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- What is CAFE?
Corporate Average Fuel Economy (CAFE) is the sales
weighted average fuel economy, expressed in miles per gallon
(mpg), of a manufacturer’s fleet of passenger cars or
light trucks with a gross vehicle weight rating (GVWR) of 8,500
lbs. or less, manufactured for sale in the United States, for
any given model year. Fuel economy is defined as the average
mileage traveled by an automobile per gallon of gasoline (or
equivalent amount of other fuel) consumed as measured in accordance
with the testing and evaluation protocol set forth by the Environmental
Protection Agency (EPA).
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What is
the origin of CAFE?
The “Energy Policy Conservation Act,”
enacted into law by Congress in 1975, added Title V, “Improving
Automotive Efficiency,” to the Motor Vehicle Information
and Cost Savings Act and established CAFE standards for passenger
cars and light trucks. The Act was passed in response to the
1973-74 Arab oil embargo. The near-term goal was to double new
car fuel economy by model year 1985.
- Who has executive responsibility
for CAFE?
The Secretary of Transportation has delegated
authority to establish CAFE standards to the Administrator of
the National Highway Traffic Safety Administration (NHTSA).
NHTSA is responsible for establishing and amending the CAFE
standards; promulgating regulations concerning CAFE procedures,
definitions and reports; considering petitions for exemption
from standards for low volume manufacturers and establishing
unique standards for them; enforcing fuel economy standards
and regulations; responding to petitions concerning domestic
production by foreign manufacturers and all other aspects of
CAFE, including the classification of vehicle lines as either
cars or trucks; collecting, recording and cataloging Pre- and
Mid-model year reports; adjudicating carry back credit plans;
and providing program incentives such as credits for alternative
fueled vehicle lines.
EPA is responsible for calculating the average fuel
economy for each manufacturer. CAFE certification is done either
one of two ways: 1) The manufacturer provides its own fuel economy
test data, or 2) the EPA will obtain a vehicle and test it in
its Office of Transportation & Air Quality facility in Ann
Arbor, MI. EPA will do actual tests on typically about 30% of
the existing vehicle lines, using the same laboratory test that
they use to measure exhaust emissions. The entire certification
test procedure, including the vehicle test preparation, the actual
running of the test on the dynamometer, the recording of the data,
etc., is specified in Title 40 of the Code of Federal Regulations.
- Do NHTSA’s CAFE values
differ from EPA’s fuel economy data?
Three different sets of fuel economy values- NHTSA’s
CAFE values, EPA’s unadjusted dynamometer values, and
EPA’s adjusted on-road values exist. NHTSA’s CAFE
values are used to determine manufacturers’ compliance
with the applicable average fuel economy standards and to develop
its annual report, the Automotive Fuel Economy Program Annual
Update. The EPA’s unadjusted dynamometer
values are calculated from the emissions generated during the
testing using a carbon balance equation. EPA knows the amount
of carbon in the fuel, so by measuring the carbon compounds
expelled in the exhaust they can calculate the fuel economy.
EPA’s adjusted on-road values are those values listed
in the Fuel Economy Guide and on new vehicle labels, adjusted
to account for the in-use shortfall of EPA dynamometer test
values.
- What is meant by “maximum
feasible fuel economy standards?”
Congress specified that CAFE standards must be set at the “maximum
feasible level.” Congress provided that the Department’s
determinations of maximum feasible level be made in consideration
of four factors:
(1) Technological feasibility;
(2) Economic practicability;
(3) Effect of other standards on fuel economy; and
(4) Need of the nation to conserve energy
- For what years and at what
levels have the passenger car CAFE standards been set?
To meet the goal of doubling the 1974 passenger car fuel economy
average by 1985 (to 27.5 mpg), Congress set fuel economy standards
for some of the intervening years. Passenger car standards were
established for MY 1978 (18 mpg); MY 1979 (19 mpg); MY 1980
(20 mpg); and for MY 1985 and thereafter (27.5 mpg). Congress
left the level of 1981-84 standards to the Department to establish
administratively. Subsequently, standards of 22, 24, 26, and
27 mpg were established. For the post-1985 period, Congress
provided for the continued application of the 27.5 mpg standard
for passenger cars, but gave the Department the authority to
set higher or lower standards. From MY 1986 through 1989, the
passenger car standards were lowered. Thereafter, in MY 1990,
the passenger car standard was amended to 27.5 mpg, which it
has remained at this level.
