90122: Automobile and Light Truck Fuel Economy: Is CAFE Up to Standards?

Robert Bamberger

Resources, Science, and Industry Division

August 9, 1999

CONTENTS

• SUMMARY
• MOST RECENT DEVELOPMENTS
• BACKGROUND AND ANALYSIS
• Refocusing On Fuel Economy: SUVs and Kyoto
• Improving Fuel Economy: Policy Options
• Past Role of Cafe Standards
• Partnership for a New Generation of Vehicles (PNGV)
• Price of Gasoline
• CAFE and Reduction of Carbon Dioxide Emissions
• CAFE in Congress: Freezing the Standard
• Growth of Trucks and Sport Utility Vehicles
• Most Recent Congressional Debate Over Boosting CAFE
• LEGISLATION
• CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

SUMMARY

One of the least controversial provisions of the Energy Policy and Conservation Act of 1975 (P.L. 94-163) established corporate average fuel economy (CAFE) standards for new passenger cars. As oil prices rose, there was little expectation that manufacturers would have any difficulty complying with the standards. However, oil prices softened and the demand for small cars diminished. In response to petitions from manufacturers facing stiff civil penalties for noncompliance, the National Highway Traffic Safety Administration (NHTSA) relaxed the standard for model years 1986-1989. The current standard is 27.5 mpg for passenger automobiles and 20.7 mpg for light trucks, a classification that also includes sports utility vehicles (SUVs).

Amidst the renewed sense of urgency about growing U.S. dependence upon imported oil, proposals to boost CAFE received close attention in the early nineties. An attempt to raise CAFE proved too controversial in the 102nd Congress to enact. CAFE provisions in omnibus energy legislation proposed in the Senate (that were less aggressive than other proposals) would have extended discretion to the Department of Transportation (DOT) to set "maximum feasible" targets for each manufacturer to meet in model year (MY) 1996 and MY2002. The inclusion of CAFE provisions was cited as one of the reasons for failure of a cloture motion on the legislation in early November 1991. The subsequently enacted Energy Policy Act of 1992 (P.L. 102-486) did not include any CAFE provisions.

The Clinton Administration supported greater fuel efficiency, but indicated in 1993 that an increase in the CAFE standards was not the option likeliest to be embraced first. In September 1993, the Administration announced the Partnership for a New Generation of Vehicles (PNGV), an alliance between federal labs and agencies, and the domestic automotive industry to develop a new generation of vehicles that, among other goals, would seek to triple fuel efficiency.

In 1994, the National Highway Traffic Safety Administration (NHTSA) issued a notice of proposed rulemaking to explore raising the CAFE standard for light-duty trucks. Congress included language in the FY1996 DOT Authorization (P.L. 104-50 ) prohibiting the use of authorized funds to promulgate any CAFE rules. The prohibition was retained in the FY1997 (P.L. 104-205), FY1998 DOT Appropriations (P.L. 105-66), and the House version of the FY1999 DOT appropriations (H.R. 4328), subsequently passed at the end of the 105^th Congress. It is also in the FY2000 DOT Appropriations passed by the House (H.R. 2084) on June 23, 1999. Legislation has been reintroduced in the 106th Congress (S. 147 ) to freeze the standards, subject to change only by legislative enactment.

It is not clear whether renewed concerns about motor vehicle fuel consumption and/or the prospect of complying with international agreements for the reduction of greenhouse gas emissions will lead to reconsideration of the CAFE freeze. At issue may be whether an increase in CAFE standards would be effective and preferable to other policy options.

MOST RECENT DEVELOPMENTS

For the last 4 years, the Department of Transportation Authorizations ( P.L. 104-50, P.L. 104-205, P.L. 105-66) and the omnibus FY1999 spending bill ( P.L. 105-277) have included a general provision prohibiting the use of authorized funds to promulgate any CAFE rules. The language has been included once again in the FY2000 DOT Appropriations (H.R. 2084) passed by the House on June 23, 1999.

