Vehicle Fuel Economy:

Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards

GAO-07-921: Published: Aug 2, 2007. Publicly Released: Aug 2, 2007.

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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.

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.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress passed the Energy Independence and Security Act of 2007 in December 2007, and the President signed the bill into law. As we suggested to Congress, the Act directs the Secretary of Transportation to reform the Corporate Average Fuel Economy (CAFE) program for passenger cars based on one or more vehicle attributes, which was the approach the Department of Transportation recently used to restructure the CAFE program for light trucks. Specifically, CAFE standards for light trucks are now attribute based with the standard corresponding to the vehicle's size to help address safety, consumer choice and competitive equity concerns. Also, as we suggested, the Act gives the Secretary the authority to establish a credit trading system where auto manufacturers can trade CAFE credits with each other. As we suggested to Congress, the Act directs the Secretary of Transportation to execute an agreement with the National Academy of Sciences (NAS) to conduct an assessment of automotive technologies to reflect developments since NAS's 2002 report. The Act requires that NAS analyze the capabilities existing and potential automotive technologies to enhance passenger vehicle fuel economy. The bill's text closely follows GAO's matter for congressional consideration, including directing the Secretary to work with the NAS to develop its study. The Act sets new Corporate Average Fuel Economy (CAFE) standards, and, as we suggested to Congress, the Act directs the Secretary of Transportation to adjust the program, setting intermediate standards toward meeting 35 mpg for the total fleet by 2020 and then increasing the standards thereafter through 2030 based on on-going analyses of what fuel economy level is maximally feasible. As our report notes, determining the maximally feasible standards depends on a number of factors in the passenger vehicle market such as improvements in automotive technology. In addition, the Act directs the Secretary to work with the National Academy of Sciences to update its analysis of existing and potential automotive technologies at five year intervals through 2025 and submit its findings and recommendations to the Secretary. Such on-going analysis would help ensure that NHTSA can respond to changes in the passenger vehicle market by staying abreast of changes in available and cost-effective technology in the market.

    Matter: If Congress decides to increase CAFE standards, either through setting new standards itself or directing NHTSA to determine the standards, Congress may wish to 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 may wish to 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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In 2007, GAO found that refinements (including how vehicles are classified and adding credit trading) to the Corporate Average Vehicle Fuel Economy (CAFE) standards program could strengthen the program. GAO recommended that the National Highway Traffic Safety Administration (NHTSA) consider enhancing the CAFE program with some of these refinements. These refinements could include credit trading, how vehicles are classified, and assessing the ability to index penalties. In May 2010, NHTSA issued a final rule implementing CAFE standards that enhanced the agency's program for model year 2012 through 2016 vehicles, and considered other enhancements, as GAO recommended. First, the CAFE program includes a method for generating credits and a number of ways of using them to increase the efficiency of the standards across the program. For example, if a manufacturer's fleet achieves a CAFE standard better than required, it can generate credits and use them to offset a deficit from a previous model year, save them for use in future years, or trade them to other vehicle manufacturers under certain conditions. The automobile industry expects this refinement to help increase its flexibility in complying with the standards as well as meet them in the most cost effective way. Second, NHTSA researched and sought comments on how to classify minivans and other "3-row" light trucks. While the rule indicates that NHTSA still faces some questions about changing the current vehicle classifications and did not make any changes at this time, it will provide further opportunity for public comment and thus fully consider how to best implement such a refinement. Third, NHTSA clarified that it adjusted penalties in 1997 and since then has not met the statutory threshold for additional inflation adjustments, showing that they are monitoring this situation.

    Recommendation: 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, as part of the process for determining future CAFE standards, the Secretary of Transportation should 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.

    Agency Affected: Department of Transportation

  2. Status: Closed - Implemented

    Comments: GAO found that meeting the nation's goals to reduce oil consumption will require more than CAFE standards alone. GAO reported that policies such as market-based incentives could complement CAFE standards' fuel-saving effects in a cost-effective manner. GAO recommended that relevant agency officials evaluate the impact of policy options on fuel consumption beyond what may be achieved through CAFE standards alone. The administration has taken such steps. For example, an executive order requires agencies to reduce vehicle fleet petroleum use by 30 percent by 2020. In addition, the federal government provided more funds for battery and electric drive component manufacturing to advance the U.S. vehicle battery industry in the U.S. Also, the federal government doubled the number of hybrid vehicles in the Federal fleet in 2010 to spur growth of the plug-in hybrid electric vehicle market. Finally, focusing on consumer, market-based measures the administration included a tax rebate for electric vehicles in its fiscal year 2012 budget to speed the adoption of electric vehicles. The result of these policies is a broader approach to meeting the fuel-savings needs of the country in line with the spirit of our recommendation.

    Recommendation: To help ensure the nation's fuel-saving goals are achieved in the most efficient fashion, the Secretary of Transportation should, 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.

    Agency Affected: Department of Transportation


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