New Fuel Economy Standards—Keeping Up with the Real World?

In April, the U.S. Department of Transportation proposed a rule to ramp up fuel economy (CAFE) standards over the years 2011-2015, reaching an average of 31.6 miles per gallon in 2015. The rule represents the first phase in implementing the requirement in the Energy Independence and Security Act of 2007 that new cars and trucks reach at least 35 miles per gallon by 2020, an increase of 40% over today's levels.

The auto industry's initial response to the proposal was generally supportive, although that reaction could perhaps be a gambit to ward off California's greenhouse gas standards for vehicles, which are being adopted by states across the country.

The California standards would in effect require vehicles to reach 35 miles per gallon before 2020 and will likely be extended to ensure further improvement by 2020. In February, however, the U.S. Environmental Protection Agency denied a waiver that California must obtain before implementing its standards, sparking an outcry from many states and a lawsuit against the EPA.

As the contest between the states and the federal government plays out, the DOT will proceed with its regulation. The proposed rule sets fuel economy standards that decline with increasing vehicle size. Standards for light trucks, which are defined to include SUVs and minivans as well as pickup trucks, will remain separate from, and less stringent than, car standards—a car will generally need to reach higher fuel economy than a truck having the same "footprint" (track width times wheel base).

While the rule exhibits a more optimistic approach to the adoption of vehicle efficiency technology than DOT has taken previously, the proposed standards nonetheless fall short of the "maximum feasible" that the law requires. This comes of DOT's undervaluing the benefits associated with saving fuel. In particular, DOT's proposal is based on U.S. Department of Energy fuel price forecast, which ranges from $2.45 to $2.55 per gallon over the period 2010 to 2030. As DOT Administrator Mary Peters commented recently: "All of us would love to pay $2.60 a gallon." DOT calculations reveal that using DOE's High Price Forecast would have resulted in standards of nearly 35 miles per gallon by 2015.

Consumers' flocking towards smaller vehicles in response to high fuel prices will raise average fuel economy but, under the new size-based standards, will not help manufacturers meet their CAFE requirements. While automakers have favored the switch to "attribute-based" standards for years, the result in an era of ever-rising fuel prices will be higher average fuel economy requirements.