Improving Fuel Economy
Evidence shows that drivers switch to more fuel-efficient vehicles in response to higher gasoline prices. One study finds that higher gasoline prices accelerate the retirement of older, less fuel-efficient vehicles, and shift new purchases toward more fuel-efficient vehicles. Government policies have also been used to influence vehicle fuel economy. The Corporate Average Fuel Economy (CAFE) standard, passed in 1975, mandates a minimum mile per gallon (mpg) requirement for each manufacturer's fleet of new cars and a minimum requirement for each manufacturer's fleet of new light trucks. If a given vehicle is less fuel efficient than the requirement, the manufacturer must offset it by producing a vehicle that is more fuel efficient, so that the average fuel economy for all cars (or for all trucks) the manufacturer sells is above the required miles per gallon level. One rationale used to justify increasing the stringency of the CAFE standard is to further induce improvements in the fuel economy of vehicles sold to consumers, reducing the demand for transport fuel and the external costs associated with oil use.
It is important to note that while improvements in fuel economy translate into gasoline savings, it is not a one-to-one relationship. Higher CAFE standards encourage increased driving. Since higher fuel economy vehicles can go the same distance using less gasoline, the cost of driving a mile is reduced. As the per-mile cost of driving declines, the quantity of miles driven by individuals tends to increase. This "rebound effect" reduces potential fuel savings from improvements in fuel economy by 10 to 30 percent. Recent estimates suggest that as incomes grow, driving decisions will depend less on the cost of driving, and therefore, the rebound effect is expected to shrink in the future.
In 1978, CAFE mandated 18 mpg for cars and 17.2 mpg for light trucks. The CAFE standard became increasingly stringent until 1990, after which it remained virtually unchanged. It only recently became more stringent for light trucks. Currently, the CAFE standards are 27.5 mpg for cars and 22.2 mpg for light trucks (including SUVs). The Federal government has increased the CAFE standard for light trucks through two separate regulations, raising it in increments each year beginning in 2005. By 2011, new light trucks will meet a 24 mpg standard, reflecting a 16-percent increase. Also by 2011, the largest SUVs—those weighing between 8,500 and 10,000 pounds—will be subject to the CAFE standard for the first time. The Department of Transportation based the new standard for light trucks on vehicle footprint, a measure of size, in line with a recommendation by a National Academy of Sciences panel as a way to mitigate safety concerns. The footprint-based CAFE standard for light trucks is also an improvement over its previous configuration because it ensures that all manufacturers make fuel economy improvements instead of only those producing a wide mix of vehicles. The Department of Transportation is seeking similar authority to reexamine CAFE for new passenger cars.
The fuel economy of new vehicles rapidly increased over the first 8 years of CAFE. In part, this was a market response to the dramatic increase in gasoline prices between 1973 and 1981. By the late 1980s, however, overall fuel economy had stagnated. While the fuel economy of cars has continued to slowly increase over time and has been above the CAFE standard since 1986, consumers have bought an increasing number of SUVs and light trucks whose fuel economy has remained close to the mandated level of the light truck standard. Half of all vehicles sold in 2005 were light trucks, including SUVs, compared to 20 percent when CAFE was first put in place. This shift in consumer preferences is a rational response to more than a decade of low real gasoline prices, rising household incomes, and incentives created by CAFE requirements. Manufacturers also responded to changing consumer preferences and CAFE requirements. For instance, while station wagons and minivans have similar fuel economies, the former are counted as cars, and the latter are counted as light trucks. In the late 1980s, many manufacturers took advantage of the difference in the stringency of CAFE standards across cars and light trucks to phase out the station wagon—a relatively fuel-inefficient car—and replace it with the minivan—a relatively fuel-efficient light truck. This shift improved the individual fuel economy of both the car and light truck fleets but did little to change overall fuel economy. While the CAFE standard has contributed to improved fuel economy since its inception, understanding its precise impacts and its interaction with gasoline prices is a matter of some debate. A recent National Academy of Sciences study also finds that CAFE may have led manufacturers to produce smaller and lighter cars, posing a risk to safety.