Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards
Published: 2007-08-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: Recent concerns over national security, environmental stresses, and  Recent concerns over national security, environmental stresses, and  economic pressures from increased fuel prices have led to a heightened  economic pressures from increased fuel prices have led to a heightened  interest in reducing oil consumption. For example, the President  interest in reducing oil consumption. For example, the President  announced in early 2007, a nationwide goal to reduce gasoline  announced in early 2007, a nationwide goal to reduce gasoline  consumption 20 percent from the levels that the administration projects  consumption 20 percent from the levels that the administration projects  would otherwise occur by 2017. Efforts to reduce oil consumption will  would otherwise occur by 2017. Efforts to reduce oil consumption will  need to include the transportation sector because transportation in the  need to include the transportation sector because transportation in the  United States currently accounts for 68 percent of the nation’s oil  United States currently accounts for 68 percent of the nation’s oil  consumption, and cars and light trucks consume 60 percent of the oil  consumption, and cars and light trucks consume 60 percent of the oil  consumed in the transportation sector.  consumed in the transportation sector.
In the aftermath of the energy crisis of the early 1970s—to reduce the  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  nation’s reliance on oil, a large part of which comes from other  countries—Congress developed the Corporate Average Fuel Economy  countries—Congress developed the Corporate Average Fuel Economy  (CAFE) program for cars and light trucks. Under the CAFE program,  (CAFE) program for cars and light trucks. Under the CAFE program,  manufacturers must ensure that the new vehicles in their fleets, on  manufacturers must ensure that the new vehicles in their fleets, on  average, meet a specified miles per gallon (mpg) standard or pay a penalty.  average, meet a specified miles per gallon (mpg) standard or pay a penalty.
The National Highway Traffic Safety Administration (NHTSA), an  The National Highway Traffic Safety Administration (NHTSA), an  administration within the Department of Transportation (DOT), is  administration within the Department of Transportation (DOT), is  primarily responsible for setting and enforcing CAFE standards, although  primarily responsible for setting and enforcing CAFE standards, although  the Environmental Protection Agency (EPA) also plays a role in the  the Environmental Protection Agency (EPA) also plays a role in the  program and the Department of Energy (DOE) is involved in setting  program and the Department of Energy (DOE) is involved in setting  national energy policy. Many changes in automotive technologies and the  national energy policy. Many changes in automotive technologies and the  auto industry have occurred since the program was designed in the 1970s.  auto industry have occurred since the program was designed in the 1970s.  These developments, along with the recent security, environmental, and  These developments, along with the recent security, environmental, and  economic concerns mentioned above have led to some changes in the  economic concerns mentioned above have led to some changes in the  CAFE program and to calls for further alterations, including raising CAFE  CAFE program and to calls for further alterations, including raising CAFE  standards or revising the way the program applies the standards. Several  standards or revising the way the program applies the standards. Several  proposals to implement policies apart from the CAFE program would also  proposals to implement policies apart from the CAFE program would also  attempt to increase vehicle fuel economy or reduce oil consumption  attempt to increase vehicle fuel economy or reduce oil consumption  through regulation, incentives, tax credits, or other means.  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.
subsections: section_title: Background
paragraphs: 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. 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.  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. 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.
section_title: 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
paragraphs: 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.  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.
subsections: section_title: NHTSA and EPA Implement a Prescribed Process to Ensure Compliance with Fuel Economy Standards
paragraphs: NHTSA determines a manufacturer’s compliance with CAFE standards by  comparing its fleet-wide fuel economy average against the appropriate  CAFE standard. 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. 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. 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.  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. 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.
Another penalty that manufacturers might pay for producing car models  that have low fuel economy levels is the so-called “Gas Guzzler Tax.” 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. 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. 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.
section_title: NHTSA Recently Increased Standards and Reformed the Light Truck CAFE Program to Help Address Declining Fuel Economy
paragraphs: 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).
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.  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.
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.
According to NHTSA officials, the footprint-based CAFE approach may  enable the country to achieve larger reductions in oil consumption while  enhancing safety. 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. 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.
section_title: NHTSA Has Not Changed the Car CAFE Standard Since 1990 but Has Requested Authority to Reform the Program
paragraphs: 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. 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.
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.
section_title: The CAFE Program Has Saved Billions of Barrels of Oil, but Car Standards Have Not Changed for Decades
paragraphs: 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.
section_title: 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
paragraphs: 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. 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. 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.
section_title: Several Weaknesses in the CAFE Program Exist
paragraphs: 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. 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. 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.
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. 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.
subsections: section_title: Experts Suggest That Refinements to the Car CAFE Program Could Increase Fuel Savings and Address Some Program Weaknesses
paragraphs: 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. 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. 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.
section_title: NHTSA Generally Has the Capabilities to Reform CAFE Standards and Act Quickly in the Future, but Some Capabilities Could Be Improved
paragraphs: 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.
section_title: Some Market-Based Policy Options Could Complement the CAFE Program
paragraphs: 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. 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.
subsections: section_title: Market-Based Consumer Incentives for Purchasing Fuel-Efficient Vehicles Exist, but They Are Narrowly Targeted and Have Implications for Federal Spending
paragraphs: 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.
subsections: section_title: Tax Credits Can Encourage Consumers to Purchase Vehicles with a Higher Fuel Economy, but Related Costs Must Be Considered in Designing Such a Policy
paragraphs: 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. 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 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.
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, 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.
section_title: 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
paragraphs: 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.
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. 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.
section_title: Other Tax Policies with Different Goals Might Affect Consumer Choice of Vehicles
paragraphs: 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.
section_title: Taxes on Gasoline, Carbon Emissions, or Vehicle Miles Traveled Could Affect a Broader Range of Consumer Decisions That Relate to Fuel Consumption
paragraphs: Other tax options, including a tax on gasoline or carbon emissions 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.
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. 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.
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.
section_title: Efforts to Expand the Market Demand for Biofuels Have Been Initiated, but Several Barriers Impede Progress
paragraphs: 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. We found that although  the production of ethanol, one of the most commonly available biofuels  for cars and light trucks, has increased significantly, 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.
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.  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.
section_title: A Carbon Cap-and-Trade Program Would Combine Regulatory and Market- Based Elements, but Including Cars and Light Trucks Could Be Complicated
paragraphs: 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. 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.
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.
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. taxes.
Washington, D.C. 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.
section_title: Conclusions
paragraphs: 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.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments
paragraphs: 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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.
section_title: Appendix II: Selected Manufacturers’ CAFE Performance, Selected Years from 1990 through 2005
section_title: Appendix III: Comments from the Department of Energy
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: 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.