design and garner support for each before it was implemented. However, increasing the CAFE standards and considering options to improve the program would contribute to fuel-saving goals in the immediate future.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-921, Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards
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Report to the Chairman, Committee on Commerce, Science, and
Transportation, U.S. Senate:
United States Government Accountability Office:
GAO:
August 2007:
Vehicle Fuel Economy:
Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by
Cars and Light Trucks, and Other Options Could Complement These
Standards:
GAO-07-921:
GAO Highlights:
Highlights of GAO-07-921, a report to the Chairman, Committee on
Commerce Science, and Transportation, U.S. Senate
Why GAO Did This Study:
Concerns over national security, environmental stresses, and high fuel
prices have raised interest in reducing oil consumption. Through the
Corporate Average Fuel Economy (CAFE) program, the National Highway
Traffic Safety Administration (NHTSA) requires cars and light trucks to
meet certain fuel economy standards. As requested, GAO discusses (1)
how CAFE standards are designed to reduce fuel consumption, (2)
strengths and weaknesses of the CAFE program and NHTSA‘s capabilities,
and (3) market-based policies that could complement or replace CAFE. To
do this work, GAO reviewed recent studies and interviewed leading
experts and agency officials.
What GAO Found:
NHTSA, an administration within the Department of Transportation (DOT),
is primarily responsible for setting and enforcing CAFE standards for
cars and light trucks, although the Environmental Protection Agency
(EPA) and the Department of Energy (DOE) are also involved. NHTSA
raised the light truck CAFE standards from 20.7 miles per gallon (mpg)
in 2004 to 22.2 mpg in 2007. Subsequently, NHTSA, which has authority
to restructure the light truck program, set different standards for
light trucks of different sizes. The new approach takes full effect in
2011. However, NHTSA has not raised the CAFE standard for cars above
27.5 mpg since 1990 due, in part, to provisions in DOT‘s annual
appropriations acts for fiscal years 1996 through 2001 and, more
recently, to NHTSA‘s desire to restructure the car CAFE program before
raising the standard to avoid potential negative safety impacts.
Many experts believe CAFE has helped save oil”for example, a study by
the National Academy of Sciences estimated that in 2002 CAFE
contributed to saving 2.8 million barrels of fuel a day in passenger
vehicles, or 14 percent of consumption in that year. CAFE would help
the nation work toward fuel-saving goals if standards are increased,
and GAO‘s evaluation of NHTSA‘s capabilities suggests the agency could
act quickly to implement new standards and restructure the program.
However, GAO identified several characteristics that limit CAFE‘s
potential to save fuel. Several refinements to the CAFE program could
improve its effectiveness and reduce costs, such as setting different
standards for cars of different sizes as the restructured light truck
program does and instituting a broader CAFE credit trading program. The
Senate recently passed a bill modifying the CAFE program that includes
these refinements.
Meeting the nation‘s goals to reduce oil consumption over time will
require more than CAFE alone, and GAO identified several market-based
incentives involving passenger vehicles that could complement and
strengthen CAFE‘s fuel-saving effects or that potentially could serve
as alternatives to CAFE. Some market incentives, such as a tax credit
for hybrid vehicles and the Gas Guzzler Tax on fuel-inefficient cars,
currently exist to encourage consumers to buy fuel-efficient vehicles.
However, GAO identified other vehicle purchasing incentives that may
work at cross purposes to those intended to reduce fuel consumption.
For example, market incentives have been used to increase the
availability and use of alternative fuels; however, GAO‘s recent report
on one of these efforts identified several limitations. Several
additional policy options, including a tax on fuel or a carbon cap-and-
trade program, would affect a broader range of fuel-saving behaviors
among consumers and would likely be more cost-effective than CAFE. Such
options could help the nation reach larger, long-term fuel-saving goals
at a lower cost than CAFE, but time would be needed to design and
garner support for each before it was implemented. However, increasing
the CAFE standards and considering options to improve the program would
contribute to fuel-saving goals in the immediate future.
What GAO Recommends:
Congress should consider giving NHTSA the (1) authority to reform the
car CAFE program as it did the light truck program, (2) resources to
update information on new fuel-efficient technologies, and (3)
flexibility to adjust the program in the future.
GAO recommends NHTSA analyze the need for enhancements to the CAFE
program, and, in conjunction with the appropriate agencies, evaluate
policies meant to reduce fuel consumption to ensure they are achieving
stated goals. DOT agreed to consider the recommendations; EPA agreed
with the recommendations; and DOE did not comment on GAO‘s
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-921].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine A. Siggerud at
(202) 512-2834 or siggerudk@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The CAFE Program Is Designed to Reduce Oil Consumption by Cars and
Light Trucks and Has Been Restructured for Light Trucks but Not for
Cars:
Several Weaknesses in the CAFE Program Exist:
Some Market-Based Policy Options Could Complement the CAFE Program:
Conclusions:
Matters for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Selected Manufacturers' CAFE Performance, Selected Years
from 1990 through 2005:
Appendix III: Comments from the Department of Energy:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Current CAFE Standards:
Table 2: CAFE Penalties by Manufacturer Model Years 2001 through 2005:
Table 3: Total CAFE Penalties Paid by Individual Manufacturers, 1983
through 2005:
Table 4: BMW CAFE Performance:
Table 5: Ford CAFE Performance:
Table 6: General Motors (GM) CAFE Performance:
Table 7: Honda CAFE Performance:
Table 8: Toyota CAFE Performance:
Figures:
Figure 1: Increased Share of Light Trucks in the U.S. Passenger Vehicle
Market:
Figure 2: Application of Footprint-Based Light Truck CAFE Standards to
Light Trucks of Different Sizes for Model Year 2011:
Figure 3: Sources of Greenhouse Gas Emissions in the Transportation
Sector, 2003:
Figure 4: Gas Guzzler Tax Structure:
Abbreviations:
CAFE: Corporate Average Fuel Economy:
CARB: California Air Resources Board:
CBO: Congressional Budget Office:
DOE: Department of Energy:
DOT: Department of Transportation:
EPA: Environmental Protection Agency:
EPCA: Energy Policy and Conservation Act:
GM: General Motors:
GPS: Global Positioning System:
GVWR: gross vehicle weight rating:
INS: Immigration and Naturalization Service:
IRS: Internal Revenue Service:
MPG: miles per gallon:
NHTSA: National Highway Traffic Safety Administration:
NAS: National Academy of Sciences:
SUV: sport utility vehicle:
UAW: United Auto Workers:
USPS: United States Postal Service:
VMT: vehicle miles traveled:
United States Government Accountability Office:
Washington, DC 20548:
August 2, 2007:
The Honorable Daniel K. Inouye:
Chairman:
Committee on Commerce, Science, and Transportation:
United States Senate:
Dear Mr. Chairman:
Recent concerns over national security, environmental stresses, and
economic pressures from increased fuel prices have led to a heightened
interest in reducing oil consumption. For example, the President
announced in early 2007, a nationwide goal to reduce gasoline
consumption 20 percent from the levels that the administration projects
would otherwise occur by 2017. Efforts to reduce oil consumption will
need to include the transportation sector because transportation in the
United States currently accounts for 68 percent of the nation's oil
consumption, and cars and light trucks consume 60 percent of the oil
consumed in the transportation sector.
In the aftermath of the energy crisis of the early 1970s--to reduce the
nation's reliance on oil, a large part of which comes from other
countries--Congress developed the Corporate Average Fuel Economy (CAFE)
program for cars and light trucks. Under the CAFE program,
manufacturers must ensure that the new vehicles in their fleets, on
average, meet a specified miles per gallon (mpg) standard or pay a
penalty.
The National Highway Traffic Safety Administration (NHTSA), an
administration within the Department of Transportation (DOT), is
primarily responsible for setting and enforcing CAFE standards,
although the Environmental Protection Agency (EPA) also plays a role in
the program and the Department of Energy (DOE) is involved in setting
national energy policy. Many changes in automotive technologies and the
auto industry have occurred since the program was designed in the
1970s. These developments, along with the recent security,
environmental, and economic concerns mentioned above have led to some
changes in the CAFE program and to calls for further alterations,
including raising CAFE standards or revising the way the program
applies the standards. Several proposals to implement policies apart
from the CAFE program would also attempt to increase vehicle fuel
economy or reduce oil consumption through regulation, incentives, tax
credits, or other means.
To assist Congress in addressing these issues, you asked us to discuss
(1) how the CAFE program is designed to reduce oil consumption by cars
and light trucks and the status of the program; (2) the strengths and
weaknesses of the current CAFE program and NHTSA's capabilities to
revise the program; and (3) other market-based policies--both existing
and proposed--that are available to complement or possibly replace CAFE
in reducing oil consumption by cars and light trucks and some strengths
and weaknesses of these policies. To obtain information on how the CAFE
program is designed, we reviewed U.S. Code and program guidance,
including rule-making documents, and interviewed officials from federal
agencies involved in the program, including NHTSA, EPA, and DOE. To
obtain information about the strengths and weaknesses of the CAFE
program and NHTSA's capabilities to further revise CAFE standards, we
reviewed CAFE program budgets, key studies, and other documentation and
interviewed NHTSA officials and experts in fuel economy and safety. We
also interviewed the applicable automobile workers trade union (UAW),
industry groups representing the automobile manufacturers, automotive
safety experts, insurance industry representatives, and environmental
advocates. To obtain information on other policy options for reducing
oil consumption by cars and trucks, we reviewed published research and
interviewed more than 30 experts in fuel economy from universities and
advocacy organizations, and other industry stakeholders. We selected
these experts in part by contacting officials who worked on a 2002
National Academy of Sciences (NAS) report on CAFE standards. During
these conversations, we asked them to identify additional experts for
us to contact. We also contacted officials in selected foreign
countries with programs designed to reduce oil consumption for cars and
light trucks. We did not, however, evaluate the costs and benefits of
these alternatives, nor try to rank them in terms of overall
effectiveness or efficiency. We conducted our work from August 2006
through June 2007 in accordance with generally accepted government
auditing standards. See appendix I for further details on the scope and
methodology.
Results in Brief:
The CAFE program is designed to reduce oil consumption by cars and
light trucks by holding automobile manufacturers responsible for
meeting or exceeding specified mpg standards for cars and light trucks
and assessing penalties for manufacturers who do not meet those
standards. NHTSA has overall responsibility for setting standards and
administering the program. EPA collects information on vehicle models'
fuel economy so that NHTSA can calculate the annual CAFE results for
manufacturers' fleets. See table 1 for current CAFE standards.
Table 1: Current CAFE Standards:
Model Year: 2007;
Domestic Car CAFE Standard: 27.5 mpg;
Imported Car CAFE Standard: 27.5 mpg;
Light Truck CAFE Standard: 22.2 mpg.
Source: NHTSA.
[End of table]
Manufacturers whose average mpg does not meet NHTSA's standards for
each fleet in any given year will be subject to a penalty if they did
not earn "credits" by exceeding the standards in the previous 3 years,
or do not submit a plan to exceed the standards up to 3 years in the
future. Also, manufacturers may increase their CAFE levels if they sell
vehicles that can run on fuels other than gasoline. In terms of the
status of the program, in 2003 NHTSA raised the light truck CAFE
standard from 20.7 mpg in model year 2004 to 22.2 mpg in model year
2007. Subsequently, NHTSA restructured the CAFE program for light
trucks using a method that categorizes light trucks based on their size
and sets different standards for different sizes of light trucks
beginning on a mandatory basis in model year 2011. However, NHTSA has
not changed the CAFE standard for cars--27.5 mpg--since 1990, in part,
because of provisions in DOT's appropriations acts for fiscal years
1996 through 2001 that prevented NHTSA from spending any funds to
change CAFE standards. Recently, NHTSA officials stated that they
wanted to restructure the car CAFE program before raising the car
standard to avoid potential negative safety effects. However, NHTSA
does not have the authority to restructure the program for cars. In
2007, as part of the administration's plan to meet the President's
gasoline-reduction goal, the administration proposed legislation to
Congress that would allow NHTSA to restructure the car CAFE program
based on an attribute of the vehicle, such as size. This legislation is
similar to NHTSA's recent changes to the light truck program. Several
members of the 110th Congress have also introduced legislation to raise
CAFE standards for cars and light trucks. In June 2007, the Senate
passed a bill that would raise the CAFE standards for cars and light
trucks and, among other things, allow a restructuring similar to that
proposed by NHTSA. As of July 2007, the House has not acted on this
bill.
According to estimates by the National Academy of Sciences (NAS) and
other experts we consulted, the CAFE program has helped save billions
of barrels of oil and could continue to do so in the future, but the
program has several weaknesses and is not the only potential solution
to reducing the nation's oil consumption over time. Several strengths
make the CAFE program a viable and effective tool to help the nation
meet its current oil-saving goals. First, as noted, many experts have
concluded that CAFE has helped save oil--for example, a study by
NAS[Footnote 1] estimated that in 2002 CAFE contributed to saving 2.8
million barrels of fuel a day, or 14 percent of consumption in that
year--and that increases to CAFE standards would contribute to future
oil savings. NAS also stated that as of 2002, automakers could improve
the fuel economy of most vehicle classes without large increases in
vehicle costs. In addition, NHTSA's recent reform of the light truck
program to a new attribute-based standard helped address safety,
consumer choice, and manufacturer equity concerns. Through this reform,
NHTSA was able to increase fuel economy standards for light trucks
while also ensuring that CAFE was compatible with other important
issues affecting cars and light trucks, such as safety. However, the
CAFE program has several characteristics that hinder its effectiveness.
For example, most manufacturers are already meeting or exceeding CAFE
standards, so decisions by NHTSA and Congress not to raise the car CAFE
standard since 1990 have reduced the incentive manufacturers have to
increase the fuel economy of new cars. Furthermore, CAFE is not the
most cost-effective[Footnote 2] approach to reducing oil consumption.
To further reduce the nation's oil consumption over time therefore may
require more comprehensive and cost-effective approaches--some of which
are discussed in the next section. Further, several refinements to the
CAFE program could improve its effectiveness and make it less costly,
such as instituting a CAFE credit-trading program to give manufacturers
more flexibility in meeting the standards. The bill the Senate passed
in June 2007 would institute an attribute-based CAFE system for cars
and create a program where manufacturers could trade accrued CAFE
credits with one another. Finally, our evaluation of NHTSA's
capabilities suggests the agency could act quickly to implement new
standards so CAFE standards could help the nation work toward reducing
oil consumption in the immediate future.
Through reviews of our past reports and other studies, interviews with
experts, reviews of recently proposed legislation, and analysis of
existing programs in the United States and other countries, we
identified several market-based policies involving cars and light
trucks that could complement and strengthen the CAFE program's
contribution to reducing oil consumption or that could serve as broader-
reaching and potentially more cost-effective alternatives to CAFE.
Market-based consumer incentives could complement CAFE by increasing
consumer interest in purchasing vehicles with a high fuel economy.
Several of these incentives already exist, such as the "Gas Guzzler
Tax" on cars with a low fuel economy and tax credits for the purchase
of fuel-saving hybrids. However, our review of these existing
initiatives identified several limitations. Further we found other
existing incentives that appear to work at cross purposes to those
intended to reduce oil consumption, such as the relatively generous
write-offs for purchases of sports utility vehicles for businesses.
These incentives, if improved, could complement CAFE's fuel-saving
effects; however, such incentives may not be enough to meet future
goals for reducing oil consumption, even in conjunction with CAFE,
because they are narrowly focused on influencing car purchases.
Finally, market-based incentives to increase the availability and use
of biofuels are being used to displace oil consumption.[Footnote 3]
However, our recent report on these efforts identified several
limitations, and the cost-effectiveness of these programs is
unclear.[Footnote 4] Several options, such as a tax on fuel and carbon
emissions or a carbon cap-and-trade program, provide incentives for
consumers to engage in a number of fuel-saving behaviors. For example,
increased gasoline taxes would likely influence consumers to reduce the
amount of miles they drive in addition to purchasing fuel-efficient
cars. In addition, such options could help the nation reach its oil
consumption goals in a more cost-effective manner than the CAFE
program. While these strategies could lead to larger reductions in oil
consumption at lower cost to the nation, it would take time to design,
garner support for, and implement each one.
This report includes matters for congressional consideration that,
should Congress decide to increase fuel economy standards, it provide
NHTSA with (1) express authority to reform the car CAFE program, (2)
the resources to update information on new technologies, and (3) the
flexibility to adjust the program in the future in response to changes
in the passenger vehicle market. Also, to help ensure future CAFE
standards are as affordable and effective as possible, we are
recommending that NHTSA determine whether enhancements--including, but
not limited to, credit trading, eliminating incentives to classify
vehicles as light trucks, and indexing CAFE penalties to keep pace with
inflation--should be made to the CAFE program. In addition, to ensure
that existing and potential policies meant to reduce fuel consumption
are achieving their goals, we are recommending that DOT, in cooperation
with other relevant government agencies, evaluate what impact these
policies are having or might have on fuel consumption. DOT, EPA, and
DOE commented on a draft of this report. DOT officials generally
concurred with the report's findings, did not believe indexing civil
penalties to inflation would achieve further compliance with CAFE
standards, and will consider the recommendations. Without more
definitive research on the effect of increased penalties for not
meeting CAFE standards, we continue to recommend that NHTSA consider
studying the issue. EPA generally agreed with the report and
recommendations and suggested we include more discussion on the issue
of safety, which we did. Finally, DOE did not comment on the
recommendations and did not agree with our finding that policy options
other than CAFE, such as taxes and cap-and-trade programs, have the
potential to produce fuel savings beyond what could be achieved through
CAFE in a more cost-effective manner. We provided more information on
the existing research we used to conclude that other approaches to
reducing fuel use have the potential to be more cost-effective that the
current program.