There was some speculation whether the Kyoto Agreement, which would require the United States to achieve a 7% reduction in 1990 levels of carbon dioxide emissions, might prompt new efforts to reduce vehicle fuel consumption. Congress has been chary of committing the United States to this agreement pending further decisions about the participation of developing nations, and how the agreement would be enforced. Many of the car manufacturers would prefer to forestall any state or federal regulation. On February 4, 1998, General Motors, Ford, Chrysler and Toyota announced they would produce cars in model year (MY) 1999 with engine and catalytic converter technologies that would achieve lower emissions.

Passenger cars have been losing market share to larger, multi-purpose sports utility vehicles (SUVs); their classification as light duty trucks makes them subject to a less stringent fuel economy standard of 20.7 miles per gallon (mpg). Whether the scrutiny being given to the growing market share of SUVs, and/or tougher clean air objectives will lead Congress to re-evaluate the current freeze on CAFE standards or consider other CAFE options is uncertain. All of this comes at a time when gasoline is cheaper than it has been in several years.

BACKGROUND AND ANALYSIS

The Arab embargo of 1973-1974 and the tripling in the price of crude oil brought into sharp focus the fuel inefficiency of U.S. automobiles. New car fleet fuel economy had declined from 14.8 miles per gallon (mpg) in model year 1967 to 12.9 mpg in 1974. In the search for ways to reduce dependence on imported oil, automobiles were an obvious target. The Energy Policy and Conservation Act (P.L. 94-163) established corporate average fuel economy (CAFE) standards for passenger cars for model years 1978-1980 and 1985 and thereafter. The CAFE standards called for essentially a doubling in new car fleet fuel economy, establishing a standard of 18 mpg in model year (MY) 1978 and rising to 27.5 by MY1985. (Interim standards for model years 1981-1984 were announced by the Secretary of Transportation in June of 1977.) EPCA also established fuel economy standards for light duty trucks, beginning at 17.2 mpg in MY1979, and currently 20.7 mpg. (The CAFE standards are summarized in Table 1.)

Compliance with the standards is measured by calculating a sales-weighted mean of the fuel economies of a given manufacturer's product line, with domestically produced and imported vehicles measured separately. As originally enacted, the penalty for non-compliance was $5 for every 0.1 mpg below the standard, multiplied by the number of cars in the manufacturer's new car fleet for that year. Civil penalties collected from 1983-1995 have totaled over $400 million.

When oil prices rose sharply in the early 1980s, smaller cars were selling well, and it was expected that manufacturers would have no difficulty complying with the standards. Dependence upon imported petroleum (as a percentage of net imports) declined from a high of 46.5% in 1977 to a low of 27.3% in 1985.

However, oil prices had declined by 1985. Sales of smaller cars tapered as consumers began to place less value on fuel economy and gasoline cost as an input in the overall costs of vehicle ownership. In response to petitions from manufacturers facing stiff civil penalties for noncompliance, the National Highway Traffic Safety Administration (NHTSA) relaxed the standard for model years 1986-1989, but it was restored to 27.5 in MY1991. The Persian Gulf War in 1990 caused a brief spike in oil prices, but it also demonstrated that it was unlikely that the United States or many of the producing nations would tolerate a prolonged disruption in international petroleum commerce. As a consequence, U.S. dependence upon imported petroleum, from a policy perspective, was considered less of a vulnerability.

It was also becoming apparent that reducing U.S. dependence on imported oil would be extremely difficult without imposing a large price increase on gasoline, or restricting consumer choice in passenger vehicles. Many argued that the impacts of such actions upon the economy or the automotive industry would be unacceptable. Meanwhile, gasoline consumption, which fell to 6.5 million barrels per day (mbd) in 1982, increased to 8.0 mbd in 1997. The nation's dependence upon imported oil for the first 11 months of 1997 established a new high of 48.5%.

