BACKGROUND

The vitality and economic growth of the U.S. is linked to affordable transportation. Relative to most countries, the U.S. is sparsely populated and development depends on access by highway vehicles. The interstate highway system made possible large scale freight movement by truck and facilitated travel by car. The availability of good roads and inexpensive fuel resulted in the development of large cars without much regard for fuel efficiency. The decade of the 1960s was one of the most productive in U.S. history due in part to a thriving automotive industry and inexpensive petroleum fuel. This fortuitous situation came to a rapid end in 1973 when the Organization of Petroleum Exporting Countries (OPEC) dramatically raised the price of crude oil. The resulting increases in fuel prices caused auto sales to decline and induced a long period of slow growth and inflation in the U.S.

The Corporate Average Fuel Economy Program (CAFE)

As a result of the energy crisis of 1973, and in recognition of the Nation's increasing utilization and subsequent dependency upon foreign sources of fossil fuels, Congress enacted the Energy Conservation and Policy Act of 1975 (PL 94-163; December 22, 1975). The Act amended the Motor Vehicle Information and Cost Savings Act by adding Title V: "Improving Automotive Efficiency," establishing corporate average fuel economy requirements for passenger cars and light trucks. Fuel economy is defined as the average mileage traveled by an automobile per gallon of gasoline (or an equivalent amount of other fuel) consumed as measured in accordance with the testing and evaluation protocol set forth by the Environmental Protection Agency (EPA) Administrator (49 U.S.C. �32904). Corporate average fuel economy is the sales weighted average fuel economy, expressed in miles per gallon, of a manufacturer's fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 lbs. (3636.4 Kg) or less manufactured for sale in the United States, for any given model year (49 U.S.C. �32901).

The Act authorized the Secretary of Transportation to administer the CAFE program. The Secretary delegated the authority to the NHTSA Administrator. (41 FR 25015; June 22, 1976). NHTSA was authorized to determine the maximum feasible CAFE levels; approve credit "carry back" and "carry forward" plans; determine and either grant or deny exemptions from the requirements for low-volume manufacturers; monitor the program through mandatory pre-model year and mid-model year manufacturer reports; and submit annually to Congress a report on the current status of the CAFE program. CAFE standards are to be promulgated 18 months prior to the beginning of the model year for which they are subscribed, with their determination established upon four basic statutory criteria: 1) technological feasibility; 2) economic practicability; 3) the effect of other Federal standards upon fuel economy; and 4) the need for the Nation to conserve energy.

The first year for which the standards were established for passenger cars was model year (MY) 1978 at a level of 18.0 miles per gallon (mpg); the standards increased to 19.0 mpg for MY 1979 and 20.0 mpg for MY 1980. The Act directed NHTSA to establish and promulgate standards administratively for MYs 1981, 1982, 1983 and 1984, and to specify fuel economy requirements for MYs 1985 and thereafter at 27.5 mpg. The fuel economy standard for light trucks was established for MY 1979 at 17.2 mpg for 2-wheel drive models and 15.6 mpg for models equipped with 4-wheel drive. Several changes in characterizing light truck fleet composition were made over the years, including mandatory and optional calculation of combined 2- and 4-wheel drive configurations in combination with domestically produced vehicles and "captive" imports, which are vehicles produced outside of the U.S. that are marketed under a domestic manufacturer's nameplate; optionally calculated domestic and import fleets; and finally single fleet calculations. Passenger vehicle calculations also changed over the years, and current calculations are made for manufacturers import fleets and the domestically produced fleet. Table II-1 summarizes the history of fuel economy standards for both passenger cars and light trucks from the program's inception through MY 2002, the latest year for which targets have been set.

The most recent fuel efficiency requirements for a manufacturer's passenger car fleets, either those domestically produced or imported, is 27.5 mpg, the same performance level that was established by the Act for 1985. Light truck CAFE has been established through MY 2003 at 20.7 mpg. This level has remained unchanged since MY 1996 as a result of a rider incorporated into each year's Transportation and Related Agencies Appropriations Act that forbids NHTSA from changing the standard.

A manufacturer whose CAFE level for its passenger car or light truck fleet does not meet the standard for a given model year is subject to a civil penalty of $5.50 for each tenth of a mile below the required fuel efficiency level for each vehicle sold in the model year (49 U.S.C. �32912(b)). Historically, Asian and domestic manufacturers (Chrysler, prior to the merger with Daimler-Benz; Ford; and General Motors) have either met or exceeded both the passenger car and light truck fleet requirements, whereas several of the European luxury vehicle manufacturers have consistently failed to comply with the passenger car fleet requirements and have paid substantial penalties over the years. Appendix B summarizes those manufacturers who have failed to meet the requirements and the associated penalties paid for those non-compliances.