Background:
Congress enacted the 1975 Energy Policy and Conservation Act (EPCA)
during the aftermath of the energy crisis created by the Arab oil
embargo of 1973 and 1974 to reduce oil consumption by the
transportation sector in the United States.[Footnote 5] EPCA
established the CAFE program, which requires that manufacturers meet
fuel economy standards for passenger cars and light trucks. To reduce
oil consumption, the program uses fuel economy standards--measured in
mpg--that cars and light trucks must meet separately. In addition to
decreasing oil consumption by increasing the mileage driven on a gallon
of gasoline, an increase in the standards also decreases some
greenhouse gas tailpipe emissions.
EPCA established CAFE standards for passenger cars for model years 1978
through 1980 and 1985 and thereafter and gave NHTSA responsibility for
administering the program and the authority to change the standards.
However, the law prevents NHTSA from making structural reforms to the
car CAFE program, such as basing the car CAFE standard on vehicle
attributes such as size or weight. EPA also plays a role in the CAFE
program. EPA implements testing procedures and tests vehicles to
determine each model's fuel economy and determines the procedures for
calculating the fuel economy values for CAFE for each manufacturer and
for displaying the fuel economy levels on a new vehicle's window
sticker.[Footnote 6] The procedures for calculating fuel economy values
are specified by the statute and include a separate test for city and
highway fuel economy.
The standards called for manufacturers to produce passenger car fleets
averaging 18 mpg in 1978, rising to 27.5 mpg by 1985.[Footnote 7] In
the 1980s, NHTSA reduced the CAFE standard for cars from 27.5 mpg to
26.0 mpg for model years 1986 through 1988, and to 26.5 mpg for model
year 1989, in response to petitions from automakers who noted that
consumers were demanding larger cars and engines, largely due to a
decline in gasoline prices.
NHTSA issues new CAFE standards through a rule-making process. In the
rule-making process, NHTSA issues a proposed rule and accepts comments
from the public and stakeholders such as automakers, labor unions, and
environmental advocacy groups. When determining what levels CAFE
standards should be under an attribute-based system, as now exists for
light trucks, NHTSA uses a cost-benefit model to determine the impact
of various increases in CAFE standards on areas such as oil consumption
and pollution. NHTSA must set standards at least 18 months before they
take effect.
The CAFE Program Is Designed to Reduce Oil Consumption by Cars and
Light Trucks and Has Been Restructured for Light Trucks but Not for
Cars:
To reduce oil consumption by light trucks and cars, NHTSA sets CAFE
standards and levies penalties against manufacturers that do not meet
the standards. In 2003, NHTSA raised light truck CAFE standards from
20.7 mpg in model year 2004 to 21.0 mpg in model year 2005, 21.6 mpg in
model year 2006, and 22.2 mpg in model year 2007. Subsequently, NHTSA
restructured the CAFE program for light trucks using a method that
categorizes them based on their size and sets different targets for
different sizes of light trucks to meet, beginning on an optional basis
in model year 2008 and a mandatory basis in model year 2011. NHTSA has
not raised the CAFE standard for cars above 27.5 mpg since 1990
because, among other reasons, NHTSA officials wish to first restructure
the program to mitigate potential negative effects on safety of raising
the standards. To that end, in 2007 the administration submitted a plan
to restructure the program.[Footnote 8] Several members of the 110th
Congress introduced legislation to raise CAFE standards for cars and
light trucks, and the Senate passed a bill in June 2007 increasing
standards for cars and light trucks. The House had not acted on this
bill as of July 2007.
NHTSA and EPA Implement a Prescribed Process to Ensure Compliance with
Fuel Economy Standards:
NHTSA determines a manufacturer's compliance with CAFE standards by
comparing its fleet-wide fuel economy average against the appropriate
CAFE standard.[Footnote 9] Manufacturers, for their passenger car and
light truck fleets, must meet separate CAFE standards, measured in mpg,
or pay a penalty. In addition, manufacturers must separately meet CAFE
standards for their imported and domestic passenger car
fleets.[Footnote 10] NHTSA defines light trucks as vehicles that are
designed to perform functions such as carrying cargo, having an open-
bed, carrying more than 10 passengers, or operating off-road.[Footnote
11] Sport utility vehicles (SUV), short-bed pickup trucks, and
passenger vans with a gross vehicle weight rating (GVWR) between 8,500
and 10,000 pounds have been considered medium-duty vehicles, and NHTSA
has excluded them from the CAFE program until model year 2011, when
NHTSA will include them in the CAFE program as light trucks.[Footnote
12] Vehicles with a GVWR over 10,000 pounds are considered heavy-duty
vehicles and are not subject to the CAFE requirements.
EPA allows manufacturers to test their own vehicles to determine their
fuel economy, but EPA tests a sample of new vehicles at its National
Vehicle and Fuel Emissions Laboratory in Ann Arbor, Michigan, to
confirm the manufacturers' results. EPA reports the yearly CAFE results
for each manufacturer to NHTSA for CAFE enforcement. NHTSA then
determines if the manufacturers comply with the CAFE standards and
assesses civil penalties against manufacturers who do not meet the
standards. Compliance with the standards is measured by calculating a
sales-weighted harmonic mean of the fuel economies of a given
manufacturer's product line, with domestically produced cars, imported
cars, and all light trucks measured separately. A manufacturer whose
CAFE level for its passenger car or light truck fleet does not meet the
standard for a given model year is subject to a civil penalty of $5.50
per tenth of a mpg that the manufacturer's CAFE level is below the
required CAFE level multiplied by the number of vehicles in the
affected fleet manufactured for a given model year. NHTSA collected
more than $678 million in civil penalties from model years 1983 through
2005--mostly from European manufacturers producing high-performance,
luxury vehicles.[Footnote 13] Asian and domestic manufacturers have
historically not paid penalties because they have either met or
exceeded passenger car and light truck fleet CAFE requirements. See
table 1 for a list of CAFE penalties paid, by manufacturer, for 2001
through 2005.
Table 2: CAFE Penalties by Manufacturer Model Years 2001 through 2005:
Model year: 2001;
Manufacturer: Volkswagen;
Passenger car import penalty: $0;
Light truck penalty: $173,118;
Passenger car import penalty in 2006 dollars: $0;
Light truck penalty in 2006 dollars: $196,159.
Model year: 2001;
Manufacturer: Porsche;
Passenger car import penalty: 4,997,190;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 5,662,281;
Light truck penalty in 2006 dollars: 0.
Model year: 2001;
Manufacturer: BMW;
Passenger car import penalty: 27,985,925;
Light truck penalty: 1,497,991;
Passenger car import penalty in 2006 dollars: 31,710,655;
Light truck penalty in 2006 dollars: 1,697,363.
Model year: 2001;
Manufacturer: Fiat;
Passenger car import penalty: 817,443;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 926,239;
Light truck penalty in 2006 dollars: 0.
Model year: 2001;
Manufacturer: Lotus;
Passenger car import penalty: 35,744;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 40,501;
Light truck penalty in 2006 dollars: 0.
Model year: 2002;
Manufacturer: Porsche;
Passenger car import penalty: 4,357,782;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 4,845,053;
Light truck penalty in 2006 dollars: 0.
Model year: 2002;
Manufacturer: BMW;
Passenger car import penalty: 14,066,124;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 15,638,947;
Light truck penalty in 2006 dollars: 0.
Model year: 2002;
Manufacturer: Fiat;
Passenger car import penalty: 1,344,222;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 1,494,528;
Light truck penalty in 2006 dollars: 0.
Model year: 2002;
Manufacturer: Lotus;
Passenger car import penalty: 36,850;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 40,970;
Light truck penalty in 2006 dollars: 0.
Model year: 2003;
Manufacturer: Ferrari/Maserati;
Passenger car import penalty: 1,139,710;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 1,242,024;
Light truck penalty in 2006 dollars: 0.
Model year: 2003;
Manufacturer: Porsche;
Passenger car import penalty: 3,348,609;
Light truck penalty: 189,635;
Passenger car import penalty in 2006 dollars: 3,649,221;
Light truck penalty in 2006 dollars: 206,659.
Model year: 2003;
Manufacturer: BMW;
Passenger car import penalty: 8,861,776;
Light truck penalty: 1,676,752;
Passenger car import penalty in 2006 dollars: 9,657,318;
Light truck penalty in 2006 dollars: 1,827,278.
Model year: 2004;
Manufacturer: Ferrari/Maserati;
Passenger car import penalty: 1,511,125;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 1,605,263;
Light truck penalty in 2006 dollars: 0.
Model year: 2004;
Manufacturer: Porsche;
Passenger car import penalty: 3,225,453;
Light truck penalty: 3,171,564;
Passenger car import penalty in 2006 dollars: 3,426,387;
Light truck penalty in 2006 dollars: 3,369,141.
Model year: 2004;
Manufacturer: Volkswagen;
Passenger car import penalty: 0;
Light truck penalty: 3,474,372;
Passenger car import penalty in 2006 dollars: 0;
Light truck penalty in 2006 dollars: 3,690,813.
Model year: 2004;
Manufacturer: DaimlerChrysler;
Passenger car import penalty: 8,537,364;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 9,069,212;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: BMW;
Passenger car import penalty: 2,975,496;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 3,067,446;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: DaimlerChrysler;
Passenger car import penalty: 16,895,472;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 17,417,585;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: Ferrari/Maserati;
Passenger car import penalty: 2,426,413;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 2,501,395;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: Porsche;
Passenger car import penalty: 2,238,082;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 2,307,244;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: Porsche;
Passenger car import penalty: 0;
Light truck penalty: 1,977,250;
Passenger car import penalty in 2006 dollars: 0;
Light truck penalty in 2006 dollars: 2,038,352.
Model year: 2005;
Manufacturer: Spyker;
Passenger car import penalty: 3,157;
Light truck penalty: 0;
Passenger car import penalty in 2006 dollars: 3,255;
Light truck penalty in 2006 dollars: 0.
Model year: 2005;
Manufacturer: Volkswagen;
Passenger car import penalty: 0;
Light truck penalty: 1,136,668;
Passenger car import penalty in 2006 dollars: 0;
Light truck penalty in 2006 dollars: 1,171,794.
Source: NHTSA.
Note: No manufacturers of domestic passenger cars needed to pay
penalties during this period.
[End of table]
Another penalty that manufacturers might pay for producing car models
that have low fuel economy levels is the so-called "Gas Guzzler
Tax."[Footnote 14] EPA reports the fuel economy test results for each
manufacturer to the Internal Revenue Service (IRS), which imposes a tax
on manufacturers of new model year cars that fail to meet a fuel
economy level of 22.5 mpg. IRS collects the tax from the manufacturer
after production has ended for the model year. The amount of the tax
paid is displayed on a new vehicle's fuel economy window sticker.
Although related, the Gas Guzzler Tax is not part of the CAFE program.
Gas Guzzler Tax revenues are deposited into the Treasury, like CAFE
penalties. Light trucks are not subject to the Gas Guzzler Tax.
Apart from paying penalties, manufacturers have another option if they
do not comply with the CAFE standards in one model year--using so-
called CAFE credits earned in other model years. For example, when the
average fuel economy of either a manufacturer's passenger car or light
truck fleet for a particular model year "overcomplies," or exceeds the
established standard, the manufacturer earns credits it can use to make
up a deficit in another model year.[Footnote 15] These surplus credits
can be applied to a deficit in any of the 3 consecutive model years
immediately prior to or subsequent to the model year in which the
credits are earned. Manufacturers must use any credits within 3 years
of earning them. If a manufacturers has a deficit, but no (or not
enough) credits available, the manufacturer can either pay the penalty
or submit a plan to NHTSA on how the manufacturer will make up the
deficit by earning a sufficient amount of credits in the next 3 years.
NHTSA officials stated there is no express authority for trading
credits between manufacturers, or for a manufacturer to transfer
credits among different classes of a manufacturer's fleets (such as
between cars and light trucks).
In addition, the Alternative Motor Fuels Act of 1988 gave credits to
manufacturers for producing vehicles that could run on alternative
fuels in addition to gasoline.[Footnote 16] Under this so-called "Dual
Fuel" program, manufacturers may increase their CAFE by up to 1.2 mpg
for vehicles through model year 2010 that are capable of using both
regular gasoline and an alternative fuel.[Footnote 17]
NHTSA Recently Increased Standards and Reformed the Light Truck CAFE
Program to Help Address Declining Fuel Economy:
NHTSA recently increased standards for and reformed the light truck
CAFE program. The impact of the light truck market on overall oil
consumption in the United States has grown since the beginning of the
CAFE program as market share for these vehicles has increased. For
example, in 1980, shortly after the program began, light trucks
composed about 20 percent of the new passenger vehicle market in the
United States. By 2005, light trucks, including minivans, pickup
trucks, and sport utility vehicles, accounted for about 50 percent of
the new passenger vehicle market in the United States. The overall fuel
economy of the U.S. vehicle fleet declined in the 1990s, in part due to
the increased market share of light trucks. (See fig. 1 showing share
of fleet composed by light trucks).
Figure 1: Increased Share of Light Trucks in the U.S. Passenger Vehicle
Market:
[See PDF for image]
Source: GAO analysis of data from DOE/Transportation Data Energy Book,
edition 25.
[End of figure]
To help address the overall declining fuel economy of the U.S.
passenger vehicle fleet, in April 2003, NHTSA promulgated a final rule
increasing light truck CAFE standards from 20.7 mpg in model year 2004
to 21.0 mpg in model year 2005, 21.6 mpg in model year 2006, and 22.2
mpg in model year 2007. In addition, the agency began investigating the
possibility of reforming the light truck CAFE program in part to
address safety concerns. The 2002 NAS report on the impact of CAFE
standards stated that because the lowest cost way for an automobile
manufacturer to increase vehicle fuel economy is to decrease vehicle
weight, increases to CAFE standards--under the original CAFE system
currently still in use for cars--could adversely affect safety and
result in more highway fatalities.[Footnote 18] The report also stated
that past increases in CAFE standards had likely contributed to
additional highway deaths, though other factors were also involved. The
report recommended that NHTSA investigate implementing a new CAFE
system based on the attributes of a vehicle.[Footnote 19]
NHTSA issued a final rule in April 2006 that restructures the CAFE
program for light trucks and continues to increase light truck CAFE
standards for model years 2008 through 2011. Under the new rule, fuel
economy standards are established based on truck size instead of having
one average standard for all light trucks produced by a manufacturer.
Each truck is assigned a fuel economy target based on a measure of
vehicle size called "footprint," the product of multiplying a vehicle's
wheelbase (the distance from front to the rear axles) by its track
width (the horizontal distance between the tires). (See fig. 2 for a
display of how the standard applies to trucks of different sizes). By
model year 2011, all manufacturers will be required to comply with the
reformed, footprint-based CAFE standard with a range of 21.8 mpg for
the largest footprint trucks to 30.4 mpg for the smallest footprint
trucks. NHTSA estimates that under the footprint-based system, light
trucks will average 24.0 mpg in model year 2011. To facilitate the
transition to the new system, NHTSA set both reformed and unreformed
standards for model years 2008 through 2010 and manufacturers may
choose to meet either standard during those years.
Figure 2: Application of Footprint-Based Light Truck CAFE Standards to
Light Trucks of Different Sizes for Model Year 2011:
[See PDF for image]
Source: GAO.
[End of figure]
According to NHTSA officials, the footprint-based CAFE approach may
enable the country to achieve larger reductions in oil consumption
while enhancing safety.[Footnote 20] Under the old standard,
manufacturers who build a relatively larger share of smaller light
trucks may already exceed the fleet CAFE standard and, therefore, would
have little incentive to continue increasing the fuel economy of their
light trucks. However, under the footprint-based standards, the
required overall fuel economy of the light truck fleet will rise over
time, since NHTSA has stated the targets will rise over time. NHTSA
officials told us they believe this approach will spread the regulatory
cost burden for fuel economy improvements more broadly across the
industry instead of concentrating it more exclusively on the
manufacturers of heavier, lower fuel economy vehicles. In addition, the
footprint-based standards include some larger vehicles such as sport
utility vehicles, with a GVWR between 8,500 and 10,000 pounds that
previously were excluded from the CAFE program. NHTSA estimates that
including these vehicles in the CAFE program will save 251 million
gallons of fuel over the life of the vehicles sold in 2011.[Footnote
21] In addition to these expected fuel savings, the footprint-based
CAFE standards offer enhanced safety by discouraging downsizing of
vehicles since, as vehicles become smaller, the applicable fuel economy
target becomes more stringent.