There were highly controversial attempts to significantly raise the CAFE standards on passenger cars in the early 1990s. One proposal included in omnibus energy legislation was so controversial that it contributed to the Senate's inability in 1991 to bring the bill up for debate on the floor.

NHTSA typically established truck CAFE standards 18 months prior to the beginning of each model year, as EPA allows. However, such a narrow window permitted NHTSA to little more than ratify manufacturers' projections for the model year in question. In April 1994, the agency proposed to abandon this practice and issued an Advance Notice of Proposed Rulemaking inviting comment on what level that standards might be established for trucks for MY1998-MY2006. The following year, however, after a change in congressional leadership, Congress included language in the FY1996 Department of Transportation Appropriations to prohibit expenditures for any rulemaking that would make any adjustment to the CAFE standards. Identical language was included in the appropriations and spending bills for FY1997-FY1999. Whether or not this language is proposed for FY2000 remains to be seen.

Refocusing On Fuel Economy: SUVs and Kyoto

Two developments during the 105^th Congress focused the attention of some on the CAFE standards and fuel economy in general. One development was that passenger cars continued to lose market share to the larger, multi-purpose sport utility vehicles (SUVs) that are subject to the less stringent light-truck fuel economy standard. A 1996 study conducted for the Department of Transportation found that consumers valued the larger vehicles for their versatility and roominess, and the availability of four-wheel drive. The increasing market share of these vehicles, combined with their lower average fuel economy, has contributed to a lowering in overall average fuel economy since the mid-1980s.

A second development has less to do with energy security and more to do with environmental objectives. The Kyoto Agreement would require the United States to achieve a 7% reduction in 1990 levels of carbon dioxide emissions. Congress has been chary of committing the United States to this agreement pending further decisions about the participation of developing nations, and how the agreement would be enforced. Whether or not the United States becomes a signatory, the California Air Resources Board (CARB) voted November 5, 1998, to reclassify SUVs as passenger cars and hold those vehicles to California emission standards.

Many of the manufacturers would prefer to forestall any state or federal regulation. On February 4, 1998, General Motors, Ford, Chrysler and Toyota announced they would produce cars in MY1999 with engine and catalytic converter technologies that would achieve lower emissions. Whether the growing market share of SUVs and/or tougher clean air objectives will lead Congress to re-evaluate the current freeze on CAFE standards or consider other CAFE options is uncertain. It did not in the 105^th Congress.

Improving Fuel Economy: Policy Options

As a practical matter, reducing gasoline consumption can be achieved by raising the price of gasoline through taxation or other means to a level that induces some conservation, or by increasing the efficiency of the automobile fleet in use. Of course, a combination of these two broad approaches might be used as well.

Past Role of Cafe Standards. The effectiveness of the CAFE standards themselves has been controversial. Since 1974, domestic new car fuel economy has roughly doubled; the fuel economy of imports has increased by roughly one-third. Some argue that these improvements would have happened as a consequence of rising oil prices during the 1970s and 1980s. Some studies suggest that the majority of the gains in passenger car fuel economy during the 1970s and 1980s were technical achievements, rather than the consequence of consumers' favoring smaller cars. Between 1976 and 1989, roughly 70% of the improvement in fuel economy was the result of weight reduction, improvements in transmissions and aerodynamics, wider use of front-wheel drive, and use of fuel-injection. The fact that overall passenger car fleet fuel economy has remained comparatively flat during a period of declining real prices for gasoline also suggests that the CAFE regulations have contributed to placing some sort of floor under new-car fuel economy.

General criticisms of raising the CAFE standards have been that, owing to the significant lead times manufacturers need to change model lines and because of the time needed for the vehicle fleet to turn over, increasing CAFE is a slow and inefficient means of achieving reductions in fuel consumption. Further, it is argued that the standards risk interfering with consumer choice and jeopardizing the health of a recovered domestic automotive industry.

