Raising Automotive Fuel Efficiency

By Foster, Taft; Klier, Thomas H. | Chicago Fed Letter, September 2009 | Go to article overview

Raising Automotive Fuel Efficiency


Foster, Taft, Klier, Thomas H., Chicago Fed Letter


The Obama administration recently moved up the schedule for achieving the fuel efficiency standards set forth by Congress in the 2007 Energy Independence and Security Act. The deadline for meeting these standards is now vehicle model year 2016 instead of 2020.

Stricter fuel efficiency standards, estab- lishing a 35 miles per gallon (mpg) target for the corporate average fuel economy (CAFE) of new vehicle sales by model year (MY) 2020, were part of the 2007 Energy Indepen- dence and Security Act (EISA). These re- quirements will be phased in beginning with MY2011 vehicles. The National High- way Traffic Safety Adm ini s tr at i ? ? (NHTSA), which is part of the U.S. De- partment of Trans- portation, is the government agency authorized to regu- late fuel economy. The NHTSA there- fore issues the de- tailed rules required to implement fuel economy standards. During spring of this year, the Obama ad- ministration moved up the deadline by which the new requirements have to be met from MY2020 to MY2016. In addi- tion, it instructed the U.S. Environmental Protection Agency (EPA) to regulate au- tomobile emissions of greenhouse gases (GHG) . Assuming the requirements for carbon emissions will be met entirely through fuel efficiency improvements equates to achieving a fleet average level of 35.5 mpg by MY20 16 (see figure 1).

On June 4, 2009, the Federal Reserve Bank of Chicago held a workshop at its Detroit branch to discuss the challenges of meeting these stricter fuel efficiency requirements.1 Thomas H. Klier, senior economist, Federal Reserve Bank of Chicago, provided lessons from past experience with regulating fuel efficiency in the auto sector. Brent Yacobucci, specialist in energy and environmental policy, Congressional Research Service, shared his inside-the-Beltway perspective on the new regulations. The session concluded with two views from the frontline: Eric Fedewa, vice president of global powertrain forecasts, CSM Worldwide (an industry consultancy) , shared his thoughts on the likely sources of improvements in fuel economy; and Roger Wood, executive vice president and general manager of turbo and emissions systems, Borg Warner, provided the perspective of a supplier of technology that improves fuel efficiency. This Chicago Fed Letter summarizes the day's discussions.

From CAFE 1 to CAFE 2

Requirements for corporate average fuel economy in the motor vehicle sector were first proposed in the wake of the 1973 Arab oil embargo. The Energy Policy and Conservation Act of 1975 established CAFE standards for passenger cars to be phased in starting in MYl 978.

It authorized the NHTSA to administer the fuel efficiency requirements as well as to set standards for other vehicle classes (such as light trucks, which include minivans, sport utility vehicles, and pickup trucks) . The NHTSA exercised the authority to set fuel efficiency standards for light trucks starting in MYl 979. Collectively, these standards are referred to as CAFE 1 in this article.

In 2007, the Energy Independence and Security Act included stricter standards, which we refer to as CAFE 2; they require fuel efficiency to rise to 35 mpg by MY2020, representing a 40% increase from CAFE 1 . As mentioned before, this spring, the Obama Administration moved up the deadline to meet the new requirement to MY2016; in addition, it established authority for the EPA to regulate GHG emissions from motor vehicles.

CAFE 2 also prescribes a different way of implementing the fuel efficiency standard. Under CAFE 1, a specific mileage standard applied to passenger cars and a different standard applied to light trucks. Each manufacturer had to meet the standard as averaged across the sales of individual models within each vehicle class.2

CAFE 2 authorizes "attribute-based" fuel efficiency standards. The underlying rationale was to provide incentives for vehicles of the same size to become more fuel-efficient, instead of possibly compromising safety by achieving fuel efficiency gains primarily through reductions in vehicle size and weight. …

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