An Assessment of Corporate Average Fuel Economy (CAFE)

Abstract

At current gasoline prices in the United States consumers do not pay for the full consequences of their vehicle purchase or use decisions; consequently, the financial incentive for consumers to purchase a fuel-efficient vehicle is small. In theory, regulations like Corporate Average Fuel Economy (CAFE) can play a role in reducing oil consumption. An evaluation of the effectiveness and economic impacts of CAFE involves multiple issues, including potential impacts on travel, safety, industry financial condition and structure, and use of alternative fuels. Critics have overstated some problems linked to CAFE´, including the possibility that improvements in fuel efficiency regulations have been offset by increases in travel and potential impacts of vehicle downsizing on safety. However, under current gasoline prices, innovations to improve fuel efficiency, which are economically viable in Japan and Europe, are unattractive in the United States. Given current economic conditions, automobile firm opposition to CAFE is rational. The actual impact of CAFE has been and is likely to remain small until US gasoline taxes are increased.