Proponents of a CAFE increase have argued that boosting the standards might bring about the introduction of technological improvements that do not compromise features that consumers value, but which would otherwise not be added because these improvements do add to the cost of a new vehicle.

Partnership for a New Generation of Vehicles (PNGV). In late September 1993, President Clinton announced establishment of a government and industry research program, the Partnership for a New Generation of Vehicles (PNGV), that had among its goals development of an environmentally friendly "Supercar" that would as much as triple the fuel efficiency of today's mid-size cars without sacrificing performance, affordability, and safety. The PNGV is an effort to combine the resources and expertise of federal agencies and laboratories with the private sector to reduce U.S. dependence on oil and maintain competitiveness without intervening to alter the market price of fuel.

Production prototypes of the Supercar are projected to be ready by 2004. By early 1998, the PNGV completed its selection of technologies judged to hold the most promise for development of the Supercar. Research and development is to be focused on hybrid electric vehicle drive, direct-injection engines, fuel cells, and greater use of lightweight materials. It is difficult at this point to predict whether the PNGV effort will result in a vehicle that will achieve widespread absorption into the vehicle fleet of the next century.

Price of Gasoline. Raising the price of gasoline has not proven a popular or politically feasible choice. Energy is a major input into the production and delivery of goods and services in the economy. Owing to the relative price inelasticity of gasoline demand, many believe that the size of the price increase it would take to curb gasoline consumption to any degree would have a damaging effect on the economy of several times greater magnitude. Indeed, analysis of recent research (Plotkin, Greene, 1997, cited in References) suggests that an increase in gasoline taxes would be one-third as effective in achieving a reduction in demand as studies of the 1980s projected.

Price, however, could be used to at least keep some floor under the cost of gasoline to motorists. For example, a decision could be made to see that gasoline would not become less expensive than a certain level in real (inflation adjusted) dollars. The federal tax could be adjusted annually to preserve that level, if necessary, in nominal (unadjusted) dollars. Or, the price of gasoline might be adjusted by equal annual increments to achieve some statutorily established real increase. In subsequent years, under this option, the price could be adjusted to see that changes in the nominal price did not erode the real price.

CAFE and Reduction of Carbon Dioxide Emissions. Vehicles account for one-fifth of U.S. production of CO₂ emissions. Some argue that raising the CAFE standards would be an ineffective or marginal way to reduce emissions of carbon dioxide. On one hand, improvements in fuel economy should enable the same vehicle to burn less fuel to travel a given distance. However, to the extent that technologies to improve fuel economy add cost to new vehicles, it has been argued that consumers will tend to retain older, less efficient cars longer. It has also been suggested that there is a correlation between improved fuel economy and an increase in miles driven and vehicle emissions. However, vehicle miles traveled have continued to increase in recent years when fuel economy improved only slightly, suggesting that the broader factor is the overall cost of driving, which is tied as well to the price of gasoline. The relationship between where people live and where they work is also a factor.

The Administration proposed a five-year, $6.3 billion package of tax credits, and reliance on voluntary efforts by individuals and industry, to meet the proposed targets of the Kyoto agreement. Many believe that the Administration plan would fall well short, largely because carbon emissions are forecast by the Department of Energy to be 34% above 1990 levels by the year 2010. Some urged that Congress disapprove the treaty and seek renegotiation of the targets, arguing that meeting the currently proposed targets would require possibly crippling taxes and regulations. Others suggested that a significant increase in CAFE requirements would help meet the Kyoto targets and that an increase in CAFE should not wait final dispensation of the agreement.

