Discussion Paper

The New CAFE Standards: Are They Enough on Their Own?

May 1, 2013 | Virginia McConnell


New Corporate Average Fuel Economy (CAFE) standards were recently passed in the United States with the twin goals of reducing greenhouse gas emissions and oil use. The new standards represent a dramatic change from recent policy. This paper examines the key features of the new rules, and compares them to previous CAFE standards in terms of flexibility and structure. The importance of consumer preferences and market forces on CAFE outcomes are identified. In the second part of the paper, the perspective of the consumer is explored. Consumer assessments of fuel economy savings with more fuel-efficient vehicles may be biased or incomplete, leading many to argue that there is an “energy efficiency gap” in consumer demand for vehicles. Reasons for such a gap, such as market failures, behavioral responses, and market barriers, are summarized. The implications for policy are discussed, including the role of combining CAFE with other policies.

Major changes have recently been made to the Corporate Average Fuel Economy (CAFE) standards for cars and light trucks sold in the United States. These changes are a key component of policy efforts to address the problems of energy security and greenhouse gas emissions that contribute to climate change. CAFE regulations, which set minimum fuel economy levels for new vehicles sold for each auto manufacturer, had been relatively unchanged for many years, but the new rules require the National Highway Traffic Safety Administration to set the standards at “maximum feasible” levels through 2025. In addition, greenhouse gas emissions can now be regulated by the Environmental Protection Agency. The two agencies have collaborated on a harmonized rule that is designed to reduce oil use and greenhouse gas emissions from the fleet by over 40 percent by 2025.

In “The New CAFE Standards: Are They Enough on Their Own?,” RFF Senior Fellow Virginia McConnell​ examines the key aspects of the new standards, including their implications for changes to the size mix of vehicles and the role of credit policies on compliance and cost-effectiveness. She also identifies potential issues with consumer demand for new vehicles, focusing on whether there is an energy paradox in consumer fuel economy choices. The paradox is that consumers “may not be willing to trade off the up-front costs of more fuel-efficient vehicles for the value of the future fuel savings from those cars.” Consumers are likely very diverse in their views, and McConnell explores some of the reasons for the potential paradox, including both traditional market failures and behavioral responses. She argues that consumer choices will be important for how manufacturers comply with the new standards, and whether the CAFE goals for reducing greenhouse gas emissions and fuel consumption will be met.

McConnell offers several complementary policy solutions that could make those goals more attainable. These include programs that increase consumer information about fuel economy, a tax on gasoline to fully account for externalities, and possibly a feebate, which imposes a fee on less fuel-efficient vehicles and offers a rebate on more fuel-efficient vehicles.