Manufacturers can earn CAFE "credits" to offset their deficiencies in their CAFE performances. Specifically, when the average fuel economy of either the passenger car or light truck fleet for a particular model year exceeds the established standard, the manufacturer earns credits. The number of credits a manufacturer earns is determined by multiplying the tenths of a mile per gallon that the manufacturer exceeded the CAFE standard in that model year by the amount of vehicles they manufactured in that model year. These credits can be applied to any three consecutive model years immediately prior to or subsequent to the model year in which the credits are earned. The credits earned and applied to the model years prior to the model year for which the credits are earned are termed "carry back" credits, while those applied to model years subsequent to the model year in which the credits are earned are known as "carry forward" credits

(49 U.S.C. �32903(b)). Failure to exercise carry forward credits within the three years immediately following the year in which they are earned will result in the forfeiture of those credits. As is evident in Appendix B, penalties for failing to meet fuel economy standards can be substantial. The United States has collected close to a half billion dollars in CAFE penalties through 1999. Earned and "banked" credits that can offset shortfalls in fuel efficiency can have significant financial implications for manufacturers.

CAFE has impacted the amount of highway fuel used in the U.S. Figure 1 illustrates highway fuel use in the U.S. since 1970. Figure 2 illustrates the average fuel economy for cars and light trucks since CAFE standards were implemented in the late 1970s. The impact of CAFE is clearly shown on Figure 1. Without CAFE, highway fuel use might be 35 percent higher than it is today.

AMFA CAFE Credits

Though CAFE has been effective in improving the average fuel economy of the light vehicle fleet, the transportation sector remains overwhelmingly dependent on petroleum-based fuels (approximately 95 percent of transportation energy comes from petroleum) and on technologies that provide virtually no flexibility. The transportation sector currently accounts for approximately two-thirds of all U.S. petroleum use and roughly one-fourth of total U.S. energy consumption. Highway transportation petroleum consumption has risen from 121 billion gallons per year in 1979, when CAFE was enacted, to 155 billion gallons per year in 1999 (28 percent over 20 years). EIA projects U.S. dependence on imported petroleum will grow to 54 percent in 2000 and 57 percent in 2005. Dependence of U.S. autos and trucks on imported oil was one of the major driving forces behind congressional passage of AMFA and EPACT.

Citing the dependency upon foreign energy sources and the associated compromise to National energy security; the increasing deleterious effect of combustion of petroleum upon the atmosphere; and that replacement fuels such as methanol, ethanol and natural gas would burn cleaner and more efficiently and would reduce the amounts of carbon dioxide released to the atmosphere, Congress enacted AMFA. The primary purpose of AMFA was to encourage the widespread use of methanol, ethanol and natural gas as light vehicle transportation fuels and to promote the production of alternative fuel vehicles by automobile manufacturers. In enacting AMFA, Congress sought to provide incentives directly to the auto makers in order to put an end to the "cause and effect" paradigm, in which auto makers had consistently argued that they would manufacture and market alternative fuel vehicles if only a supply and distribution infrastructure were available to support an alternative fuel vehicle fleet as the fuel industry simultaneously argued that it would develop such an infrastructure if there was significant demand for alternative fuels in the marketplace that would justify the capital expenditures.

AMFA contains provisions that allow for special treatment of vehicle CAFE calculations for "dedicated" and "dual-fuel"(also referred to as "flexible-fuel") methanol, ethanol and natural gas alternative fuel vehicles. To afford these incentives, AMFA amended the automotive fuel efficiency provisions of Title V of the Motor Vehicle Information and Cost Savings Act by addition of a new section that contains incentives for the manufacture of vehicles designed to operate either exclusively or flexibly on methanol, ethanol or natural gas. Vehicles that operate exclusively on a 70 percent or greater methanol or ethanol concentration, or only on compressed or liquefied natural gas are recognized by AMFA to be "dedicated" alternative fuel vehicles. Those that have the capability to operate on either conventional gasoline or diesel fuel, or a mixture of the fuel and gasoline or diesel fuel, or only on the alternative fuel, without modification to the vehicle, are considered as "dual-fuel" or "flexible-fuel" vehicles. A manufacturer producing alternative fuel vehicles that meet specific energy efficiency and minimum driving range requirements is able, if the manufacturer chooses, to raise its overall fleet fuel economy average by manufacturing these vehicles.