CAFE in Congress: Freezing the Standard

Growth of Trucks and Sport Utility Vehicles. In 1988, passenger cars constituted nearly 75% of the vehicle fleet. By 1994, this figure had dropped to 68% and it continues to drop. The percentage of pickup trucks did not change during this period; the overall change is attributable to the burgeoning popularity of mini-vans and sports utility vehicles (SUVs). The number of these vehicles in the fleet grew by 42% from 1988 to 1994. Minivans and SUVs grew from being 5% of the total vehicle stock in 1988 to 11% in 1994. During this same period, vehicle miles traveled (vmt) by light trucks grew at a rate of 7.8% annually. Expressed as a percentage of overall fuel consumption in the transportation sector, gasoline consumption by light trucks has grown at an annual rate of 4.5% from 1985 to 1995 while automobile fuel consumption fell fractionally during the same period. As a consequence, attention has increasingly focused upon the contribution of this portion of the fleet to growing gasoline consumption.

Months prior to the midterm elections in 1994, NHTSA published a notice of possible adjustment to the fuel economy standards for trucks before the end of the decade. The following year, however, the House-passed version of H.R. 2002, the FY1996 Department of Transportation Appropriation, prohibited the use of authorized funds to promulgate any CAFE rules; the Senate version did not include the language, but it was restored in conference. The House and Senate approved the conference report, and the bill became law (P.L. 104-50) on Nov. 15, 1995. Much the same scenario occurred in the second session of the 104^th and the first session of the 105^th: A similar rider was passed by the House and not by the Senate, but included by the conferees and enacted. This scenario occurred again in the second session. The prohibition was included in the version of the FY1999 appropriations passed by the House (H.R. 4328) in July 1998, but not in the Senate version (S. 2307); it was finally included in the omnibus spending bill at the end of the 105^th Congress (P.L. 105-277). The prohibition was reported from the House Appropriations Committee in the FY2000 DOT Appropriations (H.R. 2084) and passed by the House on June 23, 1999.

Legislation was introduced in the 104th Congress (H.R. 2200), the 105^th Congress (S. 286, H.R. 880), and now the 106^th Congress (S. 147) that would freeze the current CAFE standards. Unlike the annual prohibition on rulemaking that has been included in the FY1996-FY1999 appropriations, these bills would maintain the CAFE standards at the level in force at the time of enactment unless superseded by a subsequent act of Congress.

Most Recent Congressional Debate Over Boosting CAFE. As an historical note, legislation to boost the CAFE standards last received major attention in the 102nd Congress. One proposal (S. 279) would have abandoned uniform standards but otherwise left the historic infrastructure of the CAFE standards intact. Under S. 279, each manufacturer would have been required to achieve a 20% improvement in passenger car fuel economy by 1996 and 40% by 2001 over its 1988 baseline. The same standard of improvement would have been required of light trucks.

In that same Congress, legislation was being developed to open up the Arctic National Wildlife Refuge (ANWR) for exploration. Proponents of higher CAFE standards predicted that there would be no support for exploration of ANWR without some increase in CAFE. S. 341, omnibus energy legislation reported from the Senate Committee on Energy and Natural Resources in May 1991, would have extended discretion to the Department of Transportation (DOT) to set "maximum feasible" CAFE targets for each manufacturer for MY1996 and MY2002. The DOT would have taken into account application of known fuel-saving technologies, MY1990 as a baseline for performance, sales mix, vehicle interior size, and safety standards. Credits earned could have been traded or held by the manufacturer. When it appeared that the ANWR provisions would almost certainly not survive unless the CAFE provisions were strengthened, Senator Johnston proposed an amendment in markup that would have had the effect of embracing the goals of S. 279, but over a longer time frame. The amendment was defeated in markup, as was an attempt to append to the omnibus bill the specific targets in S. 279.

The proposal appeared to fail at the combined hands of those who either thought they went too far or not far enough. But the omnibus bill failed to reach the floor; a cloture vote on whether to proceed with it (it became S. 1220) was defeated Nov. 1, 1991. Both CAFE and ANWR provisions were stripped from modified legislation introduced in the second session of the 102^nd Congress, and there have not been any further attempts to raise the CAFE standards.