- For what years and at what
levels have the light truck CAFE standards been set?
Congress did not specify a target for the improvement of light
truck fuel economy. Instead, it provided that light truck standards
be set at the maximum feasible level for model year 1979 and
each model year thereafter. Unlike for the passenger car fleet,
there is no default standard established for light trucks. NHTSA
must set the standard for each model future model year. Light
truck fuel economy standards have been established by NHTSA
for MY 1979 through MY 2007.
Light truck fuel economy requirements were first established
for MY 1979 (17.2 mpg for 2-wheel drive models; 15.8 mpg for
4-wheel drive). Standards for MY 1979 light trucks were established
for vehicles with a gross vehicle weight rating (GVWR) of 6,000
pounds or less. Standards for MY 1980 and beyond are for light
trucks with a GVWR of 8,500 pounds or less. The light truck
standard progressively increased from MY 1979 to 20.7 mpg and
19.1 mpg, respectively, by MY 1991. From MY 1982 through 1991,
manufacturers were allowed to comply by either combining 2-
and 4-wheel drive fleets or calculating their fuel economy separately.
In MY 1992, the 2- and 4-wheel drive fleet distinction was eliminated,
and fleets were required to meet a standard of 20.2 mpg. The
standard progressively increased until 1996, when the Appropriations
prohibition froze the requirement at 20.7 mpg. The freeze was
lifted by Congress on December 18, 2001. On March 31, 2003,
NHTSA issued new light truck standards, setting a standard of
21.0 mpg for MY 2005, 21.6 mpg for MY 2006, and 22.2 mpg for
MY 2007.
- What is the penalty for not
meeting CAFE requirements for any given model year (MY)?
The penalty for failing to meet CAFE standards recently increased
from $5.00 to $5.50 per tenth of a mile per gallon for each
tenth under the target value times the total volume of those
vehicles manufactured for a given model year.
Since 1983, manufacturers have paid more than $500 million in
civil penalties. Most European manufacturers regularly pay CAFE
civil penalties ranging from less than $1 million to more than
$20 million annually. Asian and domestic manufacturers have
never paid a civil penalty.
For MY 2002, five passenger car fleets including BMW, DaimlerChrysler
import, Fiat, Lotus, and Porsche are projected to fail to meet
27.5 mpg passenger car CAFE standard. In addition, two
light truck fleets including BMW and Volkswagen will likely
fail to meet the light truck CAFE standard of 20.7 mpg. Final
Reports for MY 2002 provided by the EPA to NHTSA in mid-calendar
year of 2003 may adjust these projections favorably.
- What are CAFE credits?
Manufacturers can earn CAFE “credits” to offset
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 amount of credit
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. 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.
Credits cannot be passed between manufacturers or between fleets,
e.g., from domestic passenger cars to light trucks.
- How is the actual Average
Fuel Economy reported by manufacturers to the Government?
Manufacturers are required to submit three reports: 1) Pre-model
year; 2) Mid-model year; and 3) Final Report. The pre- and mid-model
year reports are submitted to NHTSA, while the final report
is submitted to and validated by the EPA.
- Who classifies vehicles for
the purposes of CAFE and how is it done?
Authority to establish vehicle classifications for the purposes
of calculating CAFE was delegated to NHTSA. Specifically, the
definitions are as follows:
1) Passenger Car – any 4-wheel vehicle not designed
for off-road use that is manufactured primarily for use in
transporting 10 people or less.
2) Truck – a 4-wheel vehicle which is designed for
off-road operation (has 4-wheel drive or is more than 6,000
lbs. GVWR and has physical features consistent with those
of a truck); or which is designed to perform at least one
of the following functions: (1) transport more than 10 people;
(2) provide temporary living quarters; (3) transport property
in an open bed; (4) permit greater cargo-carrying capacity
than passenger-carrying volume; or (5) can be converted to
an open bed vehicle by removal of rear seats to form a flat
continuous floor with the use of simple tools.
