One of the National Research Council’s findings is that the CAFE standards program has “clearly contributed to increased fuel economy.” It points out that had fuel economy not improved since the 1970s, gasoline consumption would have been 14% higher in 2003. But the council admits that it is difficult to disentangle the mileage improvements due to CAFE standards from those driven by a market response to higher gasoline price.
It is likely that CAFE standards resulted in reduced gasoline consumption during the 1980s and 1990s, when the price of gasoline was low. GM, Ford and Chrysler struggled to meet the standards, which suggests consumers would have preferred less fuel-efficient vehicles. Since Toyota and Honda already exceeded CAFE standards during that time, any improvement in vehicle mileage that can be attributed to the CAFE standards came from the Big Three automakers. Taking this into consideration, it is likely that mileage improvements due to CAFE standards were modest over the period.
Yale economist Pinelopi Goldberg estimated that abolishing the CAFE standards program in 1989 would have led to a 19-million-gallon annual increase in fuel consumption in the short-run and an increase of 400 million gallons per year in the long run. But this represented only 0.01% and 0.3%, respectively, of the 130 billion gallons consumed yearly in the U.S. at that time. Robert Crandall surveyed the literature and found a midrange estimate of 6.8 billion gallons of fuel saved during the 1984-89 period due to CAFE standards, savings of less than 1% of total consumption. He found that it cost about $0.63 to save one gallon of gasoline through CAFE standards, which was 60% of the average price of a gallon of gasoline at the time. So, while CAFE standards can help reduce gasoline consumption, the impact is relatively small and relatively expensive.
Federal Trade Commission economist Andrew Kleit found that modest increases in CAFE standards can result in increased fuel consumption. As discussed in the next section, CAFE standards tend to reduce the price of smaller, more fuel-efficient vehicles and increase the price of larger, less fuel-efficient ones. This helps automakers sell more of the former and less of the latter and thus meet the standards. But these price signals may not affect consumers equally.
For instance, suppose consumers of larger vehicles tend to be high-income and less price sensitive than consumers of smaller vehicles, who tend to have less income. Sales of large vehicles might not substantially decrease even if their price increases. But since buyers of small vehicles are more price sensitive, sales of smaller vehicles could increase substantially when their price decreases. The net effect under this scenario would be more vehicles on the road and thus more gasoline consumed.
Kleit found evidence for this phenomenon and estimated that raising CAFE standards from 26 mpg to 28 mpg in the late 1980s would increase gasoline consumption, but only up until a point. After that, further increases in CAFE standards would help reduce gasoline consumption. But the cost of this reduction is substantial: Kleit estimated the cost of each gallon of gasoline saved to be over $10 per gallon. His work suggests that CAFE standards may not automatically result in reduced gasoline consumption and that finding the right balance for a CAFE standard is important. But even then, the costs might outweigh the benefits.
Gasoline savings under the CAFE standards program differ substantially in the short and long run. One reason for this is that the standards only apply to new vehicles, not used vehicles, and it takes time for these new vehicles to influence the overall vehicle market. Thus, CAFE standards only affect the used vehicle market after an extended period, or an estimated 14 years, according to the Congressional Budget Office. This may help explain findings like those from Mark Jacobsen, who estimated that a one-mpg increase in the CAFE standard only reduces household gasoline consumption by 0.84% in the first year, but eventually by 3.37% in the 10th year following the increase.
Another factor that offsets the vehicle mileage improvement brought about by CAFE standards is how flex fuel was treated under the program. Flex fuel is a blend consisting of up to 83% ethanol and at least 17% gasoline, sometimes called “E85.”[*] For purposes of CAFE compliance, the EPA assumes that flex fuel capable vehicles burn E85 half the time and conventional gasoline the other half. The EPA also assumes that the carbon content of E85 is zero, even though E85 contains only marginally less carbon than conventional gasoline, given the fossil fuels involved in growing corn and producing ethanol. Likewise, the EPA currently assumes that fully electric vehicles produce no carbon emissions, despite estimates that total carbon emissions resulting from electric vehicles (due to things such as generating the electricity to power them) might exceed those for conventional gasoline vehicles.
Michigan State University economist Soren Anderson and University of Chicago economist James Sallee find that given how E85 was treated for CAFE standard compliance, automakers could boost reported their vehicle mileage by an average of 1.2 miles per gallon by adding flex fuel capacity to a vehicle at little cost — $100 to $200 per vehicle. This is regardless of how often motorists use E85.
Installing flex fuel capacity was a cheap way for automakers to get some extra miles-per-gallon for CAFE compliance, but it represented waste to consumers. Consumers expressed no willingness to pay for flex fuel capacity, as vehicles with it sold for the same price as vehicles without it. Survey evidence reported by Anderson and Sallee indicated that 75% of consumers did not know their vehicles had a flex fuel capability, and a large proportion of flex fuel vehicles were sold in states where little E85 was available for purchase. Most flex fuel vehicles — 87% — were sold in states where, at most, 1% of gasoline stations carried E85. So in practice, flex fuel had no impact on fuel economy trends.
Instead, flex fuel served as a method by which automakers could more easily comply with CAFE standards. Automakers added this feature to vehicles at a low cost, though hardly anyone used it, because doing so made it easier for them to meet the standards. This was important for domestic automakers, as each of the Big Three would have fallen short of CAFE standards from 1993-2006 without it.
The contention that they used flex fuel capability primarily to meet CAFE standards is further illustrated by the fact that neither Toyota nor Honda has ever produced flex fuel capable vehicles. They did not need to. Recall from Graphics 10 and 11 that Toyota and Honda routinely exceed CAFE standards, while the Big Three automakers just barely met them. Thus, the Big Three needed flex fuel to meet CAFE standards, while flex fuel had no similar value for Toyota and Honda. The favorable treatment of flex fuel for CAFE standards compliance ended in 2015. But since automakers can bank credits to use against CAFE standards for up to five years, they continued to use flex fuel for CAFE standards compliance through 2019.
[*] The U.S. Department of Energy defines E85 this way: “E85 (or flex fuel) is a term that refers to high-level ethanol-gasoline blends containing 51% to 83% ethanol, depending on geography and season.” “Alternative Fuels Data Center” (Office of Energy Efficiency and Renewable Energy), https://perma.cc/VX7R-JR9Z.