LEGISLATION

P.L. 105-277, H.R. 4328 (Wolf)
Omnibus Fiscal 1999 Appropriations, including appropriations for the Department of Transportation. Includes language that prohibits the expenditures of appropriated funds for any rulemaking that will amend the CAFE standards from their current levels. House adopted conference report, 333-95, October 20, 1998; Senate approved conference report, 65-29, October 21. Signed into public law, October 21, 1998.

H.R. 2084 (Wolf)

Department of Transportation and Related Agencies Appropriations Act, 2000. Includes language that prohibits the expenditures of appropriated funds for any rulemaking that will amend the CAFE standards from their current levels. Reported to House from the Committee on Appropriations, H.Rept. 106-180, June 9, 1999. Passed House, amended (429-3), June 23, 1999.

S. 147 (Abraham)
Provides for a reduction in regulatory costs by maintaining federal average fuel economy standards in effect at current levels until changed by law. Introduced January 19, 1999; referred to Committee on Commerce, Science and Transportation.

CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

National Research Council. Committee on Fuel Economy of Automobiles and Light Trucks. Automotive Fuel Economy: How Far Should We Go? Washington, D.C.: National Academy Press, 1992. 254 p.

Plotkin, Steve. Greene, David. "Prospects for Improving the Fuel Economy of Light Duty Vehicles." Energy Policy, vol. 25, no. 14-15. December 1997. P. 1179-1188.

U.S. Congress. House. Committee on Energy and Commerce. Subcommittee on Energy and Power. Automotive Fuel Efficiency. Hearing, 101st Congress, 1st session. July 13, 1989. Washington, U.S. Govt. Print. Off., 1989. 73 p.

Serial No. 101-73. 73 p.

U.S. Congress. Office of Technology Assessment. Improving Automobile Fuel Economy: New Standards, New Approaches. Summary. October 1991. OTA-E-508. 15 p.

U.S. Congress. Senate. Committee on Commerce, Science and Transportation. Motor Vehicle Fuel Efficiency Act. Hearing on S. 279. Feb. 21, 1991. Washington, U.S. Govt., Print. Off., 1991. 175 p.

S.Hrng. 102-19

----- Motor Vehicle Fuel Efficiency Act; report to accompany S. 279. (102nd Congress, 1st session. S.Rept. 102-48: 39 p.)

----- Motor Vehicle Fuel Efficiency Act of 1990; report on S. 1224. June 11, 1990. Washington, U.S. Govt. Print. Off., 1990. 29 p. (101st Congress, 2nd session. S.Rept. 101-329.)

U.S. Congress. Senate. Committee on Commerce, Science and Transportation. Subcommittee on the Consumer. Motor Vehicle Fuel Efficiency Act of 1989. Hearing on S. 1224. 101st Congress, 1st session. Sept. 7, 1989. Washington, U.S. Govt. Print. Off., 1989. 341 p.

S.Hrng. 101-347

U.S. Congress. Senate. Committee on Energy and Natural Resources. Subcommittee on Energy Regulation and Conservation. Automobile Fuel Efficiency Standards. Hearing, 101st Congress, 1st session. Apr. 4, 1989. Washington, U.S. Govt. Print. Off., 1989. 352 p.

S.Hrng. 101-44

U.S. Department of Transportation. National Highway Traffic Safety Administration. Automotive Fuel Economy Program. [Twenty-First Annual] Report to the Congress. May 1997, appearing in: U.S. Federal Register, Vol. 62, No. 107, June 4, 1997: p. 30657.

U.S. Federal Register. Department of Transportation., National Highway Traffic Safety Administration. Light Truck Average Fuel Economy Standards; Model Years 1996-1997. Vol. 59, No. 66. Wednesday, Apr. 6, 1994, p. 16312.

----- Light Truck Fuel Economy Standards, Model Years 1998-2006. Advance Notice of Proposed Rulemaking (ANPRM). Vol. 59, No. 66. Wednesday, Apr. 6, 1994, p. 16324-16332.

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