- Are import vehicles treated
the same as domestics when it comes to CAFE?
The rules are different for passenger cars and trucks. There
is a statutory “two-fleet rule” for passenger cars.
Manufacturers’ domestic and import fleets must separately
meet the 27.5 mpg CAFE standard. For passenger cars, a vehicle,
irrespective of who makes it, is considered as part of the “domestic
fleet” if 75% or more of the cost of the content is either
U.S. or Canadian in origin. If not, it is considered an import.
Beginning in 1980, light trucks were administratively subjected
to a similar two-fleet rule. However, given changes in market
conditions (the “captive import” sector of the fleet
had become insignificant), NHTSA eliminated the two-fleet rule
for light trucks beginning with MY 1996. Therefore, there are
no fleet distinctions, and trucks are simply counted and CAFE
calculated as one distinct fleet of a given manufacturer.
- How are alternative fuel
vehicles treated under CAFE?
The CAFE law provides for special treatment of vehicle fuel
economy calculations for dedicated alternative fuel vehicles
and dual-fuel vehicles. The fuel economy of a dedicated alternative
fuel vehicle is determined by dividing its fuel economy in equivalent
miles per gallon of gasoline or diesel fuel by 0.15. Thus a
15 mpg dedicated alternative fuel vehicle would be rated as
100 mpg. For dual-fuel vehicles (vehicles that can use the alternative
fuel and gasoline or diesel interchangeably), the rating is
the average of the fuel economy on gasoline or diesel and the
fuel economy on the alternative fuel vehicle divided by .15.
For example, this calculation procedure turns a dual fuel vehicle
that averages 25 mpg on gasoline or diesel with the above 100
mpg alternative fuel to attain the 40 mpg value for CAFE purposes.
Several limitations are established for CAFE credits for dual
fuel vehicles. For MYs 1993-2004, the maximum CAFE increase
attributable to dual fueled vehicles in a manufacturer’s
passenger car or light truck fleet is 1.2 mpg.
The Alternative Motor Fuels Act (AMFA) directed the Secretary
of Transportation, in consultation with the EPA Administrator
and the Secretary of Energy, to conduct a study and submit a
report to Congress evaluating the success of the policy decision
to offer CAFE credit calculation incentives for dual-fuel and
gaseous dual-fuel vehicles. The report was transmitted to Congress
in March 2002.
The statutory language also requires that the Department of
Transportation either extend the incentive program for dual-fuel
vehicles beyond MY 2004 for up to four more years with a maximum
allowable increase in average fuel economy for a manufacturer
of 0.9 miles per gallon; or issue a Federal Register notice
that justifies termination of the incentive program. In March
2002, NHTSA issued an NPRM proposing to extend the availability
of the CAFE credit incentive for dual-fueled vehicles for four
years, through the end of the 2008 model year. A final rule
will be issued in 2003.
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Are any vehicles exempted
from CAFE standards?
Light trucks that exceed 8,500 lbs gross vehicle weight rating
(GVWR) do not have to comply with CAFE standards. These vehicles
include pickup trucks, sport utility vehicles and large vans.
A study prepared for the Department of Energy, in February
2002, by the Oak Ridge National Laboratory found that 521,000
trucks with GVWR from 8,500 to 10,000 lbs were sold in calendar
year 1999. The vast majority (82%) of these trucks are pickups
and a significant number (24%) were diesel. At the end of 1999,
there were 5.8 million of these trucks on the road accounting
for 8% of the annual miles driven by light trucks, and 9% of
light truck fuel use.
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How is a manufacturer’s
CAFE determined for a given model year?
A manufacturer’s CAFE is the fleet wide average fuel economy.
Separate CAFE calculations are made for up to three potential
fleets: domestic passenger cars, imported passenger cars and
light trucks. The averaging method used is referred to as a
“harmonic mean”. The regulatory language describes
the calculation as: “the number of passenger automobiles
manufactured by the manufacturer in a model year; divided by
the sum of the fractions obtained by dividing the number of
passenger automobiles of each model manufactured by the manufacturer
in that model year by the fuel economy measured for that model.”