NHTSA Has Not Changed the Car CAFE Standard Since 1990 but Has
Requested Authority to Reform the Program:
NHTSA has not changed the car CAFE standard since 1990, but it has
requested authority to reform the program so that it can raise the
standard in the future. After reducing the 27.5 mpg car CAFE standard
for model years 1986 through 1989, NHTSA raised it back to 27.5 mpg for
the 1990 model year, and the standard has remained at 27.5 mpg since
then. NHTSA officials cited several reasons for not raising the car
CAFE standard over 27.5 mpg. First, for 6 years, Congress specifically
prevented NHTSA from adjusting the CAFE standards. Beginning in fiscal
year 1996 and lasting through fiscal year 2001, Congress included
language in DOT's appropriations acts preventing NHTSA from expending
any appropriated funds for rule makings to adjust CAFE standards for
either cars or light trucks. Second, although NHTSA officials state
that the agency has the legislative authority to raise the CAFE
standard for cars above the 27.5 mpg standard, specified by the law,
these officials stated that the law does not provide NHTSA with express
authority for restructuring the program by, for example, developing a
size-based standard for cars as it recently did for light
trucks.[Footnote 22] NHTSA officials stated they are reluctant to raise
the car standard without also restructuring the program because they
are concerned that increases in the car CAFE standard under the
existing program could have a negative impact on safety by giving auto
manufacturers an incentive to reduce the weight of the vehicles they
build in order to meet increased fuel economy standards. NHTSA
officials pointed out that, according to the 2002 NAS report, reducing
the weight in vehicles may make vehicles less crashworthy and lead to
increased highway fatalities.[Footnote 23]
In 2007, the administration submitted proposed legislation to Congress
that, if enacted, would give the Secretary authority to restructure and
increase the CAFE standard for cars. The proposal calls for the
continuation of the current statutory requirement that fuel economy
standards be set at the maximum level that NHTSA believes the
manufacturers could achieve in a specific model year. The proposal
would also give NHTSA the authority to base the standard on one or more
vehicle attributes, such as size, similar to the light truck standard,
so that there would be different targets for cars with different
attributes. Since product mix typically differs from manufacturer to
manufacturer, each manufacturer would likely be subject to a unique
CAFE requirement for its car fleet. In addition, the proposal calls for
a credit trading system among manufacturers. If a manufacturer exceeds
the mileage standard, it could sell its credits to another manufacturer
or a third-party broker. The proposal does not provide a specific goal
or mpg standard, but, as for the light truck standard, calls for
setting a fuel economy standard that is the maximum feasible average
fuel economy level that NHTSA decides the manufacturers can achieve in
a specific model year.
In addition to this proposed legislation, several Members of Congress
submitted bills that have some similarities to the Secretary's proposal
but, if enacted, would set a minimum fuel economy standard for
manufacturers to meet. For example, the Senate passed a bill that calls
for cars and light trucks to achieve a combined CAFE average of 35 mpg
by 2020.[Footnote 24]
The CAFE Program Has Saved Billions of Barrels of Oil, but Car
Standards Have Not Changed for Decades:
According to estimates by NAS, the CAFE program has contributed to
saving billions of barrels of oil and could continue to do so in the
future, but several weaknesses in the program exist. Experts and
industry stakeholders with whom we spoke generally attributed this
success to the fact that CAFE was a mandatory standard, unlike
voluntary standards in many other nations. Also, most of these experts
and stakeholders agreed that NHTSA's recent reforms to the light truck
CAFE program enhanced the program by reducing incentives for
manufacturers to make vehicles less safe to meet CAFE standards and
making the program more equitable for all manufacturers. In addition,
experts and stakeholders cited the program's unintended effect of
reducing greenhouse gas emissions as a strength of the program.
However, the program has not kept pace with consumer preferences for
larger vehicles, technology, or growing concern about fuel economy.
These experts and stakeholders also cited several weaknesses in the
program, noting that there are other cost-effective strategies to
reduce oil consumption, the program is not automatically reviewed and
adjusted over time, the program has not had its penalty structure
changed since 1997, and the program--under the dual fuel program--gives
CAFE credits to manufacturers who build vehicles that can run on
alternative fuels, regardless of whether the drivers actually use those
fuels. Our evaluation of NHTSA's capabilities and the agency's recent
reform of the light truck program suggest that the agency generally has
the capabilities to reform standards and could act quickly in the
future to reform the car program if the necessary authority is
provided. However, some of NHTSA's capabilities could be improved, such
as increasing staff levels and updating data on fuel-efficient
technology for use in its cost-benefit analysis.
The CAFE Program Has Several Strengths, Including Saving Oil;
Compatibility with Other Issues, Such as Safety of Cars and Light
Trucks; and Slowing the Increase in Greenhouse Gas Emissions:
Experts, NHTSA officials, and representatives from auto manufacturers
with whom we spoke cited several strengths of the CAFE program. Most of
these experts said CAFE was somewhat effective in reducing fuel
consumption, and a study by NAS estimated that in 2002 CAFE, along with
other factors, contributed to saving about 2.8 million barrels of fuel
per day, or about 14 percent of consumption in that year. Many experts
thought that CAFE's effectiveness is largely derived from introducing a
mandatory standard that all auto manufacturers had to meet, unless the
manufacturer was willing to pay a penalty. Compared with programs in
other nations that have voluntary fuel economy standards the CAFE
program's enforceable, mandatory standards have achieved favorable
results though, in many of those countries, high fuel taxes and high
fuel prices, especially in Europe, have reduced the need for fuel
economy standards. In addition, according to NHTSA officials citing NAS
results, the program has had a demonstrable record of increasing fuel
economy in passenger cars and light trucks. These officials said they
had concluded that if the CAFE program did not exist, auto
manufacturers would produce less fuel-efficient cars than they
currently produce. For example, before Congress established CAFE and
set the standard for cars, there was no minimum standard for fuel
economy in the United States. Between model years 1967 and 1974, the
average domestic passenger car's fuel economy dropped from 14.8 mpg to
12.9 mpg. From model year 1978, when CAFE was first imposed, domestic
passenger car fuel economy increased from 18.7 mpg to 30.0 mpg in
2004.[Footnote 25] In the future, NHTSA officials stated they could
further enhance fuel savings beyond what could be expected from the
current CAFE program, with its single standard for all cars, by
requiring fuel economy increases across a wide range of vehicles with
different attributes, such as size, if they receive the authority to do
so. As noted, NHTSA has made this change to the light truck program;
and as of model year 2011, light trucks will be required to meet size-
based CAFE standards, and the agency would like to institute a similar
change for cars. The 2002 NAS report stated that the technology exists
to increase fuel economy without large increases in vehicle
costs.[Footnote 26] Manufacturers with whom we spoke agreed, though
they preferred incremental increases to CAFE standards to ensure they
could adjust to any new standards over aggressive CAFE increases over a
short-term period.
According to NHTSA and several experts with whom we spoke, NHTSA's
actions to reform the light truck standard allowed the agency to
increase fuel economy standards for light trucks while also ensuring
that CAFE was compatible with other important issues affecting cars and
light trucks, including the following:
* Enhancing Safety: According to NHTSA officials and several experts
with whom we spoke, the new size-based standard for light trucks
removes the incentive for manufacturers to comply with CAFE by pursuing
strategies that entail safety risks associated with increased highway
deaths, such as downsizing vehicles and designing some vehicles to be
classified as light trucks rather than cars, which may increase the
vehicle's propensity to roll over. According to NHTSA, the size-based
approach enables NHTSA to increase standards without encouraging these
safety risks. For example, the approach does not provide incentives for
manufacturers to downsize vehicles because smaller vehicles must meet
more stringent CAFE standards.
* Reflecting Consumer Choice: NHTSA officials also stated that the
attribute-based light truck CAFE program addresses some concerns about
consumer choice. For instance, under the previous system, instead of
installing more fuel-saving technologies across their fleets,
manufacturers might have moved toward building fewer large vehicles and
more smaller vehicles to meet new CAFE standards, even though consumers
typically have not demanded them. In the attribute-based system,
manufacturers must improve the fuel economy of all light trucks, no
matter their size. As a result, according to NHTSA, manufacturers can
continue to build a greater range of vehicles of varying sizes.
* Creating a More Equitable Regulatory Framework: The attribute-based
standard also addresses concerns that raising CAFE standards in the
previous system would tend to require only those manufacturers that
produce a relatively larger share of light trucks to increase fuel
economy in their vehicles to comply with a new standard, which places
most of the cost and compliance burdens on manufacturers that make a
wide range of vehicles, including larger vehicles. Under the attribute-
based system, however, NHTSA officials stated that it is more likely
that additional manufacturers would have to increase the fuel economy
of at least some of their vehicles in order to meet the new, size-based
light truck CAFE standard. Most experts with whom we spoke agreed that
additional manufacturers would have to increase fuel economy under the
reformed system.
In addition to these strengths, the CAFE program has had the
additional, positive, impact of slowing the rate of increase in
transportation-related greenhouse gas emissions. A link exists between
the amount of fuel burned and the growing amount of greenhouse gases in
the atmosphere, which many agree contributes to global climate change.
When the CAFE program increased fuel economy standards, it reduced
greenhouse gas emissions from passenger cars and light trucks because
as fuel economy is increased, the reduction in gasoline consumption
translates into a reduction in carbon dioxide emissions. The
transportation sector accounted for 27 percent of U.S. greenhouse gas
emissions in 2003. EPA estimates that cars and light trucks account for
62 percent of the transportation sector's greenhouse gas emissions, as
shown in fig. 3. Congress has pending several bills that would increase
CAFE standards, in part, to reduce greenhouse gas emissions that are
linked to climate change. Additionally, the California Air Resources
Board (CARB) plans to implement fuel economy regulations for cars and
light trucks sold in California that would exceed current CAFE
standards, and several other states have announced similar plans, if
EPA grants them the authority to do so.[Footnote 27]
Figure 3: Sources of Greenhouse Gas Emissions in the Transportation
Sector, 2003:
[See PDF for image]
Source: EPA.
[End of figure]
Several Weaknesses in the CAFE Program Exist:
Despite the strengths of the CAFE program, experts and industry
stakeholders with whom we spoke said aspects of the program were
outdated and the program has not been revised to recognize or
accommodate changes in technologies, consumer demand or the economics
of the auto industry that have occurred since the program took effect
in 1978. A longer discussion of these cited weaknesses follows:
* Fuel economy standards have been allowed to stagnate: The car CAFE
standard has remained stagnant for nearly 2 decades. Meanwhile, there
have been increases in the market share of larger vehicles, with
relatively lower fuel economy ratings such as SUVs and minivans. Since
the car CAFE standard returned to 27.5 mpg for the 1990 model year, the
number of vehicle miles traveled on U.S. roads has also increased by
about 31 percent, and the market share of light trucks has increased
from about 20 percent to about 50 percent of the new vehicle fleet,
resulting in more miles traveled by light trucks. This increase in the
use of light trucks, along with consumers' preferences for higher
performance vehicles, which generally achieve lower fuel economy than
lower performance vehicles, has resulted in the overall fuel economy of
the fleet declining from a high of 26.2 mpg in 1987 to 24.6 mpg in
2004, though the fleet fuel economy increased to 25.2 in 2005.
Historically low gasoline prices over much of the last 2 decades have
compounded this weakness, according to an expert with whom we spoke,
since these low prices gave consumers little incentive to demand
vehicles with higher fuel economy. However, two recent studies stated
that the recent increase in gasoline prices is showing that consumers
may be willing to pay more for fuel-efficient vehicles than in the
past. One of the studies also cited consumers' growing concern about
climate change as another reason to consider vehicles with a higher
fuel economy. However, the level of emphasis consumers will be willing
to place on these concerns remains to be seen and depends, in part, on
the future level of gasoline prices.[Footnote 28] During the time the
car CAFE standard has remained stagnant, the industry average has met
or exceeded the standard consistently. (See app. II for a description
of selected manufacturers' CAFE performance since 1990.)
* Lower-cost policies could achieve the goals of the program: Although
the CAFE program has contributed to reduced fuel consumption by cars
and light trucks in the past and would continue to do so in the future,
recent research and the experts with whom we spoke indicate that CAFE
standards are not the most cost-effective option available. For
example, studies done by GAO, the Congressional Budget Office (CBO),
and others have found that the same fuel-saving goals could have been
reached at lower cost to society if a more flexible policy that
directly increased the cost of using these fuels or other petroleum
products had been adopted. CBO has noted that the CAFE program could be
made less costly and more effective than it currently is by
instituting, for example, a broader credit trading program. However,
other options, several of which are discussed later in this report,
would also offer a less costly and more effective approach than the
CAFE program.
* The program's distinction between foreign and domestic cars is
complicated and costly and may no longer be relevant: Some experts also
cited the distinction the CAFE program draws between foreign and
domestic cars as a weakness in the program. Since the creation of the
CAFE program, many domestically based manufacturers have begun to
produce vehicles abroad, and many foreign manufacturers have begun to
produce vehicles in the United States. For example, more than half of
all the vehicles sold by foreign manufacturers in the United States are
produced in the United States. Also, because of the North American Free
Trade Agreement, NHTSA treats vehicles made in Mexico or Canada as part
of a manufacturer's domestic fleet. Several experts cited the
distinction that the CAFE program is required to make between foreign
and domestic cars as an outdated facet of the program that simply makes
it more complicated or costly for auto manufacturers to comply with
CAFE standards by adding more factors for manufacturers to consider
when deciding about where to produce their vehicles. NHTSA officials
stated they abolished the foreign and domestic vehicle distinctions
they had created in the light truck CAFE program beginning in the 1996
model year in part because manufacturers were importing almost no light
trucks into the United States. However, NHTSA has no authority to
remove this distinction from the car CAFE program, and the
administration did not request this authority in its proposal to
Congress to grant NHTSA authority to reform the car CAFE program. Auto
manufacturers and experts with whom we spoke supported abolishing this
distinction but the UAW--the labor union that represents most workers
at U.S.-owned auto manufacturers--opposes this, stating that the
distinction gives manufacturers an incentive to produce all types of
vehicles, including small vehicles, in the United States and expressing
concerns that abolishing the distinction would result in auto
manufacturers moving U.S. auto manufacturing jobs overseas. However,
the 2002 NAS report reviewed this issue and found no perceptible effect
on auto industry employment because of this distinction in the CAFE
program.
* Penalties may not be a strong deterrent as they have not increased
since 1997: Several experts with whom we spoke noted that penalties for
violating CAFE standards have not increased since 1997, when, pursuant
to the Federal Civil Penalties Inflation Adjustment Act of 1990, NHTSA
raised the penalty from $5 to $5.50 per vehicle for every 0.1 mpg (or
$55 per 1 mpg) by which a manufacturer's fleet falls short of the CAFE
standard.[Footnote 29] Several experts stated that this is not enough
of a monetary incentive for manufacturers to comply with CAFE. For
example, 22 manufacturers paid penalties during model years 1983
through 2005 (see table 3), including 5 companies that paid penalties
10 times. However, several experts also recognized that many auto
manufacturers attempt to comply with CAFE standards more to avoid the
negative public relations impact of not complying with CAFE standards
than the actual financial penalty. Representatives of the domestic auto
manufacturers confirmed this interpretation. A number of foreign
manufacturers with whom we spoke stated that the civil penalty
provisions in the law for failing to meet CAFE standards present a
deterrent because they mean a violation is "unlawful conduct." These
manufacturers believe it is an unacceptable business practice to plan
to routinely fail to meet standards. Also, NHTSA staff told us the
agency has not analyzed how the penalty structure could be modified to
achieve higher compliance rates among foreign manufacturers that
currently do not meet CAFE standards, but they noted that generally the
manufacturers that pay penalties are manufacturers of luxury or
specialty high-performance vehicles. NHTSA staff believes that as the
sales of those vehicles are significantly dependent on their current
level of performance, raising the penalty would not be likely to induce
these companies to produce more fuel-efficient vehicles. Rather, NHTSA
staff said that, in their opinion, customers of these vehicles would
absorb the cost of higher penalties.
Table 3: Total CAFE Penalties Paid by Individual Manufacturers, 1983
through 2005:
Manufacturer: Aston Martin Lagonda, Ltd;
Penalty in nominal dollars: $2,550.
Manufacturer: Autokraft, Ltd;
Penalty in nominal dollars: 2,590.
Manufacturer: BMW of North America, Inc;
Penalty in nominal dollars: 225,531,779.
Manufacturer: Consulier Industries;
Penalty in nominal dollars: 150.
Manufacturer: DaimlerChrysler Corp;
Penalty in nominal dollars: 25,432,836.
Manufacturer: Ferrari Maserati North America, Inc;
Penalty in nominal dollars: 5,077,248.
Manufacturer: Fiat Motors of North America, Inc;
Penalty in nominal dollars: 10,791,076.
Manufacturer: Jaguar Cars, Inc;
Penalty in nominal dollars: 40,069,650.
Manufacturer: Lotus Cars USA, Inc;
Penalty in nominal dollars: 239,934.
Manufacturer: Maserati Automobiles of America, Inc;
Penalty in nominal dollars: 121,600.
Manufacturer: Mercedes-Benz USA, LLC;
Penalty in nominal dollars: 226,128,170.
Manufacturer: Panoz Auto Development Corp;
Penalty in nominal dollars: 26,918.
Manufacturer: PAS, Inc; Penalty in nominal dollars: 294,500.
Manufacturer: Peugeot Motors of America, Inc;
Penalty in nominal dollars: 2,855,205.
