Cars - Corporate Average Fuel Economy

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	Cars - Corporate Average Fuel Economy

The Corporate Average Fuel Economy (CAFE) regulations in the United States, first enacted by Congress in 1975, exist to regulate and improve the average fuel economy of cars and light trucks (trucks, vans and sport utility vehicles) sold in the US in the wake of the 1973 Arab Oil Embargo. It 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 pounds (3,856 kg) or less, manufactured for sale in the United States, for any given model year. The National Highway Traffic Safety Administration (NHTSA) and Environmental Protection Agency (EPA) regulate CAFE standards.

If the average fuel economy of a manufacturer's annual car or truck production falls below the defined standard, the manufacturer must pay a penalty, currently $5.50 per 0.1 mpg under the standard, multiplied by the manufacturer's total production for the U.S. domestic market.

Complicating things, manufacturers are allowed to earn CAFE "credits" in any year they exceed CAFE requirements, which they may use to offset deficiencies in other years. CAFE credits can be applied to the three years previous or three years subsequent to the year in which they are earned. The reason for this requirement is so that manufacturers are not penalized for occasionally (due to market conditions, for example) failing the targets, but only for persistent failure to meet them.

Cars and light trucks are considered separately for CAFE and are held to different standards. As of early 2004, the average for cars must exceed 27.5 mpg and the light truck average must exceed 20.3 mpg. Overall fuel economy for cars and light trucks in the U.S. market reached its highest level in 1987, when manufacturers managed 22.1 mpg (10.6 L/100 km). The average in 2004 was 20.8 mpg. In that time, vehicles increased in size from an average of 3,220 pounds to 4,066 lb (1,461 kg to 1,844 kg).

For the purposes of CAFE, a manufacturer's car output is divided into a domestic fleet (vehicles with more than 75% U.S., Canadian or (after the passage of NAFTA) Mexican content) and a foreign fleet (everything else). Each of these fleets must separately meet the requirements. This requirement was designed to benefit the American automobile industry, but it is regarded as having little effect and the possibility of removing the two fleet rule is being considered. The two fleet rule for light trucks was removed in 1996.

A number of manufacturers choose to pay CAFE penalties rather than attempt to comply with the regulations. As of model year 2002, BMW, DaimlerChrysler (import fleet only), Fiat, Lotus and Porsche failed the automobile CAFE requirement, while BMW and Volkswagen failed to meet the light truck requirement.

Alternative fuel vehicles are treated as if they are substantially more fuel efficient, as an incentive to develop alternative fuel vehicles.

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