The numerical example below illustrates the process. Assume
that a hypothetical manufacturer produces four light truck models
in 2004, where MPG means miles per gallon and GVWR means gross
vehicle weight rating measured in lbs:
Model |
MPG |
GVWR |
Production Volume |
Vehicle A |
22 |
3000 |
130,000 |
Vehicle B |
20 |
3500 |
120,000 |
Vehicle C |
16 |
4000 |
100,000 |
Vehicle D |
10 |
8900 |
40,000 |
Because the Vehicle D exceeds 8,500 GVWR, it is excluded from
the calculation. Therefore, the manufacturer’s light truck
CAFE is calculated as:
=Average
Light Truck Fleet Fuel Economy
The 2004 model year light truck CAFE standard is 20.7 mpg therefore
the manufacturer is not in compliance.
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What is the penalty
for noncompliance for a given MY and how is it calculated?
The current penalty for failing to meet CAFE standards is
$5.50 per tenth of a MPG under the target value times the total
volume of those vehicles manufactured for a given model year.
Since 1983, manufacturers have paid more than $590 million in
CAFE civil penalties. Most European manufacturers regularly
pay CAFE civil penalties ranging from less than $1 million to
more than $20 million annually. Asian and most of the big domestic
manufacturers have never paid a civil penalty.
For MY 2002, five imported passenger car fleets, including BMW,
Daimler Chrysler, Fiat, Lotus and Porsche are projected to fail
to meet the 27.5 mpg passenger car CAFE standard. In addition,
two light truck fleets, including BMW and Volkswagen are projected
to fail to meet the light truck CAFE standard of 20.7 mpg.
When NHTSA finds that a manufacturer is not in compliance, it
notifies the manufacturer. Surplus credits generated from the
three previous years can be used to make up the deficit. Using
the example from above, the manufacturer may use credits from
any of the previous three model years (2001, 2002, or 2003).
Credits generated in the furthest out model year (2001) would
be used first, followed by any generated in 2002 and finally
2003. If there are no (or not enough) credits available, then
the manufacturer can either pay the fine, or submit a carry
back plan to the agency. In the example, the hypothetical manufacturer’s
CAFE was 19.27 mpg for model year 2004. In that year, the standard
was 20.7 mpg. The fine is calculated as:
(20.7 - Average Fuel Economy)*10.0 * $5.50* Production Volume
= Total Fine
(20.7- 19.27) *10.0* $5.50 * 350,000 = $27,527,500
If the manufacturer decides to make up the difference in the
following three years instead, they must file a carry back plan
with NHTSA. A carry back plan describes what the manufacturer
plans to do in the following three model years (2005, 2006 and
2007) to make up the deficit credits. NHTSA must examine and
approve the plan. The total number of credits that must be made
up are:
(20.7 – Average Fuel Economy)*10.0 * Production Volume
= Total Credits
(20.7 – 19.27) *10.0* 350,000 = 5,005,000
The manufacturer can make up deficit credits by producing a
fleet of vehicles that exceeds the standard at that time. For
example, suppose the manufacturer submits plans to build the
following light trucks in 2005 model year:
Model |
MPG |
GVWR |
Production Volume |
Vehicle A |
22 |
3000 |
100,000 |
Vehicle B |
20 |
3500 |
80,000 |
Vehicle D |
10 |
8900 |
55,000 |
Vehicle E |
25 |
2800 |
150,000 |
In this model year, the manufacturer has quit making one model
(Vehicle C) and introduced a new model (Vehicle E). Because
Vehicle D has a GVWR in excess of 8,500 lbs, it is excluded
from the calculation. Therefore, the manufacturer’s CAFE
is calculated as:
Since the light truck standard is 21.0 mpg in 2005, the manufacturer
has exceeded the standard and generated excess credits:
(Average Fuel Economy –21.0) *10.0* Production Volume
= Total Excess Credits
(22.69-21.0) *10.0* 330,000 = 5,577,000.
These excess credits generated in 2005 model year cover the
deficit from the 2004 model year with a surplus of 572,000 that
can be used in later model years.
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