Manufacturer: Porsche Cars North America, Inc;
Penalty in nominal dollars: 52,437,258.
Manufacturer: Rover Group, Ltd;
Penalty in nominal dollars: 23,092,226.
Manufacturer: Sterling Motor Cars;
Penalty in nominal dollars: 4,309,780.
Manufacturer: Spyker;
Penalty in nominal dollars: 3,157.
Manufacturer: Sun International;
Penalty in nominal dollars: 45.
Manufacturer: Vector Aeromotive Corp;
Penalty in nominal dollars: 4,350.
Manufacturer: Volkswagen of America, Inc;
Penalty in nominal dollars: 5,461,528.
Manufacturer: Volvo Cars of North America;
Penalty in nominal dollars: 56,421,280.
Manufacturer: Total;
Penalty in nominal dollars: $678,303,827.
Source: NHTSA.
Note: Amounts rounded to the nearest dollar and not adjusted for
inflation.
[End of table]
* NHTSA does not have authority to revise the car CAFE program
according to vehicle attributes: NHTSA's recent revision of the light
truck CAFE program generally addressed safety and equity concerns;
however, these concerns have not been addressed in the car CAFE
program. NHTSA officials stated that one reason the agency had not
increased the car CAFE standard is that under the current system,
manufacturers may have an incentive to meet higher CAFE standards,
primarily by making vehicles lighter and thus increasing their fuel
economy. NHTSA told us it would prefer to institute an attribute-based
standard for cars but does not have the authority. Officials also said
that they were mindful of the 2002 NAS report, which stated that
increases in CAFE standards in the late 1970s and early 1980s
contributed to additional highway fatalities when manufacturers built
smaller, lighter vehicles to meet the higher CAFE standards. One reason
NHTSA reformed the light truck standard is to avoid having such adverse
safety consequences again when raising CAFE standards for light trucks.
However, NHTSA does not have the legal authority to revise the car CAFE
program to implement a system of attributes that would include
increases over time. Instead, it must use a single number for the
entire fleet, though the administration has several times requested
that Congress provide such authority, and Congress is now considering
these requests.
* The current CAFE program for cars may create competitive advantages
for certain manufacturers: According to some experts with whom we
spoke, the current car CAFE standard creates a competitive advantage
for some auto manufacturers. For example, manufacturers that responded
to growing consumer demand for larger vehicles by selling large sedans
or SUVs must work harder and devote more of their resources to comply
with CAFE because the larger vehicles lower their fleet fuel economy
average. However, these vehicles are often among manufacturers' most
profitable to sell. Manufacturers whose sales are focused mostly on
smaller vehicles, which tend to have relatively higher fuel economy due
to their relatively low weight, have less incentive to further use
their expertise and install more fuel-saving technologies and do not
have to spend resources attempting to meet higher standards. As a
result, the manufacturers may be able to spend those resources on
developing new models, marketing, or other activities giving them an
advantage. However, raising the CAFE standard by instituting an
attribute system requires all manufacturers to increase the fuel
efficiency of their vehicles.
* The Dual Fuel program allows manufacturers to achieve a lower fuel
economy than otherwise would be required under CAFE: The Dual Fuel
program, which was established by the Alternative Motor Fuels Act of
1988, provides for auto manufacturers an opportunity to increase their
CAFE rating in return for producing flex-fuel vehicles capable of
running on conventional gasoline or alternative fuels (typically an
ethanol blend known as E85). The program was designed to encourage
development and increased the availability of alternative fuels by
creating a market for these fuels by giving manufacturers an incentive
to build vehicles that could run on them. EPA and NHTSA officials with
whom we spoke estimated that adding equipment to make vehicles capable
of using alternative fuels in addition to gasoline costs manufacturers
between $100 to $175 per vehicle. As an incentive to assume this extra
cost, manufacturers receive a special fuel economy calculation that
enables manufacturers to boost their fleet CAFE by up to 1.2 mpg toward
complying with CAFE standards. This means that producing flex-fuel
vehicles and obtaining the benefit of the special fuel economy
calculation has the effect of allowing manufacturers to comply with a
lower CAFE standard than they otherwise would be required to meet. As a
result, the Dual Fuel program has weakened the CAFE program's
effectiveness in reducing oil consumption in the short-term, both
because it lowers the fuel economy standards with which manufacturers
must comply and because most flex-fuel vehicles are usually run on
regular gasoline.[Footnote 30] Furthermore, manufacturers have
generally put flex-fuel capacity in their larger, relatively lower fuel
economy models, particularly light trucks. For example, about 80
percent of flex-fuel vehicles available in model years 2006 and 2007
were light trucks. Light trucks in general must meet a lower CAFE
standard than cars, and represent about 50 percent of the new car
market. That manufacturers can build these vehicles to an even lower
fuel economy standard if they produce light trucks with flex-fuel
capabilities, and because these vehicles usually run on gasoline, this
erodes potential reductions in fuel consumption that could otherwise
come from the CAFE program. Also, as discussed later in this report,
our previous work found it is not clear whether the Dual Fuel program
has actually increased the availability or use of alternative fuels
like E85. For example, although the number of fuel stations offering
E85 has increased since 2004, fewer than 1 percent of fuel stations in
the country offered E85 as of early 2007.
Some of the weaknesses that we identify here, such as the potential
negative safety impact from raising current car CAFE standards and the
distinctions the program makes between foreign and domestic cars could
be remedied through revisions to the car CAFE program. However, NHTSA
does not have the authority to make changes to the car CAFE program,
though the administration has requested this authority from Congress,
and a bill the Senate passed in the 110th Congress would give NHTSA
that authority.[Footnote 31]
Experts Suggest That Refinements to the Car CAFE Program Could Increase
Fuel Savings and Address Some Program Weaknesses:
Experts with whom we spoke suggested that several refinements to the
structure of the program could increase fuel savings and address
weaknesses in the program. The refinements selected for discussion
represent those supported by many of these experts and, in some cases,
were also supported by research. In addition, we included refinements
based on our work on 21st Century Challenges, which concluded that a
fundamental review of major program and policy areas can serve the
vital function of updating these programs to meet current and future
challenges.[Footnote 32] This is especially important for programs and
policies designed decades ago to respond to trends and challenges that
existed at the time of their creation. While these refinements show
promise to enhance the CAFE program, additional analysis of the
potential outcomes would be needed before implementation. Proposed
refinements to the CAFE program include the following:
* Reform the car program to an attribute-based system, as NHTSA
recently reformed the light truck program. In changing the light truck
system to a footprint-based approach, NHTSA cited several benefits,
including increased fuel savings, enhanced safety, and a more equitable
framework for manufacturers because compliance costs are spread more
evenly across the industry. Experts with whom we spoke generally agreed
with NHTSA that these changes enhanced the light truck CAFE program.
NHTSA has requested authority to convert the car program to an
attribute-based system, and anticipates that it would use size as it
has for the light truck program but has indicated that it might perform
some research to confirm size is the best attribute.
* Periodically review the basic structure of the CAFE program. A
regular and periodic review of the basic structure of the CAFE program
could allow NHTSA to ensure that the program keeps pace with current
conditions like changes in the fleet mix so that the program's
effectiveness in producing oil savings could be maximized, assuming
Congress grants NHTSA the authority to make changes to the program's
structure. Such a review could also be used to determine whether its
new size-based system for light trucks is increasing fuel economy as
intended.
* Remove incentive for manufacturers to classify cars as light trucks:
Currently, the definitions of cars and light trucks are structured in a
manner that allows manufacturers to make modest design changes in order
to classify a vehicle as a light truck, and thus meet a lower CAFE
standard. For example, vehicles capable of off-highway operation (i.e.,
four-wheel drive) or that have removable seats to expand cargo space
may be considered light trucks. However, recent changes in fleet mix
and the use of light trucks (i.e., primarily as passenger vehicles),
for example, make the definition outdated. NHTSA recently took some
steps to address this concern by issuing revised criteria for
classifying vehicles as light trucks, including requiring a vehicle to
have three rows of seating to qualify as a light truck. This will
result in the removal of wagon-type vehicles such as the PT Cruiser
from the light truck classification. However, this concern could be
further addressed by an additional revision to the definition of light
trucks that more accurately captures attributes of vehicles used for
light duty work. Alternatively, if NHTSA implemented an attribute-based
system for cars, the distinction between cars and light trucks could be
eliminated, and fuel economy standards could be based on attributes.
* Allow CAFE credit trading between vehicle fleets and among
manufacturers: As discussed previously, if manufacturers exceed the
required fuel economy in a certain year, they earn credits that can be
applied to past or future model year fuel economy numbers. These
credits cannot be traded among manufacturers or between fleets (that
is, between cars and light trucks). Greater flexibility in the use of
CAFE credits--specifically, trading among manufacturers as well as
transferring between fleets--than is now afforded could reduce
compliance costs to manufacturers. Specifically, manufacturers for whom
it would be particularly costly to achieve a CAFE standard for a
particular fleet could trade with another manufacturer who could
achieve the standard at less cost or transfer credits between the car
and light truck fleets or their foreign and domestic car fleets.
Although credit trading would give manufacturers flexibility in how
they meet CAFE standards, the fleet would still need to meet the
overall standard. For example, if one manufacturer exceeded the car
CAFE standard under the current system by 1 mpg, it could sell that 1
mpg credit to a manufacturer that was 1 mpg under compliance.
Collectively, the average of both manufacturers would meet the CAFE
standard. In the 2007 State of the Union address, President Bush
proposed a credit trading system under which manufacturers could trade
CAFE credits with one another to improve fuel economy at the lowest
possible cost and the Senate passed a bill in June 2007 that would
institute a program where manufacturers could trade accrued CAFE
credits with one another. As of July 2007, the House has not acted on
this bill. Industry representatives have indicated that they would not
trade credits with other manufacturers due to competitive concerns, but
they thought that many manufacturers would trade within their own
fleets, such as between their car and light truck fleets, if that
option was available.
* Raise CAFE penalties with inflation: CAFE penalties for noncompliance
were established as a part of the program and were first applied to
model year 1983. NHTSA increased the penalty in 1997 from $5.00 to
$5.50 per 0.1 mpg below the standard per vehicle, but it has not
increased them since then. Most manufacturers--including all domestic
manufacturers--comply with CAFE and do not pay penalties, and it is not
clear whether an inflation-based increase in penalties would cause
noncompliant manufacturers to comply. However, in previous work, we
have recommended that agencies collecting penalties should review their
programs regularly to determine if penalties need to increase to ensure
that they continue to deter noncompliance.[Footnote 33] Because CAFE
penalties have not risen since 1997, despite increases in inflation,
noncompliance now costs less, in real terms, for manufacturers than it
did before 1997. If CAFE penalties had kept pace with inflation since
NHTSA raised the penalties in 1997, they would currently be set at
around $7 per 0.1 mpg for 2007.
* Eliminate or revise the dual fuel credit: As previously noted, the
Dual Fuel program has the effect of allowing manufacturers to meet
lower CAFE standards, and it is not clear to what extent the program
has helped increase the production and availability of alternative
fuels. Of those who commented, many experts with whom we spoke thought
this program should be eliminated or at least revised. For example, the
credit could be granted for flex-fuel vehicles sold in states that have
a higher concentration of fueling stations offering E85. Alternatively,
a lower CAFE credit than the maximum 1.2 mpg credit currently available
could be provided. Given that flex-fuel vehicles are not always run on
alternative fuels, lowering the credit to more accurately reflect how
often these vehicles are actually run on alternative fuels could be
appropriate.
The Senate recently passed legislation that would make several changes
to the CAFE program, including revising the car CAFE program to an
attribute-based program and allowing manufacturers to trade with each
other CAFE credits they accrue for exceeding the standards.
NHTSA Generally Has the Capabilities to Reform CAFE Standards and Act
Quickly in the Future, but Some Capabilities Could Be Improved:
NHTSA's recent reform of the light truck CAFE program showed that the
agency generally has the capabilities to reform standards and could act
quickly in the future to reform the car program, but some of NHTSA's
capabilities could be improved. To reform the light truck program,
NHTSA leveraged the work of outside experts. For example, in 2001, at
the direction of Congress, NHTSA contracted with the National Academies
of Science to conduct a peer-reviewed study of CAFE and automotive
technologies. The NAS report included several findings and
recommendations and a study on the feasibility of automotive
technologies for increasing fuel economy in the future. The study,
completed in 5 months, was the basis for much of NHTSA's rule-making
affecting light trucks produced in model years 2008 through 2011.
To solicit additional input and ensure openness in its deliberations,
NHTSA published advance notices to collect information from the
automotive community and others with expertise in CAFE to assist in
developing a proposed light truck rule. NHTSA received over 45,000
comments, and NHTSA officials stated that they changed the final rule
to use size instead of weight as the attribute on which CAFE standards
would be based and revised some of its assumptions in producing the
final rule for the light truck rule, based on information provided in
the comments. For example, NHTSA officials stated that they revised
their analysis and assumptions related to the rate at which it was
practicable for manufacturers to add fuel-saving technologies to their
fleet.
In developing the revised light truck CAFE standard, NHTSA also used a
computer model to help estimate the costs and benefits of increasing
CAFE standards. NHTSA worked with DOT's Volpe National Transportation
Systems Center to develop the model. Also, because of its past work
with the automotive industry producing previous light truck standards,
NHTSA has established a good working relationship with the automotive
industry. Officials at one automotive organization said NHTSA properly
handled its confidential data and produced science-based results.
While, in general, NHTSA had the capability to reform the light truck
program in a manner supported by the automotive experts, manufacturers
and safety experts with whom we spoke, these stakeholders said that
there are areas where NHTSA could improve its capabilities for managing
and revising the CAFE program in the future. For example, some experts
observed that NHTSA has lost staff since the 1990s and stated that this
reduction may stem from the congressional prohibition on NHTSA's making
any changes to CAFE. NHTSA officials told us they need an additional
staff member with expertise in automotive engineering and computer
modeling to assist NHTSA in estimating the potential impact of new
technologies on fuel economy and to perform other tasks in preparation
for possible future changes to CAFE standards. Also, NHTSA currently
relies on the Volpe Center and the NAS report to provide the detailed
information on the capabilities of new technologies that NHTSA uses to
set future CAFE standards. Such independent information is important to
NHTSA when developing CAFE standards. However, NHTSA officials told us
that they rely heavily on the technological assumptions related to the
impact of new technologies on fuel economy in the 2002 NAS report and
that they fear the study's assumptions are becoming out-of-date. These
officials stated they would like to update the NAS study and have
requested additional staff and funding for an update of the NAS study
in NHTSA's fiscal year 2008 budget request.
Lastly, several stakeholders and experts said they were concerned about
certain inputs that NHTSA officials used in the computer model
maintained by DOT's Volpe Center. NHTSA uses this model as a tool to
help estimate the fuel savings that will result from CAFE increases and
to estimate is the likelihood that manufacturers will comply with
future CAFE standards, based on the confidential data NHTSA received
from the manufacturers. Specifically, some experts were critical
because NHTSA and Volpe staff did not assign a dollar value to
reductions in greenhouse gas emissions that would result from an
increased standard. NHTSA officials said they did not assign a value
because the scientific community had not reached a consensus on the
worth of reductions in carbon dioxide emissions, though researchers
have developed a range of values that could be considered. Therefore,
according to one expert, the results of the model may underestimate the
total dollar benefits to society of raising CAFE standards, since the
dollar value of reduced greenhouse gas emissions was not included in
the model's results. Revisions to the car CAFE program, if they occur,
may provide an opportunity to revisit this issue and to conduct
additional sensitivity analyses, possibly in conjunction with other
government agencies such as DOE and EPA, to examine how alternative
values for greenhouse gas emission reductions affect the model's
results. NHTSA has indicated it will examine this issue in the next
CAFE rule making.
Some Market-Based Policy Options Could Complement the CAFE Program:
Through reviews of our past reports and other studies, interviews with
experts, reviews of recently proposed legislation, and analysis of
existing programs in the United States and other countries, we
identified several market-based policies involving cars and light
trucks that could complement and strengthen CAFE's fuel-saving effects
or that could be broader reaching and potentially more cost-effective
alternatives to the CAFE program. The policies discussed in this
section represent those that experts viewed as most promising to reduce
fuel consumption by cars and light trucks. Market-based consumer
incentives could complement CAFE by increasing consumer interest in
purchasing fuel-efficient vehicles, and some incentives already exist.
However, some of these incentives may work at cross purposes to
programs intended to reduce fuel consumption. Also, although some
policies we identified could complement CAFE's fuel-saving effects, the
policies may not be able to produce large enough fuel savings to
achieve broader goals in the future. Market-based incentives have also
been used to increase the availability and use of biofuels, but our
recent report on these efforts identified several limitations, and the
cost-effectiveness of these programs is unclear.[Footnote 34] Several
options, including a tax on fuel or a carbon cap-and-trade program,
affect a broader range of fuel-saving behaviors among consumers and
could be more cost-effective. Such options could help the nation reach
larger, long-term fuel-saving goals at a lower cost than CAFE, but time
would be needed to design and garner support for each before it could
be implemented.
Market-Based Consumer Incentives for Purchasing Fuel-Efficient Vehicles
Exist, but They Are Narrowly Targeted and Have Implications for Federal
Spending:
Market-based incentives to encourage consumers to choose higher fuel
economy vehicles may be particularly important as options to complement
CAFE. Specifically, while CAFE encourages a supply of vehicles with a
relatively high fuel economy, it does not create a demand for them.
