Under the 'Big, Beautiful Bill,' Car Companies Won't Be Fined for Failing To Hit Arbitrary Fuel Efficiency Goals
CAFE standards try to accomplish a reasonable goal but in an ineffective way.
This week, the Senate passed its version of President Donald Trump's tax and spending bill, dubbed the One Big Beautiful Bill Act in Trump's signature nomenclature.
As with most modern spending bills, the proposal is a bloated mess, larded up with so many extraneous provisions that it not only funds the government but also adds trillions of dollars to the deficit over the next decade.
But the bill also effectively kills fuel economy standards for automakers. Even for those who support better gas mileage and lower greenhouse gas (GHG) emissions, this is good news.
Congress passed the Energy Policy and Conservation Act of 1975 after the oil embargo of 1973–74 caused gas shortages and price increases. In an attempt to lower U.S. dependence on foreign oil, the bill set corporate average fuel economy (CAFE) standards for the first time, requiring new cars to get 27 miles per gallon by the 1985 model year.
In time, CAFE standards came to serve the secondary purpose of reducing GHG emissions. The Transportation Department most recently raised fuel efficiency standards in 2012, requiring passenger cars to average at least 55 miles per gallon by the 2025 model year, while complying with limits on tailpipe emissions set under the Clean Air Act.
No vehicle is currently anywhere close to meeting these standards: According to data from the Energy Department, motorcycles come closest, at just shy of 45 miles per gallon, while cars average less than 25 miles per gallon. But the standards are fleet-wide, meaning the average for all of an automaker's output needs to fall below the minimum. In practice, this means manufacturers must rely heavily on low- or zero-emission vehicles, like battery-powered electric vehicles or plug-in hybrids, to get on the right side of the average.
Federal law says an automaker "is liable to the Government for a civil penalty of $5 multiplied by each .1 of a mile a gallon by which the applicable average fuel economy standard…exceeds the average fuel economy."
It further empowers the Transportation Department to raise the penalty to as much as $10, so long as the transportation secretary feels the increase "will result in, or substantially further, substantial energy conservation" and will not "cause a significant increase in unemployment," "adversely affect competition," or "cause a significant increase in automobile imports."
The Senate version of the "big, beautiful bill" sets both of these dollar amounts at "$0.00," effectively rendering it moot: Automakers making cars that don't adhere to CAFE standards will still technically be in violation of the law, but they would face no reprisal.
True, a future Congress could simply ratchet the fees back up to their current levels, or higher. The better option would be to repeal the law altogether. But assuming this provision survives until the final bill, it's a worthy consolation prize.
CAFE limits set out to accomplish a laudable goal—using less gasoline and creating fewer GHG emissions—but in an ineffective way.
"There's a number of unintended consequences with fuel economy mandates in the fact that they increase sticker prices, they reduce choice, and there's unforeseen costs," says Nick Loris, executive vice president for policy at C3 Solutions, a free market energy and climate think tank. "Not to mention there's the rebound effect that when you make cars more fuel-efficient, people are driving them more so you don't get as much of an environmental benefit as initially purported."
In fact, there already exist other methods of accomplishing the same goal.
Governments already tax each gallon of gas consumers purchase—currently 18.4 cents per gallon at the federal level, and an average of 32.6 cents per gallon from the states. That money is primarily meant to offset the cost of infrastructure: The more you drive, the more gas you buy, and the more you therefore contribute to repairing and repaving the roads you use.
But as is often the case with government policies, gas taxes have other effects, as well. "Fuel taxes incentivize consumers to buy more-efficient vehicles and thereby incentivize manufacturers to produce more-efficient vehicles in ways that match consumer preferences rather than by seeking to comply with footprint-based fuel economy standards," Julian Morris and Arthur R. Wardle wrote in a 2017 policy brief for Reason Foundation, the nonprofit that publishes Reason. "Fuel economy standards like CAFE cost three to four times as much to achieve similar gains in fuel economy and emissions reduction as a fuel tax."
An earlier study in 2013 by researchers at the Massachusetts Institute of Technology found the disparity was even greater, determining that fuel efficiency standards "are at least six to fourteen times more expensive than the gasoline tax."
Besides, consumers are more rational than the policy gives them credit for. CAFE standards were passed on the premise that without them, consumers would not pay more for a car, even if it saved them money on gas. A 2015 working paper from the National Bureau of Economic Research found this premise "indefensible," but noted that "nevertheless, this assumption is still employed, implicitly, in regulatory impact analyses that credit the entire fuel savings of consumers as a benefit of programs like" CAFE.
"I think, ultimately, Congress should repeal CAFE, and I think they should repeal all of the energy efficiency regulations as well, and allow the market to drive energy efficiency," Loris adds. "We've seen time and time again that whether it's a vehicle or a refrigerator, people value and will pay for energy savings because it will save them money."
