Automotive Fuel Economy

In 1973, the Organization of Petroleum Exporting Countries instituted an oil embargo against the United States and other western countries in response to U.S. support of Israel in the Yom Kippur War. This coincided with a period in which domestic oil production in the United States was dropping while domestic demand for oil was increasing, requiring the importation of 35 percent of U.S. petroleum needs. This confluence of events resulted in skyrocketing oil and gasoline prices and shortages and rationing of fuel, all of which contributed to a period of economic stagnation combined with progressive price inflation. In response, Congress created the Department of Energy and enacted the Energy Policy and Conservation Act (EPCA).

At the time of the energy crisis, the fuel economy of automobiles averaged 13.5 miles per gallon (mpg) and trucks averaged 11.6 mpg. One of the purposes of the EPCA was to provide for the improved energy efficiency of motor vehicles. The fuel economy standards required by the EPCA are often referred to as corporate average fuel economy (CAFE) standards, and are administered by the National Highway Traffic Safety Administration (NHTSA), an agency of the Department of Transportation.

For passenger cars, the EPCA gradually increased the CAFE standards to 27.5 mpg for vehicles built after 1984. That standard was once reduced but reinstated in 1990 and has not been changed since. For non-passenger vehicles (a misnomer that includes sport utility vehicles, pickup trucks, and minivans, more commonly referred to as “light trucks”), the Department of Transportation is to set average fuel economy standards by regulation for each model year. The EPCA requires CAFE standards to be set at the maximum feasible level. Determination of maximum feasible level entails the consideration of four factors: technological feasibility; economic practicability; effects of other government fuel economy standards; and national needs to conserve energy. The CAFE standard for light trucks is currently 20.7 mpg and is scheduled to increase to 22.2 mpg for the 2007 model year.

If a manufacturer does not meet CAFE standards for passenger cars or light trucks, the penalty to the manufacturer is $5.50 per tenth of an mpg under the standard for each of the particular type of vehicles manufactured for that model year. The NHTSA estimates that manufacturers, generally European, have paid civil penalties amounting to over $500 million since 1983. Asian and domestic manufacturers have met CAFE standards each year and have never paid a penalty for non-compliance.

If the vehicles built by a manufacturer in a given model year exceed CAFE standards, the manufacturer will receive “credits” for each tenth of a mpg multiplied by the number of vehicles manufactured whose average fuel economy exceeds the CAFE standard. Those credits may be applied by the manufacturer to offset any deficiencies in fuel economy the manufacturer may experience in the next three model years. Any credits not used within three years are forfeited. In addition, credits earned by passenger cars may only be applied to passenger cars, and those earned by light trucks can only be applied to light trucks. Credits may not be sold or otherwise transferred to different manufacturers.

The Environmental Protection Agency (EPA) is responsible for calculating each manufacturer’s CAFE. If the manufacturer does not supply its own fuel economy test data, the EPA will obtain the manufacturer’s vehicles and conduct its own tests. The EPA conducts different types of tests for determination of CAFE standard compliance and for new vehicle fuel economy labels and the EPA’s Fuel Economy Guide.