Auto manufacturers with whom we spoke told us that consumers generally
choose a vehicle based on other attributes, such as performance,
interior and trunk capacity, and safety features, though recent high
gasoline prices have had some impact on the demand for higher fuel
economy. Consumer incentives could help create a stronger market for
vehicles with higher fuel economy, which could encourage manufacturers
to develop new fuel-saving technologies more quickly. A few policies
that encourage a market for fuel-saving vehicles are currently in
place, and while we identified weaknesses with existing incentives,
such policies could be improved to complement any efforts Congress
takes to improve the CAFE program. These policies are described in the
following sections.
Tax Credits Can Encourage Consumers to Purchase Vehicles with a Higher
Fuel Economy, but Related Costs Must Be Considered in Designing Such a
Policy:
The Energy Policy Act of 2005 established a tax credit for the purchase
of a hybrid vehicle, which is propelled by a standard gasoline (or
diesel) internal combustion engine in combination with an electric
motor and battery storage system.[Footnote 35] Hybrid technology can
significantly improve fuel economy--for example, according to the DOE's
Fuel Economy Guide, the most efficient model year 2007 hybrid car is
rated at 60 mpg for city driving and 51 mpg on the highway. The tax
credits range from $250 to $3,400, depending on the fuel economy of the
model; and the credit is phased out once a manufacturer has sold 60,000
vehicles. The 60,000 vehicle limit was intended to prevent tax credits
from accruing excessively to foreign hybrid manufacturers. Almost
216,000 model year 2006 hybrids have been sold.
Although recent surges in gasoline prices above $3 per gallon may be
changing consumer behavior, previous research has found that consumers
purchasing new vehicles consider several factors in choosing a model,
but fuel economy has not typically been a priority. Of those experts
who discussed the issue with us, most supported the use of tax credits
to encourage consumers to place a higher value on fuel economy. A
recent report by the Center for Clean Air Policy[Footnote 36] noted
that credits can lower the cost of a fuel-saving car, thus making these
vehicles more appealing to consumers, and also can encourage
manufacturers to roll out new technologies in their fleet by helping to
overcome market barriers. Specifically, cars with new technologies are
generally more expensive than those with conventional technologies
because it takes time for manufacturers to reach economies of scale,
and some portion of these costs are passed onto the consumer. Tax
credits can help to offset the cost differential between cars with
advanced and conventional technologies, which means that consumers will
not face as much of a price disincentive for choosing a car with new
fuel-saving technologies.
One weakness of the hybrid tax credit that some experts identified is
that by targeting specific technologies, such credits may give an
advantage to technologies that ultimately are not the most efficient or
cost-effective technology available to achieve fuel-saving goals. For
example, the current tax credits that encourage consumers to purchase
vehicles with hybrid technology may discourage the development of other
promising fuel-saving technologies, because those technologies would
not have the cost advantage of a tax credit to support their sale.
To address this weakness, some experts suggested offering tax credits
based on a performance standard. For instance, a credit could be
provided for any vehicle achieving a fuel economy higher than 40 mpg,
regardless of the technology the vehicle uses. Such an approach could
also support environmental goals by including performance measures
related to pollution emissions as well. This approach would target a
broader range of fuel-saving technologies but could also increase the
costs of the policy to the federal government. As we have stated in
recent reports, tax credits are a type of tax expenditure that results
in revenue loss for the federal government, and as such, they need to
be evaluated to determine if their benefits in achieving clear, outcome-
oriented goals exceed their costs.[Footnote 37]
One option that would address the costs associated with providing
credits for purchasing vehicles with a higher fuel economy is a feebate
program, which would incorporate both incentives and disincentives by
taxing the purchase of vehicles that achieve a lower fuel economy and
applying those revenues to subsidize a rebate or credit for the
purchase of vehicles that achieve a higher fuel economy. Although the
amount of the fees and rebates might need to be relatively high to
affect consumer choices,[Footnote 38] the system could be designed to
be revenue-neutral, where the amount of rebates paid out is covered by
the fees collected. In addition, feebates can be adjusted as CAFE
standards are increased to ensure that there is always a market element
to complement CAFE. Such a system is being considered in Canada to
complement Canada's voluntary fuel economy standards.
One limitation noted by some of the experts with whom we spoke--and a
potential reason to use feebates to complement rather than replace
CAFE--is that feebates have not been tested on a large scale, and the
market may not respond as expected. In addition, some industry
representatives told us that such a system should be national, rather
than state-initiated, to prevent car buyers from going to certain
states to buy vehicles that achieve higher fuel economy so they can
obtain a rebate or, conversely, going to other states to buy vehicles
that achieve lower fuel economy to avoid paying a fee.
Taxes Can Discourage the Purchase of Vehicles with a Low Fuel Economy
and Provide a Revenue Stream for Other Fuel-Saving Programs, but Can
Face Consumer Resistance:
Taxes on vehicles with a low fuel economy are another type of market-
based incentive to encourage consumers to choose vehicles with a higher
fuel economy and are another option to complement the CAFE program.
Such taxes have been implemented in the United States and other
countries. Specifically, consumers can buy a vehicle with a high fuel
economy without paying a tax penalty or buy a less fuel-efficient
vehicle that fits other needs, but they will incur a tax penalty. The
public benefits from either consumer decision, through fuel savings or
collection of revenue that the government can put toward other fuel-
saving programs--for instance, federal research and development
programs on fuel-efficient technology or alternative fuels.
The U.S. Gas Guzzler Tax is an example of an existing disincentive
against purchasing vehicles that obtain relatively low fuel economy
ratings. The tax is levied on the sale of new cars whose fuel economy
does not meet certain levels. The tax is paid by the manufacturer,
which must disclose the amount to potential buyers by including it on
the fuel economy window sticker. The tax applies only to cars and not
to light trucks, and the tax is collected by the Internal Revenue
Service. Manufacturers currently begin paying a tax when their cars
obtain less than 22.5 mpg, and the tax increases incrementally for cars
with lower fuel economy (see fig. 4). In general, manufacturers of
luxury or sports cars primarily pay the Gas Guzzler Tax, such as Aston
Martin, Ferrari, and Mercedes.
Figure 4: Gas Guzzler Tax Structure:
[See PDF for image]
Source: DOE.
[End of figure]
Several issues may limit the effectiveness of the Gas Guzzler Tax.
First, although the tax was intended to discourage the production and
purchase of vehicles obtaining a low fuel economy, its structure has
not been updated since 1990, and the extent to which the tax serves as
an effective disincentive is not clear. Because the amount of the tax
has not been adjusted for inflation since 1990, it is less expensive
for manufacturers to pay the tax now than it was in years prior to
1990, so the tax might be less of a disincentive now than in the past.
Second, as previously noted, light trucks are not subject to the Gas
Guzzler Tax. In 1979, the year before the Gas Guzzler Tax took effect,
light trucks accounted for about 10 percent of the new light vehicle
market. By 2004, light trucks accounted for almost 53 percent of the
new light vehicle market and, according to NHTSA, in many cases are
primarily used as passenger vehicles, despite having low fuel economy.
This is a significant change in the conditions of the auto market, one
that the original lawmakers who developed the tax may not have
anticipated. Finally, it is not clear to what extent the Gas Guzzler
Tax encourages consumers to choose a vehicle with a higher fuel
economy. As noted, the tax generally is paid by manufacturers of luxury
and sports cars. If the tax were applied to a broader range of
vehicles--for example, by increasing the fuel economy standard to which
the tax applied--the tax could influence more consumers' car purchasing
decisions. While expanding the Gas Guzzler Tax would encourage
consumers to buy fewer vehicles subject to this tax, those already
owning such vehicles before the tax goes into effect may choose to hold
onto those vehicles longer than they otherwise would. If new cars
subject to an expanded Gas Guzzler Tax had better fuel economy than
these cars, then holding onto them longer would be at cross purposes
with the objective of reducing fuel consumption.
One alternative to the Gas Guzzler Tax that has been implemented in
other countries is a structure of graduated registration fees that
corresponds to different levels of fuel economy. This type of tax is
paid yearly with the renewal of an owner's vehicle registration rather
than only once at the time of purchasing a new car, and the fee
increases as a vehicle's fuel economy rating decreases. Denmark,
France, and the United Kingdom have implemented a graduated
registration tax, and the cost of registering a fuel inefficient
vehicle can be high. For example, if the current structure of Denmark's
"Green Owner Tax" were applied in the United States, it would cost
annually as little as about $30 to register a fuel-saving compact car,
compared with about $1,160 for a luxury sedan with a much lower fuel
economy.[Footnote 39] Such recurring fees may increase the value
consumers place on purchasing vehicles with higher fuel economy
ratings. In addition, while the Hybrid Tax Credit and the Gas Guzzler
Tax apply only to new model year cars being sold, graduated
registration fees would apply to all vehicles, and therefore might
influence consumer choices, even for used vehicle purchases.
Furthermore, because graduated registration fees would apply to all
vehicles, they could have a less adverse effect on the market for new
cars than a tax on new cars only.
Other Tax Policies with Different Goals Might Affect Consumer Choice of
Vehicles:
Other tax incentives that are designed to support goals other than
reducing oil consumption, but that nonetheless affect consumer choices
in purchasing a vehicle, may negate some benefits from oil-saving
programs. For example, small businesses can obtain a tax savings
through depreciation write-offs for the purchase of an SUV over 6,000
lbs. The depreciation write-off on cars, including hybrids, are treated
less generously, offering much smaller write-offs due to more stringent
depreciation limitations As a result, businesses seeking to maximize a
tax write-off may choose to purchase an SUV, which generally have lower
fuel economy ratings than hybrid cars. In addition, tax laws such as
those that exclude from income and payroll tax a portion of employer-
paid parking expenses may encourage individuals to commute by passenger
car or light truck, which could increase fuel consumption. Although
these laws were not intended to save fuel, the majority of experts with
whom we spoke thought that policy should be integrated and aligned to
produce fuel savings. In addition, we have recommended that government
programs be periodically reexamined to ensure that they are meeting
current challenges and national goals.[Footnote 40]
Taxes on Gasoline, Carbon Emissions, or Vehicle Miles Traveled Could
Affect a Broader Range of Consumer Decisions That Relate to Fuel
Consumption:
Other tax options, including a tax on gasoline or carbon
emissions[Footnote 41] would create incentives that could affect a
broader range of consumer choices, including how much to drive, whether
to use vehicles with a higher fuel economy, and when to retire older,
less efficient vehicles. A tax on the number of miles driven by an
individual (vehicle miles traveled tax or VMT tax) would encourage
consumers to drive less. However, unlike a gasoline or carbon tax, a
VMT tax does not vary depending on how many mpg a vehicle achieves;
thus, it does not provide a direct incentive to purchase a vehicle with
a higher fuel economy. Because a gasoline or carbon tax could have such
broad effect on consumer decisions, it could be used to complement CAFE
or, if set at an appropriate level, to replace CAFE standards. The
economic literature we reviewed indicates that a gasoline or carbon tax
would produce greater oil savings than increasing CAFE standards alone
and at less cost. Furthermore, this literature and all of the
economists with whom we spoke stated that a tax on gasoline or carbon
would be cost-effective, whereas increasing CAFE standards would not be
as cost-effective. For example, CBO estimated that increasing the
gasoline tax to achieve a 10 percent reduction in fuel consumption
would cost far less than an increase in CAFE standards.[Footnote 42]
In addition to being cost-effective and influencing a broader range of
consumer decisions than tax incentives on new car purchases, a gasoline
or carbon tax offers a number of other benefits in terms of potentially
reducing fuel consumption:
* It would result in a wide range of fuel-saving responses from all
consumers rather than only from those purchasing a new vehicle. For
example, a higher tax on gasoline or carbon would provide a financial
incentive for all drivers to buy vehicles with higher fuel economy,
retire vehicles with lower fuel economy sooner, and drive less. By
comparison, CAFE standards or consumer incentives to buy vehicles with
a higher fuel economy influence a much smaller group of consumers--
namely, those choosing to purchase a new vehicle, which limits the
effects of these strategies on fuel consumption. In addition, because
increases to CAFE can increase the cost of new vehicles through the
addition of new technology, CAFE can slow the sale of new cars and
extend the life of older vehicles, which may have lower fuel economy
ratings.
* Higher gasoline prices resulting from either a gasoline or carbon tax
could sustain consumers' interest in fuel-saving vehicles, leading to a
more predictable demand for these vehicles, which is important to the
car manufacturing industry. Industry representatives told us that it is
difficult for them to respond to rapid changes in consumer interest
triggered by fluctuations in fuel prices because auto manufacturers
generally plan their products years in advance. For example, in 2005
Hurricane Katrina and other factors caused disturbances in regional
gasoline supplies, and gasoline prices climbed to a nationwide average
of almost $3 per gallon. During this time, sales of light trucks
declined, causing manufacturers like Ford to significantly reduce
production.
* A gasoline or carbon tax could complement increased CAFE standards by
helping address the rebound effect--an increase in driving among those
with fuel-saving cars because the per-mile cost of driving is lower.
The rebound effect reduces the fuel savings that can be produced by
increasing CAFE standards.[Footnote 43] A gasoline or carbon tax would
provide a financial incentive for consumers to drive less, which could
mitigate the rebound effect.
* We recently reported that additional taxes on oil or carbon would be
the most economically efficient means of increasing the production and
use of biofuels because those taxes would allow biofuels to be used at
the level where they provide the greatest economic, environmental, and
other benefits.[Footnote 44]
* Some revenues from the gasoline and carbon tax could be "recaptured,"
or used to fund other efforts to reduce fuel consumption, such as
funding research and development of fuel-saving technologies for cars
and light trucks. The current federal gasoline tax is $0.184 per
gallon, of which $0.183 goes to fund highway and mass transit trust
funds.
An alternative to a gasoline or carbon tax that more directly addresses
the effect of increased driving on oil consumption is a VMT tax. The
number of overall vehicle miles traveled has increased by 22 percent
from 1994 to 2003, and increases in VMT result in increased fuel
consumption, pollutants and carbon emissions, congestion (which further
increases fuel consumption), and road maintenance requirements. A VMT
tax effects drivers' choices about how much to drive, and therefore,
could help the nation meet several goals. Also, it could be used to
complement CAFE standards and could address the rebound effect by
creating a disincentive for people to drive more when improved fuel
economy makes driving less costly.
In 2006, Oregon tested the feasibility of replacing the state gasoline
tax with a VMT tax. The Global Positioning System (GPS) was used to
track the miles driven, and participants pay the VMT tax ($0.012 per
mile traveled) instead of the state gasoline tax when they fill up at
gasoline pumps that can read information from the GPS. Using a GPS
could also track mileage in high congestion zones, and the tax could be
adjusted upward for miles driven in these areas or during more
congested times of day such as rush hour--a strategy that might reduce
congestion and save fuel. In addition, the system could be designed to
apply different tax levels to vehicles, depending on their fuel
economy. On the federal level, a VMT tax could be based on odometer
readings, which would likely be a simpler and less costly way to
implement such a program.
Some limitations exist for a gasoline, carbon, or VMT tax. For example,
the effectiveness of such taxes in reducing fuel consumption would
depend in part on setting the tax at a level that would change consumer
behavior. In addition, each of these taxes would increase the overall
costs of driving, which could disproportionately affect rural
residents, who often must drive more because of limited public
transportation and greater distances to obtain services, and low-income
drivers. Some economists believe that this disadvantage can be
addressed through "revenue recycling," a measure in which behaviors
considered to be valuable to the economy are lowered to offset some or
all of an increased tax on behaviors that create additional costs for
the public. For example, taxes on income could be lowered to offset
increased taxes on gasoline consumption or miles driven. In addition, a
VMT tax--unless it is adjusted based on the fuel economy of the
vehicle--does not provide incentives for customers to buy vehicles with
higher fuel economy ratings because the tax depends only on mileage.
Also, because the tax would likely be collected from individual
drivers, a VMT tax could be expensive for the government to implement,
potentially making it a less cost-effective approach than a gasoline or
carbon tax. By comparison, the government collects the federal gasoline
tax from fuel producers, not individual consumers, which simplifies and
lowers the cost of administering the tax. However, the most difficult
obstacle for the use of a gasoline, carbon, or VMT tax continues to be
public resistance, which stems from the high visibility to the consumer
of the cost of these types of taxes. By comparison, policies like CAFE
also create costs to the consumer--such as a higher price for new
vehicles due to new technology to save fuel--but these costs may be
less obvious to consumers because they are incorporated in the sale
price of the vehicle.
Efforts to Expand the Market Demand for Biofuels Have Been Initiated,
but Several Barriers Impede Progress:
Developing renewable and alternative fuels has been a prominent part of
the administration's plans to reduce oil consumption. For example, in
the State of the Union address in January 2007, the President
established a goal to reduce gasoline consumption by 20 percent of
projected use in 2017. About 15 percent of oil savings will come from
renewable and alternative fuels and 5 percent is expected to come from
increased CAFE standards. Fuels such as ethanol--which is made from
renewable feedstocks like corn--are currently available on the market,
while other renewable fuels, like cellulosic ethanol--which is made
from sources like corn stalks that are in abundant supply--shows
promise although technological advances are still needed to reduce the
cost of its production. Biofuels offer several environmental advantages
compared with other types of alternative fuel, including coming from
renewable resources and emitting lower levels of carbon dioxide when
they are consumed compared with conventional gasoline and alternative
fuels such as those produced by converting coal to liquid fuel.
