Vehicles and CAFE Standards

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The 1973 oil crisis started a paradigm shift in the US regarding oil’s importance. Energy independence and security reemerged as critical goals of the country. To deal with the geopolitical issue and achieve energy independence, the US passed the Corporate Average Fuel Economy Standards (CAFE) under the Energy Policy and Conservation Act. Feasibility studies are conducted by the NHTSA to determine the thresholds for CAFE standards, which require auto manufacturers to incrementally increase the sales-weighted average fuel efficiency of each new model year. Measured as a net of annual imports and exports, ultimately US energy independence was achieved in 2019 and has been maintained up to the present.

CAFE standards were originally intended to improve national security, but today they are also tied to environmental pollution and emissions controls. In conjunction with the MPG standards, the EPA sets tailpipe regulations that establish maximum emissions volumes per mile for multiple pollutants. These regulatory systems work together because the NHTSA addresses the input, MPG, and the EPA addresses the output, emissions, with both thresholds moving at similar rates of improvement.

As automakers pursue CAFE compliance, hard-to-abate emissions from ICE trucks and SUVs can be offset by an increase in EV sales, because EVs are included in the CAFE standard calculation. Also, credit and deficit markets allow automakers to exceed CAFE standards, generate a proportional number of credits, and negotiate a sale price to automakers facing federal fines for non-compliance. The private sales are often financially preferable to federal fines. When the system is used, it effectively supports a financial transfer from lower MPG automakers to higher MPG, credit-generating automakers.

Although they change with political control, CAFE standards with tailpipe regulations have incentivized technological improvements that drive energy efficiency and promote environmental and human health.