Café standards for cars: Espresso Excels and latte Lexuses

If you read much about energy issues in the US, you’ll see common references to CAFE standards for cars. What are they? Are they a good thing? And should we have them in Australia?

What are they?

CAFE stands for Corporate Average Fuel Economy and is the sales-weighted average fuel economy of a manufacturer’s fleet of passenger cars or light trucks, manufactured for sale in the US in any given year. It’s measured in miles per gallon.

The standards were first set in 1975, in response to the 1973-74 Arab oil embargo and the goal at the time was to double new car fuel economy by model year 1985. The standard for passenger car’s today (average economy of 27.5 mpg) is still the same as it was in 1985, although the standard for light trucks has been increasing.

There are substantial penalties for failing to comply with the standards. Manufacturers who exceed their requirements earn credits which they can bank to offset any shortfall in standards in future years – or past years (up to 3 years). They cannot trade credits with other manufacturers.

Are they a good thing?

It is difficult to find non-partisan assessments of CAFÉ standards, but one seemingly relatively unbiased assessment is Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards (pdf), the report of a review undertaken by the Board on Energy and Environmental Systems, Transportation Research Board, and National Research Council.

They made the following findings:

• The CAFÉ standards have substantially improved fuel efficiency and reduced fuel use, resulting in current national annual petrol consumption 14% lower than if the standards had not been introduced. That’s a big figure.

• That improvement has come at a cost, however. The standards have led to slightly higher vehicle prices and slightly lower profits for car manufacturers.

(To get an idea of how much: In a separate report, the Congressional Budget Office estimated the cost of increasing the efficiency standard to a level that would result in a 10% reduction in national gasoline use by cars. They estimated those costs at about $230 per vehicle. This includes the "dead weight loss" of reduced profits to manufacturers and reduced value to customers that would arise because the increase in vehicle price would mean that, at the margins, some people would not buy a car. It also incorporates the savings in fuel over the life of the car that buyers would enjoy - not quite enough to offset the increase in price. Note that the estimate is based on the assumption that manufacturers wouldn’t make any change to efficiency without the standard being tightened – I’m not sure if that assumption holds these days as fuel efficiency seems at last to be something that customers value. Relaxing that assumption implies a lower cost for achieving the same fuel reduction).

• In addition, (and I understand that this remains a controversial finding) the standards have led to an increase in traffic fatalities. This is apparently because the cheapest way to improve fuel efficiency is to reduce the weight of a vehicle and lighter vehicles have higher fatalities in collisions with heavier vehicles. My understanding from fairly brief background reading is that this has been exacerbated by the fact that heavy vehicles (such as 4-wheel-drives aka SUVs) are exempt from the standards, so these vehicles have not become any lighter, while lighter vehicles have become substantially lighter. You could expect that a reduction in the weight of all vehicles would not have an effect this negative and measures that reduced the weight of heavier vehicles could be expected to reduce fatalities. Obviously, this is a complicated issue with a lot of factors involved.

• The exemption for heavier vehicles has undermined the effectiveness of the scheme.

• Allowing manufacturers to trade credits would allow fuel efficiency improvements to be made at a lower cost and provide an incentive for manufacturers who already meet or exceed the standards to make further improvements.

• Higher fuel taxes may be a more efficient way to improve fuel efficiency and reduce fuel consumption.

A key advantage of fuel taxes is that they influence not only fuel efficiency but also drivers’ behaviour, so they have a much broader effect on reducing fuel consumption. And because they apply not just to new cars, they can start influencing fuel consumption immediately. Given that cars are replaced only every few years, it can take several years for fuel efficiency standards to start having much effect on national fuel consumption.

Should they be introduced in Australia?

Most of the arguments about whether they’re a good thing in the US apply equally in Australia. No doubt they would increase fuel efficiency (by definition) and reduce fuel consumption. However, it is likely that they would increase the costs of cars to consumers and presumably raise traffic safety concerns.

However, there are a couple of differences between Australia and the US which mean that manufacturer-level fuel economy standards may not be as beneficial in Australia as in the US:

The big one is fuel taxes. Australia’s petrol taxes, while low by international standards, are considerably higher than in the US. This means that fuel-guzzling is not as attractive in Australia as the US and so fuel economy standards will not make as much of a difference to fuel consumption here. Higher fuel prices already provide some incentive to consumers to buy more efficient vehicles. CAFÉ standards, it should also be noted, are an important ‘second-best’ solution in a country such as the US where fuel taxes are politically unpopular. Getting at the solution more directly, by higher fuel taxes, would reduce fuel consumption more quickly and probably at a lower cost to drivers.

The other difference between Australia and the US is Australia’s consumer clout – or lack of it. The US is a massive market for cars. It can be expected that manufacturers would invest in changes to their vehicles in response to standards there. That is less likely in response to Australian standards. That doesn’t mean that standards in Australia wouldn’t do anything: primarily they would change the mix of cars that manufacturers sell here. But they would be unlikely to lead to manufacturers investing in making their existing models more fuel-efficient. But then again, US, Asian and European markets already provide that incentive so it’s probably not a big deal.