Expanding the use of alternative fuels can work in parallel with CAFE
standards to reduce oil consumption. Although fuel economy standards do
not create an incentive for consumers to seek opportunities to use
biofuels, as we reported in June 2007, strategies to develop both the
supply and demand for biofuels in the transportation sector are
currently in place, but several barriers impede progress.[Footnote 45]
We found that although the production of ethanol, one of the most
commonly available biofuels for cars and light trucks, has increased
significantly,[Footnote 46] most of this supply is being used as an
additive in gasoline (10 percent or less) to improve the emissions of
conventional gasoline and to extend gasoline supplies rather than being
made into the alternative fuel, E85. In addition, few fueling stations
offer E85--in early 2007 approximately 1,100, or fewer than 1 percent
of the fuel stations in the United States, offered E85, and these were
primarily concentrated in the Midwest. As our June 2007 report
indicated, other significant barriers to expanding the availability of
E85 also exist, including higher costs of production, limits on
available land to grow the feedstocks used to create E85, and increases
in food costs associated with greater use of corn and soybeans to make
these fuels instead of food products, which may discourage use of
biofuels.
To support public and private investments in expanding the production
and availability of alternative fuels, including biofuels, two programs
work to expand the market demand for these fuels: (1) an incentive that
aids efforts to meet the CAFE standards for auto manufacturers and (2)
requirements that federal agencies purchase flex-fuel vehicles. As
noted earlier in the report, auto manufacturers receive a maximum
increase of 1.2 mpg toward meeting CAFE standards for producing flex-
fuel vehicles capable of running on E85 or conventional gasoline.
Although manufacturers have increased their production of flex-fuel
vehicles and more models are available now than in the past, a 2002
DOT, EPA, and DOE report estimated that less than 1 percent of the fuel
consumed by these vehicles was E85, though this number may be higher
now that E85 is in greater supply. As noted, E85 is not widely
available to consumers and while most E85 fueling stations are located
in the Midwest, we recently reported that, according to the Alliance of
Automobile Manufacturers, in 2006, the largest number of privately
owned flex-fuel vehicles were in Texas, Florida, and California.
A second program to increase the availability of flex-fuel vehicles and
alternative fuels by increasing demand for both was included in the
Energy Policy Acts of 1992 and 2005, which required federal agencies to
increase their purchase of flex-fuel vehicles and use alternative fuels
to fuel these vehicles. We recently evaluated the extent to which the
United States Postal Service (USPS) has been able to comply with these
requirements, and we reported that these requirements may not be
contributing to passenger vehicle oil savings. For example, to comply
with the laws, USPS purchased a large fleet of flex-fuel vehicles to
reduce its reliance on petroleum-based fuels, yet the limited
nationwide alternative fueling infrastructure and the often higher cost
and lower efficiency of E85, compared with regular gasoline have
prevented USPS from using alternative fuels. As of 2006, alternative
fuels accounted for only 1.5 percent of the total fuel consumed by
USPS's internal fleet. USPS officials have had success in improving
gasoline mileage by using hybrids, which the officials indicated are
well suited to the stop-and-go driving of mail delivery, but hybrids
are not considered flex-fuel vehicles and therefore do not help USPS
comply with the Energy Policy Act of 2005.[Footnote 47]
The federal government also uses tax credits to promote the greater
availability and use of biofuels. For example, the American Jobs
Creation Act of 2004 created a tax credit for ethanol use that provides
a 51 cent per-gallon tax credit to fuel blenders for ethanol they blend
with gasoline as well as tax credits for installing fuel stations
providing alternative fuels.[Footnote 48] We recently reported that,
according to Treasury Department data, these credits cost the
government about $2.7 billion in forgone revenue in 2006. Whether these
credits create energy independence or environmental benefits sufficient
to justify their costs is a matter of debate.[Footnote 49]
A Carbon Cap-and-Trade Program Would Combine Regulatory and Market-
Based Elements, but Including Cars and Light Trucks Could Be
Complicated:
Several bills have been introduced in both the House and Senate
proposing a multi-industry cap-and-trade program to reduce greenhouse
gas emissions, including carbon dioxide emissions. Cap-and-trade
programs combine a regulatory limit or cap on the amount of a
substance--in this case, carbon dioxide--that can be emitted into the
atmosphere with market elements like credit trading to give industries
flexibility in meeting the cap.[Footnote 50] The cap can be reduced in
outlying years in order to steadily decrease the total amount of carbon
dioxide emitted; and, in this scenario, individual companies would
comply with the cap by either reducing their emissions to the cap's
limit or buying credits from a company that is below the cap. Because
burning gasoline produces carbon dioxide emissions, a cap on carbon
dioxide, if applied to cars and light trucks, would also improve fuel
economy and reduce fuel consumption.[Footnote 51]
Research indicates that by combining regulatory (namely the carbon cap)
and market-based elements (such as credit trading), cap-and-trade
programs can produce cost-effective outcomes, especially when compared
with regulatory programs. For example, the cap sets a predetermined
limit on emissions, but credit trading allows the industry to achieve
the goal in the least costly manner by allowing companies for whom
compliance costs are low to overcomply and sell allowances to those
companies for whom compliance costs are high, all while remaining
within the overall cap. In addition, the costs are borne and shared by
all those industries participating in the program--and some portion of
these compliance costs are passed on to the consumer. Research also
suggests that for a carbon cap-and-trade program to maximize its cost-
effectiveness, it would need to include all major sources of carbon
emissions from a broad range of industries, such as electric utility
companies, oil producers, auto makers, and others, which would spread
the cost of compliance broadly.[Footnote 52]
Designing a cap-and-trade program would be complicated and would take
time to develop, and its effectiveness in producing fuel savings and
reduced greenhouse gas emissions would depend in part on how
aggressively the cap was reduced. For example, when a program is
established, the government must give or auction allowances for the
right to emit carbon dioxide up to the total number of allowances equal
to the cap. Determining whether to auction or give allowances to
companies is important in designing a cap-and-trade program because it
has cost implications for the government and society and can create
competitive advantages for participating companies. For example, if
allowances are auctioned, the government will receive revenues, which
could be used to offset the costs of managing the program or fund
research and development on technology to reduce carbon emissions.
In addition, a carbon cap-and-trade program could be designed to
incorporate cars and light trucks, which would influence fuel
consumption but would also create additional design challenges that
would impose different requirements and costs on auto manufacturers.
One approach would introduce an "upstream" cap on fossil fuels in which
all producers and importers of oil, coal, and other fossil fuels would
be required to hold allowances based on the carbon content of their
fuel. Such a design would link the pricing of transportation fuels to
their carbon content, which would in turn affect consumer behavior in a
similar manner to a carbon tax by encouraging consumers to buy more
fuel-saving vehicles and drive less. This approach would not require a
CAFE standard or any type of carbon cap on auto manufacturers, but
instead it would allow fuel pricing to drive changes in the market.
Alternatively, some proposals under consideration in Congress would
establish a cap-and-trade program and would include some form of cap
for auto makers. This could be accomplished by using CAFE standards as
a proxy for carbon emissions, increasing the CAFE standards over time,
and developing a credit trading program between CAFE credits and the
carbon trading among other industries. However, maintaining the CAFE
system within a larger cap-and-trade program could result in higher
compliance costs for auto manufacturers, making it more costly for
manufacturers to reduce emissions, compared with other industries.
Conclusions:
Reducing the nation's growing oil consumption, particularly for cars
and light trucks, is a formidable challenge. Despite its limited scope,
the CAFE program has reduced oil consumption by cars and light trucks
over what it would have otherwise been, and the evidence suggests that
increasing CAFE standards would save additional oil. However, the
average vehicle fuel economy of cars and light trucks in the United
States has stagnated since 1990 due to several factors, including the
low price of oil during much of this period and an increase in the
number of large cars and SUVs in the market for which there have not
been comparable increases in CAFE standards. Most, but not all,
manufacturers have been exceeding the car CAFE standard for some time
and therefore do not oppose incremental increases in these standards.
Furthermore, experts with whom we spoke, and NAS in its 2002 report,
stated that the technology exists to increase fuel economy without
large increases in vehicle costs.
As shown by its recent revision of the light truck CAFE program, NHTSA
has the technological capabilities to perform the analysis required to
raise the car CAFE standard while balancing fuel economy improvements
against concerns about vehicle safety and cost. As a result, NHTSA
could move quickly to increase the car CAFE standard and revise the car
CAFE program. However, updating the 2002 NAS study would be helpful in
giving NHTSA the most up-to-date technological information for
determining future CAFE standards. In its fiscal year 2008 budget
request, NHTSA has asked for funding to update this study, so that it
is not reliant on outdated technological data. Also, under current law,
NHTSA does not have the authority it believes it needs to revise the
car CAFE program, though the administration has asked Congress several
times to provide this authority, without success. Congress could choose
to set new standards for CAFE, or it could give NHTSA the authority to
reform the car CAFE program, much as it recently revised the light
truck program, or both. Either approach would provide an opportunity
for NHTSA to evaluate the car CAFE standard and increase fuel economy
while attempting to minimize any adverse effects on safety and the
equity and consumer choice concerns associated with the current car
CAFE program. In addition, evaluating the impact of refinements such as
the current CAFE penalty structure and incentives to classify vehicles
as light trucks would be an important component to maximize the
effectiveness of any CAFE program revisions. The recently passed Senate
bill would address some of these refinements, including creating an
attribute-based car CAFE program and instituting a system of credit
trading for manufacturers.
While CAFE has been an important tool to reduce oil consumption by cars
and light trucks and has several strengths, because of its focus on
cars and light trucks, the potential oil savings that can be obtained
from CAFE may not be enough to help the nation achieve larger fuel-
saving goals. Several alternatives to CAFE, including a gasoline or
carbon tax or a cap-and-trade program for carbon dioxide, have the
potential to produce further fuel savings at less cost and could
address a broader range of national goals, including addressing climate
change. However, overcoming consumer resistance to a highly visible
cost like a gasoline tax or developing a design for a carbon cap-and-
trade program that would incorporate cars and light trucks in an
equitable and cost-effective manner would both likely require time and
consensus-building. In the interim, increases in CAFE standards and
revisions to the car CAFE program similar to recent changes to the
light truck CAFE program are likely to help the nation make some
progress toward reducing fuel consumption. In addition, evaluating and
updating existing consumer incentives, such as tax credits for buying
fuel-saving vehicles or taxes on purchases of vehicles with low fuel
economy ratings, could strengthen the CAFE program's fuel-saving
effects. Finally, other market incentives that are designed for other
purposes but nonetheless affect passenger vehicle fuel consumption,
such as depreciation write-offs for small businesses purchasing large
SUVs, also could be evaluated to determine whether the value these
programs contribute toward their intended goals is sufficient to offset
potential increases in oil consumption.
Matters for Congressional Consideration:
If Congress decides to increase CAFE standards, either through setting
new standards itself or directing NHTSA to determine the standards, it
should consider providing NHTSA with the flexibility and information
necessary to reform and revise CAFE standards while mitigating any
adverse impact on safety, consumer choice, or competitive equity
concerns. Thus, Congress should consider giving NHTSA (1) the authority
to reform the car CAFE program much as it restructured the light truck
CAFE program and evaluate additional refinements to the program such as
credit trading; (2) the resources to update information on the
capabilities of new technologies to enhance passenger vehicle fuel
economy--as was done in the 2002 NAS study; and (3) the flexibility to
adjust the program in the future in response to changes in the
passenger vehicle market, such as improved automotive technology and
changes in the mix of passenger vehicle types.
Recommendations for Executive Action:
So that the DOT is prepared to move quickly to revise the CAFE program
in the event Congress decides to set higher CAFE standards or
authorizes NHTSA to reform the existing program, we recommend that as
part of the process for determining future CAFE standards, the
Secretary of Transportation direct the Administrator of NHTSA to
consider in the agency's analysis whether the CAFE program should be
enhanced to include credit trading, eliminate incentives to classify
vehicles as light trucks, index CAFE penalties to keep pace with
inflation, or incorporate other reforms.
To help ensure the nation's fuel-saving goals are achieved in the most
efficient fashion, we further recommend that the Secretary of
Transportation, in coordination with all relevant agency officials,
including the Secretary of Energy, the Administrator of the
Environmental Protection Agency, and the Secretary of the Treasury
evaluate the impacts existing and potential policy options are having
or might have on fuel consumption by cars and light trucks beyond what
may be achieved through CAFE standards alone and report on the result
of this evaluation. Specifically, such an analysis should evaluate (1)
existing consumer incentives that complement CAFE to determine whether
changes to the incentives could improve their effectiveness and reduce
their costs; (2) existing incentives that may affect fuel consumption
by cars and light trucks--whether these policies were designed to do so
or not--to ensure that policies meant to reduce fuel consumption are
not being counteracted inadvertently by policies that increase fuel
consumption; and (3) broader reaching strategies such as a carbon tax,
cap-and-trade program, and others, as possible long-term alternatives
to the CAFE program.
Agency Comments:
We provided a copy of a draft of this report to the Department of
Transportation, the Environmental Protection Agency, and the Department
of Energy for their review. DOT and EPA provided comments via e-mail,
and DOE provided written comments (see app. III). DOT generally
concurred with the report's findings and will consider the
recommendations; EPA generally agreed with the report and
recommendations; and DOE did not comment on the recommendations and did
not agree with our finding that policy options other than CAFE, such as
taxes and cap-and-trade programs, have the potential to produce fuel
savings beyond what could be achieved through CAFE in a more cost-
effective manner. Specific comments on the draft, as well as our
responses, follow.
DOT officials, including the Senior Associate Administrator for Vehicle
Safety, stated that, while we recommended that as part of any reform to
the CAFE program, NHTSA should consider indexing CAFE penalties to keep
pace with inflation, NHTSA has the ability to increase current civil
penalties from $5.50 to $10.00 for every 0.1 mpg a manufacturers' fleet
falls short of CAFE standards. However, NHTSA officials believe that
since the manufacturers that generally pay these penalties are those
that produce luxury or specialty, high-performance vehicles whose sales
they believe are dependent on performance, doubling the penalties will
likely not induce these companies to produce more fuel-efficient
vehicles. Without more definitive research, we continue to recommend
that NHTSA consider studying the impact of systematically increasing
civil penalties if it revises the CAFE program to determine how the
penalties can best influence the intended outcomes of the CAFE program.
Officials from EPA, including the Office of Air and Radiation and
Office of Policy, Economics, and Innovation acknowledged our
comprehensive discussion of the CAFE program as well as the issue of
climate change. However, EPA officials requested we include more
discussion of disagreements over the safety impacts and other potential
trade-offs involved in raising CAFE standards. In response, we added
material on the lack of consensus on the safety issue. Also, our Matter
for Consideration to Congress to provide NHTSA the authority to modify
the program as the industry and technology changes, if implemented,
would provide NHTSA an opportunity to adjust the program to enhance
safety if conditions warrant. EPA agreed with our recommendations and
suggested we include a recommendation that NHTSA work with EPA and DOE
to establish a valuation for reducing carbon dioxide emissions in its
computer model that estimates the costs and benefits of increasing CAFE
standards. While we did not include such a recommendation, we added
information on this possibility in this report.
DOE officials, in a letter from the Assistant Secretary of the Office
of Policy and International Affairs, expressed four general concerns
with our draft report. (See app. III). First, DOE's letter states that
we do not provide sufficient analysis to support the report's assertion
that reforming CAFE standards alone is not sufficient to realize
reductions in oil consumption. However, our report says that an
increase in CAFE standards would likely make an important contribution
to reducing oil consumption. Further, our discussions about the role of
the CAFE program in reducing gasoline and oil consumption were based,
in part, on the President's "Twenty In Ten" plan which proposes to
reduce U.S. gasoline consumption by 20 percent over current levels over
the next 10 years through a combination of initiatives--increasing CAFE
standards as well as increasing the use of renewable and alternative
fuels. It is also based on our analysis of academic and government
studies on additional policy options for reducing oil consumption in
the transportation sector. Finally, we would expect NHTSA's analysis
for any proposed increase in CAFE standards, as it has in the past, to
include estimates on how much gasoline increased standards and reforms
of CAFE would likely save.
Second, DOE officials stated the report should include more analysis
comparing benefits and costs of different approaches to reducing oil
consumption by the transportation sector. It was not the purpose of
this report to analyze the costs and benefits of these options as we
see the discussion in this report as a first step in describing a
number of options policymakers could consider in making decisions about
how to reduce oil consumption. We acknowledge that more analysis will
help guide future policy decisions and thus recommended that cognizant
agencies including DOE, EPA, and DOT evaluate existing and potential
policy options to further reduce fuel consumption of cars and light
trucks beyond what may be achieved through CAFE standards alone. In
addition, many of the options we discuss could be implemented in a
variety of ways. For example, in a cap-and-trade program policy makers
would need to determine which sectors of the economy to include in the
program. Thus, analysis on specific, proposed program designs will be
important to provide decision makers further information on the
benefits and costs of specific proposals.
