CAFE Emission Standards

Image by Chris Campbell

On Tuesday, President Obama announced rules that would require a car company to have a fleet with an average of 35.5 miles per gallon (mpg) by 2016. Right now, this number stands at 27.5 mpg, as required by the Corporate Average Fuel Economy (CAFE) standards.

Let’s take a look at some interesting things about CAFE.

CAFE Facts

CAFE is the fuel economy of a manufacturer’s fleet of cars and trucks. It has two different categories – one for passenger cars and one for light trucks. The current standard for passenger cars is 27.5 mpg and 22.2 mpg for light trucks.

Trucks and other vehicles that weigh over 8,500 lbs don’t have to comply with CAFE rules. (Just for reference — the Toyota Tundra weighs 6,200 lbs).

Imported cars are treated as a different fleet and the car manufacturer has to calculate the CAFE differently for domestic and imported cars.

The different car types are taken and then a harmonic mean is calculated to arrive at a single number for a car manufacturer. This number determines whether the car manufacturer is in compliance or not.

If manufacturers exceed CAFE standards, they get credits, which they can then use in a subsequent year (up to 3), if they fail to meet the standards at that time.

If they fail to meet with the standard then they are charged a penalty based on how far below they are and how many cars or trucks they have sold.

These emission standards are expected to get the car manufacturers go green and help reduce pollution levels over the long run.

This is just one way of doing it though; the Japanese have taken another route to tackle this situation and have come up with tax cuts that have greatly benefited their car sales last month.

The Japanese Alternative

Japanese automakers had good news on Tuesday, when they saw car sales rising; spurred by tax cuts by the Japanese government for fuel efficient cars.

The Japanese government has announced tax cuts for different categories of vehicles – ranging from fuel efficient to hybrids and Japanese companies like Honda, Toyota and Nissan have seen their sales take – off because of these tax cuts.

From Bloomberg:

Nissan Motor Co., Japan’s third- largest automaker, said domestic sales this month have risen about 30 percent so far, helped by government measures to spur car sales.

Nissan is benefiting from a tax break on purchases of fuel- efficient cars that applies to 14 of its models, Chief Operating Officer Toshiyuki Shiga told reporters today in Tokyo.

Which One Is Better?

The Japanese alternative works much better for the Japanese who are looking at the worst ever quarterly GDP decline and desperately need something to kick start their economy. Not only do the tax cuts nudge car makers to go green, but also give their sales a boost by incentivizing sales of greener cars.

The American situation is quite different. With major car manufacturers facing the prospects of bankruptcy – the American administration can’t give tax cuts to greener vehicles. That would just give foreign cars an edge and further deteriorate the position of domestic car companies and push them to a position from which they may never recover. So, in that sense the Japanese solution was never really meant to be implemented here.

In the longer run, I prefer tax cuts because they are much more direct, easy to administer, understand and give more flexibility to people and car makers in what they do.

If car makers want to make trucks with a low MPG and people are willing to buy them; despite the higher emissions price – it will happen (under both regimes). With tax cuts; at least it is much more direct. Under CAFE – the car makers will pay a penalty for not meeting the standards and then pass on the cost to the consumers.

Just that, in tax cuts, you would be able to see the difference directly in the price of the vehicles and put your finger on the tax rebate and make the decision.

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