A "dual energy" vehicle is defined by AMFA as:

Similarly, a "natural gas dual energy" vehicle is one:

AMFA directed NHTSA to establish two minimum driving ranges; one specification for the alcohol/gasoline or diesel dual energy vehicles when operating on the alcohol and the other for the natural gas dual energy vehicles while operating on natural gas. In establishing these criteria, AMFA directed the agency to consider consumer acceptability, economic practicability, technology, environmental impact, safety, driveability, performance and other factors considered relevant. Minimum driving ranges for the alcohol vehicles were established at 200 miles, and natural gas vehicle range was required to meet or exceed 100 miles. EPACT amended the natural gas dual energy driving range to 200 miles. NHTSA codified this requirement in April 1996. EPACT also revised the terminology of the AMFA qualified fuels. Section 301.8(A) of EPACT revised the definitions in Section 513(h)(1)(C) of the Motor Vehicle Information and Cost Savings Act by redefining a "dual energy" and "natural gas dual energy" vehicles to "dual-fuel" vehicles. In addition, a broader category of "alternative fuel" vehicles was established that would also include vehicles capable of operating on liquefied petroleum gas, hydrogen, coal derived liquefied petroleum, fuels derived from biological materials, electric vehicles that include those deriving power from battery sources and solar energy, ethers and any other materials that the Secretary of Energy deems to be substantially non-petroleum in origin and that deliver substantial energy security and environmental benefits.

Section 6 of AMFA amended the fuel economy provisions of Title V of the Motor Vehicle Information and Cost Savings Act through the addition of section 513 that provides CAFE incentives for vehicles capable of operating on alternative fuels. Beginning in MY 1993, manufacturers of alternative fuel vehicles could qualify for special treatment in the calculation of their CAFE by computing the weighted average of the fuel economy while operating on gasoline or diesel fuel and when operating on the alcohol after dividing the alcohol fuel economy by a factor of 0.15. As an example, a dedicated alternative fuel vehicle that would achieve 15 mpg fuel economy while operating on alcohol would have a CAFE calculated as follows:

FE = (1/0.15)(15) = 100 miles per gallon.

For alternative dual-fuel vehicles, an assumption is made that the vehicles would operate 50% of the time on the alternative fuel and 50% of the time on conventional fuel, resulting in a fuel economy that is based on a harmonic average of alternative fuel and conventional fuel. The fuel economy for an alternative dual-fuel model is calculated by dividing 1.0 by the sum of 0.5 divided by the fuel economy as measured on the conventional fuel and 0.5 divided by the fuel economy as measured on the alternative fuel, using the 0.15 volumetric conversion factor. For example, for an alternative dual-fuel model that achieves 15 miles per gallon operating on an alcohol fuel and 25 mpg on the conventional fuel, the resulting CAFE would be:

FE = 1/((0.5/25) + (0.5/100) = 40 miles per gallon

Calculation of fuel economy for natural gas vehicles is performed in a similar fashion. For the purposes of this calculation, the fuel economy is equal to the weighted average of the fuel economy while operating on natural gas and while operating on either gasoline or diesel fuel. AMFA specifies the energy equivalency of 100 cubic feet of natural gas to be equal to 0.823 gallons of gasoline, with the gallon equivalency of natural gas to be considered to have a fuel content, similar to that for alcohol fuels, equal to 0.15 gallons of fuel (49 U.S.C. �329059(c)). Calculations to determine the adjusted CAFE values for natural gas alternative fuel vehicles are performed in similar fashion. For example, under this conversion and gallon equivalency, a dedicated natural gas vehicle that achieves 25 miles per 100 cubic feet of natural gas would have a CAFE value as follows:

FE = (25/100) x (100/0.823)(1/0.15) = 203 miles per gallon

These calculation procedures, along with the fuel economy testing procedures for alternative fuel vehicles, were codified by the EPA in 1994 (59 FR 39638; August 3, 1994).

AMFA also limits the extent to which these special considerations can improve a manufacturer's average fuel economy. For model years 1993 through 2004, the maximum increase that can be attributed to this program is 1.2 mpg for each category of automobiles (domestic and import passenger car fleets; light truck fleets). The incentive program can be extended at the approval of the Secretary of Transportation for up to four years beyond MY 2004, but at a ceiling reduced from 1.2 mpg to 0.9 mpg. In the event that the Secretary of Transportation reduces the current CAFE requirement from 27.5 mpg for any model year, any increase of CAFE resulting from the AMFA calculation amount will be reduced by the CAFE standard, but may not be reduced to yield less than 0.7 mpg (49 U.S.C. �32906(b)).