Third, DOE officials stated the report should assess the differential
impacts that reforming CAFE standards would have on automobile
manufacturers and related firms. While we agree this is an important
analysis, it was not the focus of this report. If NHTSA revises the
CAFE standards, we expect that NHTSA will continue to use its model to
assist in determining the economic feasibility of different mpg
standards for automobile manufacturers.
Fourth, DOE officials stated the report should address the impact of
consumer demand for horsepower in their personal vehicles and the
impact on potential fuel economy lost as a result. The report
acknowledges that potential fuel economy has been lost over the last
few decades while vehicle power has increased and fuel economy
standards stagnated; and this information informed our analysis of
potential reforms to the CAFE program. Furthermore, NHTSA's reformed
light truck standards and proposals in Congress and from NHTSA to use a
similar approach to revising the standards for cars are responsive to
this issue by helping balance oil savings with consumer choice for a
variety of vehicle sizes. The reformed light truck CAFE program is
designed so that manufacturers need to improve the fuel economy of
vehicles of all sizes of vehicles over time.
DOE officials also stated they agree with our recommendation that
Congress not pursue gasoline taxes and that they do not agree with the
conclusion that other options are potentially more cost effective to
reduce petroleum consumption than a reformed CAFE program. While we
made no recommendation about gasoline taxes, as described in our scope
and methodology section, we relied on recent, peer reviewed research
that as a whole presents a strong case that options other than CAFE
standards can be less costly to the economy as a whole to implement.
DOE also criticized our use of CBO's cost-benefit analysis to
illustrate that approaches such as a gas tax can be more cost effective
than a reformed CAFE program. As noted in our report, CBO found that a
gas tax would achieve the targeted reduction in fuel consumption at 19
percent less cost per year, compared with increased CAFE standards and
3 percent less cost per year than increased CAFE standards with a
credit trading program, after all existing vehicles have been replaced
by vehicles meeting the new CAFE standards. We emphasized the greater
cost savings for two reasons: First, NHTSA does not have express
authority to institute a credit trading program, and it is unknown
whether manufacturers would take full advantage of such a program--a
key assumption in the CBO estimate. Second, CBO's analysis also found
that an increased gas tax had significant benefits in the short run,
compared with a CAFE program with credit trading--specifically, a
gasoline tax would save 42 percent more fuel while costing 27 percent
less over the initial 14 years.
Finally, each organization provided technical comments. We obtained
conflicting information in one area--the amount of mpg credits
manufactures receive for producing vehicles that are capable of using
both regular gasoline and an alternative fuel. DOE commented that from
model years 2005 to 2008 the credit is decreasing from 1.2 mpg to 0.9
mpg. However DOT states that the credit is 1.2 mpg through model year
2010. We agree with DOT's explanation based on our review of the Energy
Policy Act of 2005. The remaining technical corrections, we addressed
throughout the report as appropriate.
We are sending copies of this report to interested congressional
committees, the Secretary of Transportation, the Administrator of EPA,
and the Secretary of Energy. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-2834 or siggerudk@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix III.
Sincerely yours,
Signed by:
Katherine A. Siggerud:
Director, Physical Infrastructure Issues:
[End of section]
Appendix I: Scope and Methodology:
To obtain information on how the Corporate Average Fuel Economy (CAFE)
program is designed to reduce oil consumption by cars and light trucks
and its status, we reviewed relevant law, including the legislation
that established the program and authorized the National Highway
Traffic Safety Administration (NHTSA) authority to administer it as
well as legislation creating the CAFE credit program for manufacturers
of flex-fuel vehicles. We reviewed NHTSA's rule-making documents that
reformed the light truck standards, including the advanced notice of
proposed rule making, input provided by outside parties during the
comment period, and the final rule, paying particular attention to
changes between the initial and final rule. We also reviewed program
guidance describing the Volpe Center's role assisting NHTSA in setting
new CAFE standards as well as material describing Volpe's cost benefit
analysis, the variables used in the analysis, and documentation of the
rationale for decisions to assign certain values to certain variables.
To determine the scope of cars and light trucks that were subject to
CAFE, we examined data on new car sales since 1978 and tracked changes
in the number of cars and light trucks sold. To further our
understanding of how NHTSA works with the Environmental Protection
Agency (EPA) to evaluate the fuel economy of new vehicle models, we
reviewed relevant legislation and EPA program guidance about CAFE
testing fuel economy labeling procedures. We also examined EPA's recent
rule to modify the methodology for calculating fuel economy levels
posted on new car labels. We reviewed program guidance on NHTSA's
process for tracking vehicle model fuel economy and manufacturer
credits toward meeting CAFE standards, and we reviewed the process for
notifying noncompliant manufacturers in order to understand NHTSA's
enforcement procedures. We also examined NHTSA's data on penalty
collection since the program's inception. To complement our review of
key legislation and program documents, we interviewed a wide range of
officials at agencies, including NHTSA, EPA, the Department of Energy
(DOE), and the Volpe Center to ensure that we had a clear understanding
of the CAFE program's design and implementation.
To obtain information about the strengths and weaknesses of the CAFE
program, we interviewed officials from NHTSA, EPA, and DOE, as well as
experts in fuel economy and safety who either participated on the 2002
committee for the National Academy of Sciences (NAS) report on CAFE
standards or who were recommended by members of the NAS committee or
NHTSA. We also interviewed the applicable automobile workers trade
union (UAW) and industry groups representing the automobile
manufacturers, automotive safety experts, and insurance industry
representatives. In addition, we reviewed several key studies,
including the 2002 National Academy of Sciences analysis of CAFE and
articles by the Congressional Budget Office, our previous work on fuel
economy, and other recently published articles about CAFE and its
effect on reducing fuel consumption, carbon dioxide emissions, and
other benefits. To understand what influence CAFE standards have had on
fuel economy, we obtained data on changes in the average fuel economy
of cars and light trucks since the initiation of the program. We also
examined estimates developed by NHTSA and others about how much
additional fuel would have been consumed in the absence of CAFE
standards. To ensure that the studies we considered were of sufficient
scientific rigor, we limited our review to articles published in well-
respected peer reviewed journals and those provided by experts or
organizations that we interviewed because of their level of expertise
in this area. These articles were reviewed for quality and reliability
by our methodologists. To identify potential refinements that could
address weaknesses in the CAFE program, we spoke with a wide range of
experts and reviewed relevant literature. The refinements selected for
discussion represent those supported by many of these experts and in
some cases were also supported by research. In addition, we included
refinements based on our work on 21st Century Challenges, which
concluded that a fundamental review of major program and policy areas
can serve the vital function of updating these programs to meet current
and future challenges.
To assess NHTSA's capabilities to further revise CAFE standards, we
reviewed budgets for the CAFE program and NHTSA's fiscal year 2007
budget. We also reviewed documentation about NHTSA's previous and
current staffing levels and plans to hire additional staff. Further, we
consulted with experts that were familiar with NHTSA's operation of the
CAFE program to discuss whether NHTSA had sufficient staff, whether
staff had appropriate technical expertise such as in automotive
engineering, and to what extent NHTSA leveraged outside experts from
universities, the National Laboratories, and consulting firms. To
determine whether NHTSA's use of computer modeling to analyze the costs
and benefits of increasing CAFE standards was adequate, we reviewed
documentation of the models assumptions, comments submitted during the
rule-making process about these assumptions, and we met with NHTSA and
Volpe Center staff to discuss the processes and resources they used to
assign values to certain variables. We compared this information to
guidance published by the Office of Management and Budget for federal
agencies using cost benefit analyses to develop policy.
To further our understanding of other market-based policies that are
available to replace or complement the CAFE program, we conducted
literature searches of recent scholarly publications analyzing options
to reduce fuel consumption. We also included in our review any article
recommended by the experts with whom we spoke. Our literature review
for this section included nearly 100 publications. Finally, to obtain
information on other market-based options for reducing oil consumption,
we interviewed over 30 experts in fuel economy from universities and
advocacy organizations, the National Laboratories, automotive
engineering consulting firms, and other industry stakeholders. We
selected these experts by contacting officials who served on the 2002
committee for the National Academy of Sciences report on CAFE standards
as well as by asking government agencies such as NHTSA, DOE, and EPA to
recommend outside experts with whom we should speak. During these
conversations, we asked them for names of additional experts we should
contact. The experts we interviewed had expertise in a wide range of
disciplines, including economics, consumer behavior, automotive
engineering, public policy, and environmental analysis. We developed a
semi-structured interview protocol with open-ended questions, asking
participants to discuss the strengths and weaknesses of CAFE and
several other policy options to reduce fuel consumption by cars and
light trucks, particularly market-based incentives that figured
prominently in recent legislation and published research. We also asked
experts to identify those options that they thought had the greatest
potential to reduce fuel consumption, and we discussed how these
options could complement or replace the CAFE program. The options
selected for discussion in the report represent those alternatives that
many of these experts viewed as most promising to reduce fuel
consumption by cars and light trucks. To obtain information on policies
currently being used to complement CAFE, such as the hybrid tax credit,
the Gas Guzzler Tax, and efforts to expand the market for alternative
fuels, we relied on our recently published work, relevant legislation,
and program information publicly available on government agency Web
sites. We conducted our work from August 2006 through June 2007 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Selected Manufacturers' CAFE Performance, Selected Years
from 1990 through 2005:
Table 4: BMW CAFE Performance:
Year: 1990;
Domestic car CAFE standard: 27.5;
BMW domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
BMW imported car CAFE rating: 22.2;
Light truck CAFE standard: 20.5;
BMW light truck CAFE rating: n/a.
Year: 1995;
Domestic car CAFE standard: 27.5;
BMW domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
BMW imported car CAFE rating: 25.3;
Light truck CAFE standard: 20.6;
BMW light truck CAFE rating: n/a.
Year: 2000;
Domestic car CAFE standard: 27.5;
BMW domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
BMW imported car CAFE rating: 24.8;
Light truck CAFE standard: 20.7;
BMW light truck CAFE rating: 17.5.
Year: 2005;
Domestic car CAFE standard: 27.5;
BMW domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
BMW imported car CAFE rating: 26.9;
Light truck CAFE standard: 21.0;
BMW light truck CAFE rating: 21.6.
Source: NHTSA.
[End of table]
Table 5: Ford CAFE Performance:
Year: 1990;
Domestic car CAFE standard: 27.5;
Ford domestic car CAFE rating: 26.3;
Imported car CAFE standard: 27.5;
Ford imported car CAFE rating: 32.4;
Light truck CAFE standard: 20.0;
Ford light truck CAFE rating: 20.2.
Year: 1995;
Domestic car CAFE standard: 27.5;
Ford domestic car CAFE rating: 27.7;
Imported car CAFE standard: 27.5;
Ford imported car CAFE rating: 34.0;
Light truck CAFE standard: 20.6;
Ford light truck CAFE rating: 20.8.
Year: 2000;
Domestic car CAFE standard: 27.5;
Ford domestic car CAFE rating: 28.3;
Imported car CAFE standard: 27.5;
Ford imported car CAFE rating: 27.4;
Light truck CAFE standard: 20.7;
Ford light truck CAFE rating: 21.0.
Year: 2005;
Domestic car CAFE standard: 27.5;
Ford domestic car CAFE rating: 28.2;
Imported car CAFE standard: 27.5;
Ford imported car CAFE rating: 28.4;
Light truck CAFE standard: 21.0;
Ford light truck CAFE rating: 21.5.
Source: NHTSA.
Note: Prior to 1991, NHTSA issued separate CAFE standards for two-and
four-wheel drive light trucks. The higher figure is used here.
[End of table]
Table 6: General Motors (GM) CAFE Performance:
Year: 1990;
Domestic car CAFE standard: 27.5;
GM domestic car CAFE rating: 27.1;
Imported car CAFE standard: 27.5;
GM imported car CAFE rating: 32.3;
Light truck CAFE standard: 20.0;
GM light truck CAFE rating: 19.6.
Year: 1995;
Domestic car CAFE standard: 27.5;
GM domestic car CAFE rating: 27.4;
Imported car CAFE standard: 27.5;
GM imported car CAFE rating: 36.7;
Light truck CAFE standard: 20.6;
GM light truck CAFE rating: 20.1.
Year: 2000;
Domestic car CAFE standard: 27.5;
GM domestic car CAFE rating: 27.9;
Imported car CAFE standard: 27.5;
GM imported car CAFE rating: 25.4;
Light truck CAFE standard: 20.7;
GM light truck CAFE rating: 21.0.
Year: 2005;
Domestic car CAFE standard: 27.5;
GM domestic car CAFE rating: 28.8;
Imported car CAFE standard: 27.5;
GM imported car CAFE rating: 29.3;
Light truck CAFE standard: 21.0;
GM light truck CAFE rating: 21.5.
Source: NHTSA.
Note: Prior to 1991, NHTSA issued separate CAFE standards for two-and
four-wheel drive light trucks. The higher figure is used here.
[End of table]
Table 7: Honda CAFE Performance:
Year: 1990;
Domestic car CAFE standard: 27.5;
Honda domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
Honda imported car CAFE rating: 30.8;
Light truck CAFE standard: 20.0;
Honda light truck CAFE rating: n/a.
Year: 1995;
Domestic car CAFE standard: 27.5;
Honda domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
Honda imported car CAFE rating: 32.7;
Light truck CAFE standard: 20.6;
Honda light truck CAFE rating: n/a.
Year: 2000;
Domestic car CAFE standard: 27.5;
Honda domestic car CAFE rating: 31.4;
Imported car CAFE standard: 27.5;
Honda imported car CAFE rating: 29.3;
Light truck CAFE standard: 20.7;
Honda light truck CAFE rating: 25.4.
Year: 2005;
Domestic car CAFE standard: 27.5;
Honda domestic car CAFE rating: 36.7;
Imported car CAFE standard: 27.5;
Honda imported car CAFE rating: 31.5;
Light truck CAFE standard: 21.0;
Honda light truck CAFE rating: 24.8.
Source: NHTSA.
Note: Honda did not build domestic cars or any light trucks for the
U.S. market in 1990 or 1995.
[End of table]
Table 8: Toyota CAFE Performance:
Year: 1990;
Domestic car CAFE standard: 27.5;
Toyota domestic car CAFE rating: n/a;
Imported car CAFE standard: 27.5;
Toyota imported car CAFE rating: 30.8;
Light truck CAFE standard: 20.5;
Toyota light truck CAFE rating: 24.1.
Year: 1995;
Domestic car CAFE standard: 27.5;
Toyota domestic car CAFE rating: 28.5;
Imported car CAFE standard: 27.5;
Toyota imported car CAFE rating: 30.4;
Light truck CAFE standard: 20.6;
Toyota light truck CAFE rating: 21.2.
Year: 2000;
Domestic car CAFE standard: 27.5;
Toyota domestic car CAFE rating: 33.3;
Imported car CAFE standard: 27.5;
Toyota imported car CAFE rating: 28.9;
Light truck CAFE standard: 20.7;
Toyota light truck CAFE rating: 21.8.
Year: 2005;
Domestic car CAFE standard: 27.5;
Toyota domestic car CAFE rating: 34.3;
Imported car CAFE standard: 27.5;
Toyota imported car CAFE rating: 35.1;
Light truck CAFE standard: 21.0;
Toyota light truck CAFE rating: 23.1.
Source: NHTSA.
Note: Prior to 1992, NHTSA issued separate CAFE standards for two-and
four-wheel drive light trucks. The higher figure is used here. In 1990,
Toyota did not build any domestic cars.
[End of table]
[End of section]
Appendix III: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
July 17, 2007:
Ms. Catherine Colwell:
Assistant Director:
Government Accountability Office:
200 West Adams St.
Suite 700:
Chicago, Illinois 60606:
Ms. Colwell:
We have reviewed the GAO Report to the Chairman of the U.S. Senate
Committee on Commerce, Science and Transportation entitled "Passenger
Vehicle Fuel Economy - Reforming Fuel Economy Standards Could Help
Reduce Oil Consumption, and Other Options Could Complement These
Standards" and offer the following general and specific comments on its
content.
General Comments:
The report analysis is insufficient analytically in four key areas.
First, there is no analysis to support the report's assertion that
reforming CAFE standards alone is not sufficient to realize reductions
in oil consumption. DOE does not agree with the GAO's finding that
other policy options (e.g., a gasoline tax, carbon tax, or cap-and-
trade program) have the potential to produce greater fuel savings at
lower costs than a CAFE program. Notably the GAO expresses concern that
fuel or carbon taxes are not politically viable options and do not
recommend Congress pursue these options at this time. These findings
are not supported by adequate analysis.
While DOE supports the GAO recommendation that Congress should not
pursue gasoline taxes as a potential policy mechanism to address
petroleum consumption, DOE does not agree with the conclusion that
gasoline or carbon taxes (or cap-and-trade) are potentially more cost
effective options to reduce petroleum consumption than a reformed CAFE
program. It appears that the GAO has referenced only a few studies in
forming this conclusion and has not consulted experts or literature
that have substantially different view points.
It appears that the GAO relied on a limited number of cross section
analyses and experts and, in particular, a report by the CBO as the
basis for this conclusion. The CBO analysis indicates that a gasoline
tax is only marginally more cost effective than a reformed CAFE
program. While the GAO mentions this in a footnote, they have chosen to
highlight the cost differences between a gasoline tax and an unreformed
CAFE program in making the statement that gasoline taxes would cost
"far less" than increases in CAFE standards.
