Impacts of Long-Range Increases in the Fuel Economy (CAFE) Standard

I. INTRODUCTION AND BACKGROUND In 1975 the U.S. government enacted legislation regulating the fuel efficiency of new motor vehicles. The apparent objective of this law is to reduce American dependence on foreign oil. After large increases in the price of petroleum in the late 1990s, and with continued conflict in the Middle East, corporate average fuel economy (CAFE) standards once again became a topic of interest. A number of proposals for changing the CAFE standards were discussed in Congress in early 2002, culminating in a defeat in the Senate of an amendment that would have required a 50% increase in the relevant CAFE standards. In place of that increase, the Senate voted to require the executive branch to examine the impact of further increases in the CAFE standard. This work evaluates the long-term economic implications of raising the standard by 3.0 miles per gallon (MPG) above current levels. In industry parlance, this approach is sometimes referred to as "technology forcing." I choose 3.0 MPG because it reflects the focus of a May 2001 report by the vice president's task force on energy policy and because it reflects several legislative proposals in Congress. (1) The long term refers to a length of time such that manufacturers can adjust vehicle technologies and powertrain designs to reduce the amount of fuel required to move a given amount of mass or to achieve a given amount of performance or acceleration per gallon of fuel consumed. Previous work on CAFE standards, such as Kleit (1990) and Thorpe (1997), focused on short-term responses to higher CAFE standards, where technology forcing was not an option for manufacturers. The analysis is conducted under two different scenarios. The first scenario is that CAFE standards are not binding in the current marketplace. The second scenario takes account of the current impact of CAFE standards and then analyzes the costs and benefits of increasing the standards. The costs of CAFE standards are broken down into two areas: the changes in consumer and producer surplus, and the increase in externalities caused by the increased driving that higher CAFE standards induce. The plan of this article is as follows. Section II reviews the history of CAFE standards and briefly discusses the rationale for the regulation. Section III develops a model in which the current CAFE standard is assumed to be nonbinding. Section IV provides estimates of the impacts for a long-term 3.0 MPG CAFE increase under the assumption that the current standard is not binding. Section V then revises the model to take into account the arguably more realistic assumption that the existing CAFE standard was in fact binding. It then reports estimates for a long-term 3.0 MPG increase. Section VI provides a brief cost-benefit analysis of CAFE increases, and section VII provides a summary and conclusion. II. BACKGROUND ON AUTOMOBILE FUEL ECONOMY STANDARDS A Brief History of the CAFE Program The CAFE program, as enacted in 1975, called for all manufacturers selling more than 10,000 autos per year in the United States to reach the mandated CAFE levels. CAFE levels rose from 19.0 MPG in 1978 to 27.5 MPG in 1985 and later years. A manufacturer's domestic and foreign cars are placed in separate CAFE categories, based on the domestic context of the vehicle. If a car has over 75% American context, it is considered domestic and placed in the domestic pool. Otherwise, it is placed in the foreign car pool (see Kleit 1990 for a discussion). Light trucks (pickup trucks, sport-utility vehicles [SUVs], and minivans) were placed in a different CAFE pool than cars. When CAFE standards were originally passed, these vehicles represented a small fraction of the relevant market. By 2001, however, such vehicles made up approximately one-half of the sales of personal vehicles. In 2001, light trucks were required to reach 20.7 MPG. (There is no domestic and foreign division in the CAFE regulation for light trucks. …