EPACT re-codified the provisions of Section 513 of the Information and Cost Savings Act as Title 49 U.S.C. Sections 32901, 32905 and 32906. In addition, the definition of alternative fuel was expanded to include liquefied petroleum gas, hydrogen, liquid fuels derived from coal and biological materials, electricity and any other fuel that the Secretary of Transportation determines to be substantially non-petroleum based and has environmental and energy security benefits. The law also revised terminology by replacing Adual energy@ and Anatural gas dual energy@ with "alternative fueled vehicles@ in order to more appropriately reflect the expanded list of alternative fuels. Beginning in MY 1993, manufacturers of these alternative fuel automobiles that met the minimum driving range and energy efficiency criteria could qualify for special treatment in the calculation of their CAFE.

The decision to either extend the program for dual-fuel or gaseous dual-fuel vehicles beyond MY 2004 or to issue of a Federal Register notice that justifies termination of the incentive program must be made by December 31, 2001. No later than September 30, 2000, the Secretary of Transportation, in consultation with the EPA Administrator and the Secretary of Energy, is to submit to the Commerce Committee of the U.S. House of Representatives and the U.S. Senate Committees on Commerce, Science, and Transportation and Government Affairs, a report that assesses the success of the policy decision to offer these CAFE calculation incentives for dual-fuel and gaseous duel fuel vehicles. In performing the study and in the execution of the report, DOT/EPA/DOE is to consider:

Recent Events

In the last year, several events have transpired related to CAFE and the credit incentive provision. These are summarized below:

On May 17, 2001, the Energy Policy Development Group, led by Vice President Cheney, issued its National Energy Policy. This report made recommendation's to President Bush regarding the path that the administration's energy policy should take and included specific recommendations regarding vehicle fuel economy and CAFE. The report recommends that the President direct the Secretary of Transportation to:

• Review and provide recommendations on establishing CAFE standards with due consideration of the National Academy of Sciences study to be released in July 2001. Responsibly crafted CAFE standards should increase efficiency without negatively impacting the U.S. automotive industry. The determination of future fuel economy standards must therefore be addressed analytically and based on sound science.

• Consider passenger safety, economic concerns, and disparate impact on the U.S. versus foreign fleet of automobiles.

• Look at other market-based approaches to increasing the national average fuel economy of new motor vehicles.

The National Energy Policy Development Group also stated in their report that, "ethanol vehicles offer tremendous potential if ethanol production can be expanded." Additionally, the report states that, "a considerable enlargement of ethanol production and distribution capacity would be required to expand beyond their current base in the Midwest in order to increase use of ethanol-blended fuels."

The fiscal year 2001 DOT Appropriations Act still included the rider prohibiting the Department from revising the CAFE standards, however it also included a provision directing the Department to fund a National Academy of Sciences study on the effectiveness and impacts of CAFE standards. On July 30, 2001, the National Academy of Sciences released their report entitled, "Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards." This report included 15 findings and seven recommendations. Recommendation 5 stated that, "Credits for dual-fuel vehicles should be eliminated, with the provision that NHTSA's notice of such action provides enough lead-time to limit adverse impacts on the automotive industry."

On August 2, 2001, the U.S. House of Representatives passed H.R. 4, which is entitled the Securing America's Future Energy (SAFE) Act of 2001. This bill, which has been placed on the Senate legislative calendar, includes provisions in Section 203, Dual Fueled Automobiles, which alter the AMFA CAFE credit incentive program by extending it for an additional four model years to 2008 and by extending the 1.2 mpg limitation on the maximum allowable CAFE credit that can be earned by a specific manufacturer's fleet through model year 2008 as well. The deadline for making a decision whether to extend the program beyond 2008 would be December 31, 2005, with the report on the effects of the program due on September 30, 2004.

On July 10, 2001, Secretary Mineta sent a letter to Congress asking that the freeze on CAFE standards be lifted immediately so NHTSA could resume its CAFE rulemaking responsibilities. However, the freeze was not lifted until December 2001, when the FY 2002 Appropriations Act for the Department of Transportation, for the first time in six years, did not include a rider freezing CAFE standards. NHTSA immediately resumed its CAFE rulemaking responsibilities and issued a Notice of Proposed Rulemaking for MY 2004 light truck standards on January 24, 2002.