A primary assumption underlying the CBO analysis is that consumers make
economically rational decisions when purchasing vehicles and making
travel decisions. Many experts analyses of consumer behavior indicate
otherwise and would most likely negate the results of the CBO analysis.
DOE recommends that the GAO revise the reports findings concerning the
cost effectiveness of alternative programs such as gasoline or carbon
taxes and only highlight the reforms to the CAFE program that may
increase its cost effectiveness and fuel savings potential.
Second, the report should include the results of a cost/benefit
analysis to show if the various market measures or policy options
suggested by the GAO would be more or less cost-effective than
reforming CAFE standards.
Third, the report should also assess the differential impacts that
reforming the CAFE standards may have on firms within the automotive
manufacturing sector.
Finally, the report should also address consumer demand for
performance/horsepower in both cars and light trucks and discuss the
impact this demand has had on advanced technology penetration, and
review and discuss the potential fuel economy lost due to this
phenomenon.
Specific Comments:
1) The report makes many references to the term "passenger vehicles".
It is unclear if GAO is referring to the definition of passenger
vehicles in the CAFE regulations. The definition of passenger vehicles
in the CAFE regulations does not include light trucks. Furthermore, the
report, in sections, fails to appropriately distinguish between the
passenger car and light truck CAFE programs (e.g., page 4, page 8).
2) All references to "gas" should be changed to "gasoline" throughout
the report (e.g., page 12, second paragraph).
3) Page 1, last paragraph, 3`d line: The phrase "and enforcing CAFE
standards, although Environmental Protection Agency." should read "and
enforcing CAFE standards, although the Environmental Protection
Agency."
4) Page 3, 2"D paragraph: The last sentence states that EPA calculates
the annual average mpg for manufacturers' fleets. Although EPA
determines vehicle model fuel economy, NHTSA calculates the annual
average mpg for a manufacturers' fleet.
5) Page 3: The 3rd paragraph states that the new size based light truck
CAFE standards begin in 2011. The new size based CAFE standards begin
in 2008 and are optional until 2011. NHTSA has also increased the fleet
light truck CAFE standards for model years 2008 through 2010, if a
manufacturer chooses to opt out of the size based standard.
6) Report should clarify that AMFA credits do not result in a lower
standard but adjust the calculation for determining a manufacture's
compliance (e.g., page 3, page 28).
7) Page 4, footnote 2, 2nd line: The phrase "one of the commonly used
tool to determine." should read "one of the commonly used tools to
determine."
8) Page 7, footnote 5: As mentioned in Appendix I, this footnote should
convey that EPA has updated the test procedure to better estimate
actual on-road fuel economy.
9) Page 8, 2"d paragraph, 6`h line: The sentence should be made clear
that the new size based light truck CAFE standards begin in 2008, but
are not mandatory until 2011.
10) Page 9, footnote 8: The footnote should note clearly that CAFE
standards apply to model year fleet production, not calendar year.
11) Page 12, 2nd paragraph: The paragraph states that the Alternative
Motor Fuels Act of 1988 (AMFA) CAFE credit is 1.2 mpg through 2010.
AMFA states that manufacturers can earn a CAFE credit up to 1.2 mpg
through model year 2004, but that an extension of the credit program
will be limited to 4 years (to model year 2008) and up to 0.9 mpg CAFE
credit.
12) The report mischaracterizes the revised light truck standard (e.g.,
page 14, page 20)
13) Page 18, first paragraph: The phrase "would set a specific" should
read "would set minimum".
14) Page 19, 2nd paragraph, line 13: The phrase ".a demonstrable record
of increasing fuel efficiency in passenger cars,." should read ".a
demonstrable record of increasing fuel economy in passenger cars,."
15) Page 20, 1 S`paragraph: The paragraph states that according to the
NAS report technology exists to increase fuel economy without large
increases in vehicle costs. It should be noted that the NAS study
assumed no increase in vehicle performance (i.e. horsepower).
16) Page 31: The Subaru Outback is likely to remain categorized as
light truck due to 4WD and other vehicle attributes.
17) Page 32, last bullet: The AMFA provides CAFE credits up to 1.2 mpg
through model year 2004, after model year 2004 the credit is reduced to
0.9 mpg.
18) Page 40, line 10: The phrase ".light trucks accounted for almost 53
percent of the new car market." should read ".light trucks accounted
for almost 53 percent of the new light vehicle market."
19) Page 43, footnote 36, line 5: The phrase "CBO's estimated are
consistent." should read "CBO's estimates are consistent."
20) Page 47, 2nd paragraph, line 5: See the previous comments regarding
AMFA CAFE credits and website:
http://www.nhtsa.dot.gov/cars/rules/CAFE/Rulemaking/AMFAFinalRule2004.ht
m.
21) Page 48: Note that flex-fuel vehicles are typically larger vehicles
with lower fuel economies. As such, the flex- fuel vehicle requirement
may actually increase a fleet's petroleum consumption if flex-fuels are
not available.
22) Page 48: Omit the last sentence.
If you have any questions concerning our comments, please contact
Mitchell Baer of my staff at (202) 586-5167.
Sincerely,
Signed for:
Karen A. Harbert:
Assistant Secretary:
Office of Policy and International Affairs:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Farah B. Angersola, Chuck
Bausell, Catherine Colwell, Colin Fallon, Joah G. Iannotta, Bert
Japikse, Terence C. Lam, Elizabeth A. Marchak, Joshua Ormond, Franklin
Rusco, Raymond Sendejas, and Karla Springer made key contributions to
this report.
FOOTNOTES
[1] Effectiveness and Impact of Corporate Average Fuel Economy (CAFE)
Standards. National Research Council. (Washington, D.C.: 2002).
[2] A cost-effectiveness analysis is used to determine the least-cost
option for achieving a specified objective with a given level of
benefits. It is one of the commonly used tools to determine whether
government investments or programs can be justified on economic
principles. These tools also help to identify the best alternative from
a range of competing investment alternatives.
[3] Biofuels are a type of alternative fuel made from corn or soybeans
or, in the case of cellulosic ethanol from low value agricultural
byproducts like cornstalks that are in abundant supply. Alternative
fuels include a wider set of fuels that are not made from petroleum,
including biofuels, hydrogen, natural gas, and potentially fuels
produced by converting coal to liquid, and others. Biofuels offer
several environmental advantages, including coming from renewable
resources and emitting lower levels of carbon dioxide when they are
consumed compared with conventional gasoline and alternative fuels such
as those produced from coal.
[4] GAO, Biofuels: DOE Lacks a Strategic Approach to Support Increasing
Production with Infrastructure Development and Vehicle Needs, GAO-07-
713 (Washington, D.C.: June 8, 2007).
[5] Pub. Law 94-163, codified as positive law at 49 U.S.C. Ch. 329.
[6] A model's CAFE figure generally differs from the window sticker a
new vehicle displays showing its fuel economy. The law [49 U.S.C. §
32904(c)] requires that CAFE values be determined through a specific
set of test procedures in place at the time EPCA was passed, while
window stickers are based on EPA's best estimates of real world fuel
economy. Based on the new fuel economy labeling methodology that EPA
adopted in 2006, CAFE values are, on average for the industry as a
whole, about 25 percent higher than window sticker fuel economy values.
CAFE test procedures do not take into account real-world driving
conditions such as the use of air conditioning and high-speed driving.
EPA officials stated that this results in CAFE figures that are higher
than the fuel economy that consumers actually receive from their
vehicles.
[7] The Secretary of Transportation issued interim standards for 1981
to 1984.
[8] The Administration submitted similar plans in 2002, 2005, and 2006,
but Congress did not act on them.
[9] For example, a manufacturer meets the standard if the average mpg
of all the vehicles it manufactures in a model year meet the CAFE
standard for that model year. Manufacturers have had to meet an mpg of
27.5 for cars since 1990.
[10] EPCA considers a vehicle to be domestic if at least 75 percent of
the cost of the vehicle to the manufacturer is attributable to value
added in the United States, Mexico, or Canada. Through rule making,
NHTSA required manufacturers to meet the same fleet distinction rule
for light trucks, but eliminated it starting in model year 1996. Thus,
light truck CAFE standards are calculated as one distinct fleet of a
given manufacturer.
[11] 49 C.F.R. § 523.5.
[12] GVWR represents the weight of a vehicle when fully loaded with
passengers and cargo.
[13] CAFE penalties are deposited in the U.S. Treasury and are not
retained by DOT. The $678 million noted here is not adjusted for
inflation.
[14] 26 U.S.C. § 4064.
[15] The number of credits a manufacturer earns is determined by
multiplying the tenths of a mpg that the manufacturer exceeded the CAFE
standard for a class of vehicles in a model year by the amount of
vehicles it manufactured in that class in that model year.
[16] Alternative fuels are fuels or energy sources other than
conventional fossil fuels and include ethanol, hydrogen, and batteries.
[17] NHTSA has the authority to continue this credit through rule
making.
[18] This conclusion of the NAS report was not unanimous. Two members
of the panel that authored the 2002 report dissented from this
conclusion. Also, the panel concluded that manufacturers could improve
fuel economy while maintaining vehicle weight and that the safety
impact of future increases in CAFE standards would depend on many
factors. NAS recommended further research on this issue.
[19] The law does not prevent NHTSA from reforming the light truck CAFE
program, as it does the car program.
[20] Some experts have noted that if manufacturers shifted their fleet
mix toward light trucks with the largest footprints, the average fuel
economy of the light truck fleet could decrease from current levels. It
is unclear whether complying with the new CAFE standards would cause
manufacturers to make larger vehicles, but some experts have suggested
that if this became a problem an "antibacksliding" provision could be
incorporated in the program to ensure fuel savings. Such a provision
would establish a single standard based on the current fleet average
below which a manufacturer's fleet could not fall, regardless of
compliance with the attribute-based standards.
[21] 71 Fed. Reg. 17566 (2006).
[22] EPCA included a so-called legislative veto provision allowing
either the House of Representatives or the U.S. Senate to disapprove
any attempt to increase car CAFE standards above the current 27.5 mpg
level (or decrease them below 26.0 mpg). However, the Supreme Court has
held that this provision is unconstitutional. INS v. Chadha, 462 U.S.
919 (1983). The law does not restrict NHTSA's ability to adjust the
light truck CAFE standard or restructure the light truck CAFE program.
[23] This conclusion of the NAS report was not unanimous. Two members
of the panel that authored the 2002 report dissented from this
conclusion. Also, the panel concluded that manufacturers could improve
fuel economy while maintaining vehicle weight and that the safety
impact of future increases in CAFE standards would depend on many
factors. NAS recommended further research on this issue.
[24] H.R. 6 as amended, 110th Congress.
[25] Some production classified as foreign in 1978 would likely be
classified as domestic today, as NHTSA now treats vehicles manufactured
in Canada or Mexico as domestically made vehicles.
[26] In this study, NAS assumed no increase in vehicle performance,
such as additional horsepower.
[27] In April 2007, the Supreme Court, in a case arising out of EPA's
denial of a petition by the state of Massachusetts, among others, ruled
that EPA has the authority to regulate greenhouse gas emissions from
vehicles and that the agency must either regulate greenhouse gases or
explain why it will not or cannot regulate these gases. In denying the
petition, EPA officials had stated that one reason they had not issued
regulations to reduce greenhouse gas emissions by passenger vehicles
was that DOT, not EPA, had the authority to regulate fuel economy, and
therefore greenhouse gas emissions, through the CAFE program. However,
the Court stated that EPA and DOT could coordinate any rule makings on
fuel economy and stated that "there is no reason to think the two
agencies cannot both administer their obligations and yet avoid
inconsistency."
[28] "Can Proactive Fuel Economy Strategies Help Consumers Mitigate
Fuel Price Risks?" University of Michigan Transportation Research
Institute (Ann Arbor, Michigan: Sept. 14, 2006); and Espey and Nair,
"Automobile Fuel Economy: What Is It Worth?" Contemporary Economic
Policy, fall 2005.
[29] NHTSA officials stated that, in addition to the authority the
Federal Civil Penalties Inflation Adjustment Act of 1990 under EPCA,
NHTSA has the authority to raise CAFE penalties to $10 per 0.1 mpg
shortfall.
[30] A 2002 report by DOT, EPA, and DOE estimated that 1 percent of the
fuel that flex-fuel vehicles consumed was E85, though this number is
likely higher now due to increased availability of E85.
[31] H.R. 6, as amended, 110th Congress.
[32] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[33] GAO, Civil Penalties: Agencies Unable to Fully Adjust Penalties
for Inflation under Current Law, GAO-03-409 (Washington, D.C.: Mar. 14,
2003).
[34] GAO-07-713.
[35] The act also created tax credits for purchasing diesel, fuel cell,
and dedicated alternative fuel vehicles.
[36] Dierkers, G; Houdashelt, M; Silsbe, E; Stott, S; Winkelman, S; &
Wubben, M. CCAP Transportation Emissions Guidebook Part Two: Vehicle
Technology and Fuels, Center for Clean Air Policy; Washington, D.C.
Available online at www.ccap.org/guidebook.
[37] GAO, Government and Performance Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined,
GAO-05-690 (Washington, D.C.: Sept. 23, 2005). Also, the Government
Performance and Results Act of 1993 requires executive branch agencies
to evaluate tax expenditures that affect their missions, and we have
noted that outcome-oriented performance goals are important in such
evaluations.
[38] One expert estimated that a feebate system that included a rebate
of about $2,000 to $2,500 for fuel-efficient vehicles would roughly
double demand for these vehicles. Another study estimated that a
feebate system paying or charging a minimum of $1,000 could be
effective. We did not evaluate the accuracy of these estimates.
[39] On June 11, 2007, the exchange rate was 1 Denmark Kroner =
0.179372 U.S. Dollars.
[40] GAO-05-325SP.
[41] In a system of carbon taxes, each fossil fuel would be taxed, with
the tax in proportion to the amount of carbon dioxide released in its
combustion. In this and later sections, "carbon" refers to carbon
dioxide.
[42] CBO. The Economic Costs of Fuel Economy Standards Versus a
Gasoline Tax, December 2003. Washington, D.C. CBO's estimate assumes
that manufacturers with high cost of complying with CAFE standards
cannot buy "credits" from those that exceeded the standards. Under this
assumption gas tax would achieve the targeted reduction in fuel
consumption at 19 percent less cost per year compared to increased CAFE
standards after all vehicles have been turned over and replaced by
vehicles meeting the new CAFE standard. If the credit trading is
allowed, CBO estimated that increasing the gas tax would still cost
less than increasing CAFE standards but not by as much--about 3 percent
annually. CBO's estimates are consistent with what economists told us
and the findings of the empirical studies we reviewed. For example,
Murphy and Rosenthal, "Allocating the Added Value of Energy Policies"
Energy Journal, 2006. Vol. 27, No. 2; pg. 143; Sarah E West, Roberton C
Williams III, "The Cost of Reducing Gasoline Consumption", American
Economic Review, 2005. Vol. 95, No. 2; pg. 294-300; David Austin, Terry
Dinan, "Clearing the air: The costs and consequences of higher CAFE
standards and increased gasoline taxes, "Journal of Environmental
Economics and Management, 2005. Vol. 50, No. 3; pg. 562. The studies
all found that increasing the tax on gasoline or instituting a tax on
carbon is more cost effective than tightening CAFE standards in
reducing gasoline consumption.
[43] According to Fischer, Harrington and Parry, "Should Automobile
Fuel Efficiency Standards Be Tightened?" Resources for the Future,
2007, the range of the rebound effect is 6 to 10 percent, which is
consistent with the estimate Small & Van Dender, "Fuel Efficiency and
Motor Vehicle Travel: The Declining Rebound Effect" Energy Journal, No.
28, 2007. However, in its estimation, NHTSA used a range of 10 to 20
percent for rebound effect based on earlier studies.
[44] GAO-07-713.
[45] GAO-07-713.
[46] Ethanol production increased from 3.4 billion gallons in 2004 to
4.9 billion gallons in 2006.
[47] GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices
Requires Improved Tracking and Monitoring of Consumption Information,
GAO-07-244 (Washington, D.C.: Feb. 16, 2007).
[48] Pub. Law 108-357.
[49] In addition to GAO's June 2007 report, cited above, see also
Congressional Budget Office's discussion of the exemption for alcohol
fuels from excise taxes. Congressional Budget Office. Budget Options.
(February 2007) Washington, D.C., pp. 324-325.
[50] A current example is the cap-and-trade program for sulfur dioxide
under the Clean Air Act. This program includes electric utilities,
which are the primary emitters of sulfur dioxide, and established a cap
on the utilities' emissions. Sulfur dioxide allowances were primarily
given (rather than auctioned) to companies. The program is noteworthy
because it represented the first large-scale attempt to set overall
emissions levels by using marketable allowances and a choice of
compliance methods to control emissions rather than using regulations
that specify what actions must be undertaken.
[51] We are currently convening a panel of economists to evaluate the
benefits, costs, and trade-offs of climate change policy options. We
expect to complete this work in early 2008.
[52] For example, see Resources for the Future (2007). Emissions
trading versus CO2 taxes. Washington, D.C.
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