The U.S. Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) and the U.S. Environmental Protection Agency (EPA) released the final Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, setting Corporate Average Fuel Economy (CAFE) and CO2 emissions stringency standards.
NHTSA establishes CAFE standards through authorities provided under the Energy Policy and Conservation Act of 1975, as amended by the Energy Independence and Security Act of 2007, while EPA establishes CO2 emissions standards under the Clean Air Act, as amended.
Under EPCA, NHTSA is required to set fuel standards 18 months ahead of a model year, meaning in this case that April 1 is the cutoff date for MY 2022.
NHTSA is required by Congress to set fuel economy standards at the maximum feasible level for both passenger cars and light trucks for every model year. If NHTSA determines that standards previously set are no longer maximum feasible, NHTSA can amend them. In determining what levels of CAFE standards would be maximum feasible, Congress directed NHTSA to consider four specific factors: technological feasibility; economic practicability; the effect of other government motor vehicle standards on fuel economy; and the Nation’s need to conserve energy.
In April 2018, the EPA issued its Mid-Term Evaluation Final Determination that found that the MY 2022-2025 CO2 standards might not be appropriate and thus might need to be revised. Once EPA made the Revised Final Determination that the 2012 standards were no longer appropriate, the agency took comment on revisiting those standards.
For more than a year, NHTSA and EPA have worked together to analyze automotive and fuel economy technologies, reviewed hundreds of thousands of public comments, studied economic conditions and projections, and consulted with relevant agencies across the administration.
The SAFE Vehicles Rule is the result produced by that joint effort. It serves as the next generation of Congressionally mandated CAFE and light-duty vehicle and CO2 emissions standards. The new rule will set the MY 2021-2026 standards that carmakers must achieve for their passenger car and light-duty truck fleets.
The price consumers pay for vehicles has risen. The costs of new technology to meet fuel economy standards is responsible for a share of those higher prices. Americans pay on average $38,000 for a new vehicle. To cope with ever rising vehicle prices, Americans and their families have been forced to seek credit over ever lengthening periods. It is now common for vehicle loans and credit to run 72 and 84 months (between 6 and 7 years). As a result, Americans are driving older cars longer, putting themselves and their families at risk. A decade ago, the average vehicle was 10 years old. Today it is nearly 12 years, the oldest in U.S. history. And because used cars are substitutes for new ones, when new car prices rise, used car prices rise too as more families shift purchases to older vehicles. This, in turn, affects the U.S. DOT’s safety mission, because newer cars are safer cars. The average vehicle on the road in 2012 would have an estimated 56% lower fatality risk for its occupants than the average vehicle on the road in the late 1950s. Families cannot get the safety benefits of newer vehicles if they cannot afford them due to fuel economy standards.
Automakers falling behind
Under the standards from 2012, overall fleet fuel economy has been improving at an impressive pace but not enough for many automakers. Some manufacturers have been meeting the standards have been by relying on “credit banks” (i.e., overcompliance in earlier years, which generates credits) and, in some cases, purchasing credits from electric vehicle manufacturers such as Tesla. But because automakers have been underperforming over the past several years, over time the credit banks are being depleted, while those credits earned prior to MY 2017 will expire at the end of MY 2021. Currently, an active credit market enables automakers to purchase credits to demonstrate compliance. The availability of current and future credits is uncertain and thus decreasing the need to rely on them makes the program better.
Automakers have applied varied technologies to their vehicles over the last five to 10 years, but have in some cases reached the point where the additional costs of those technologies – to get marginal improvements in efficiency – comes at a cost that consumers are unable or unwilling to bear.
It is NHTSA’s job to further energy conservation by setting fuel economy standards, but in doing so, it must consider the economic impacts and national consequences.
Prior rule’s incorrect assumptions
The 2012 CAFE were based on three predictions that have turned out to be off the mark.
When NHTSA and EPA set more stringent fuel economy and CO2 standards, Americans stand to save money because their vehicles go farther on a gallon of gas. When gasoline costs lower than expected, however, Americans tend to worry less about fuel economy – and for the agencies’ purposes, the benefits we previously forecasted (in terms of money saved on fuel purchases) turned out to be too high. In 2012, oil was close to $100 per barrel. The agencies projected that average gasoline prices would be $3.63/gallon in 2017, $3.76/gallon in 2020, and $4.09/gallon in 2035 [source: AEO 2012 Early Release reference case]. In today’s analysis, the agencies are projecting average gasoline prices of $2.59 in 2017, $3.00 in 2020, and $3.50 in 2035 [source: AEO 2019 reference case]. DOE’s Energy Information Administration actually tracked average gas prices at $2.42/gallon in 2017, $2.60 in 2019, and $2.55 in January 2020 – even lower than our analysis assumes. Gas prices tend to affect which vehicles Americans choose to buy, as we have seen since 2012.
U.S. energy production
Part of why gas prices turned out lower than we expected in 2012 is that U.S oil production has more than doubled over the last 10 years. U.S. shale oil is more expensive to produce than traditional crude oil, but the addition of U.S. production to the global market helps to keep global prices in check in a variety of ways. Sustained high oil prices are less likely, on balance, than they were before U.S. production ramped up.
Consumers opted for larger and heavier vehicles
Even while fleet fuel economy has been increasing, many Americans were choosing to buy lower-fuel economy versions of new vehicles than what automakers needed to sell to meet the Obama-era standards. While average fleet fuel economy increased between MY 2012 and 2017, automaker performance against the standards actually began to fall. In MY 2012, the new vehicle fleet exceeded the standards by 1 mpg on average; by MY 2017, the new vehicle fleet fell short of the standards by 0.4 mpg. Individual automaker performance varies over time, but the general trend is that many companies had to dig into their credit banks to remain in compliance, and the credit banks are being depleted. NHTSA projects that the overall 2019 fleet will have fallen behind CAFE standards by 1.3 miles per gallon, or 4%. If CAFE and CO2 standard stringency continue increasing at the rate the agencies believed could be achieved in 2012, and if gas prices continue to stay relatively low, automakers will be harder and harder pressed to convince Americans to buy the higher fuel economy vehicles they need to buy if automakers are going to meet the standards.
Diminishing returns of additional fuel economy
The final rule acknowledges the diminishing marginal benefits of more stringent fuel economy standards. It also recognizes the marginal costs of the technology required to meet those standards. At the same time, the SAFE Vehicle Rule continues to protect the environment by increasing stringency of CAFE and CO2 emissions standards over the next five years.
Assume a vehicle owner drives his light vehicle 15,000 miles per year, if that owner trades in the vehicle with fuel economy of 15 mpg for one with fuel economy of 20 mpg, the owner’s annual fuel consumption would drop from 1,000 gallons to 750 gallons — saving 250 gallons annually. If, however, that owner was to trade in a vehicle with fuel economy of 30 mpg for one with fuel economy of 40 mpg, the owner’s annual gasoline consumption would drop from 500 gallons/year to 375 gallons/year — only 125 gallons even though the mpg
Each additional fuel economy improvement becomes much more expensive as the low-hanging fruit of low-cost technological improvement are adopted. Automakers, nonetheless continue adding technology to improve fuel economy and reduce CO2 emissions. In doing so automakers sacrifice other performance attributes to mitigate against price increases or raise the price of vehicles—neither of which is fair to consumers who must stretch family budgets by making longer and higher payments.
Learn more at NHTSA.gov/SAFE.