As Graphic 12 illustrates, CAFE standards only directly affect the Big Three domestic automakers. Toyota and Honda routinely exceed the standards, while the Big Three barely meet them. This suggests that the cost of complying with CAFE is very low (or nonexistent) for these foreign automakers while the Big Three bear most, if not all, of the compliance cost. Andrew Kleit estimates that increasing CAFE standards from 26 mpg to 28.5 mpg for model year 1989 would have cost GM $1.8 billion and Ford $3.6 billion, but it would have helped Asian firms’ combined profits to grow by $2.5 billion.[*] Not surprisingly, there’s evidence that the CAFE standards hurt the Big Three’s collective market share: Kate Whitefoot, Meredith Fowlie and Steven Skelos find the standards caused a 5-13% decline in market share for the Big Three.[52] Graphic 13 illustrates automakers’ U.S. market share from 1961–2018:
Graphic 12: Auto Market Share by Company in the United States, 1961-2018
The Big Three’s share collectively eroded from about 85% of the U.S. auto market in 1961 to 43% in 2018. There are numerous reasons for this decline, but research suggests that the competitive disadvantage from CAFE standards likely played a role.
Since U.S. automakers are constrained by CAFE standards, they had to reduce their production of midsize and large passenger cars, such as luxury sedans, and increase their production of lighter, more fuel-efficient cars.[53] This made it easier for Toyota and Honda to enter the large luxury sedan market. Toyota, for example, entered this market in 1989 by creating its Lexus luxury car line. Since these automakers already exceeded the CAFE standards, they could begin producing heavier, less fuel-efficient luxury sedans to compete with the Big Three’s offering.
The result is that overall average fuel efficiency for the entire market rose by less than what was predicted by the CAFE standards program. In addition to losing market share, the Big Three saw fewer profits, as they were restricted from producing the cars consumers demanded. This was especially true when gasoline prices were relatively low. Mark Jacobsen estimates that in the first year of a one-mpg increase in CAFE standards, GM, Ford and Chrysler would see a 21.3%, 4.3% and 14.7% loss of profit, respectively. In the 10th year following an increase in the standard, he estimated these loses to be 15.4% for GM, 0.5 % for Ford and 10.2% for Chrysler. In contrast, Toyota and Honda saw a 2.8% and 1.6% increase in profit in the first year of a one-mpg CAFE standard increase and a 4.9% and 3.0% increase in profit in the 10th year after an increase.[54]
European automakers also benefit from the CAFE standards program. European automakers of luxury sedans, such as BMW and Mercedes-Benz, elect to simply pay the noncompliance fine rather than comply with CAFE standards.[55] With their relatively low volume of sales in the U.S. market, their fines are significantly less than those the Big Three would face if they attempted to deploy the same strategy.[†] European automakers took advantage of increased demand for these heavier, less fuel-efficient vehicles, given that the Big Three were less able to serve this market due to CAFE standards. Jacobsen estimates that European automakers saw a 2.0% increase in profits in the first year of a one-mpg increase in the CAFE standard and a 3.9% increase in the 10th year following this increase.
A shift away from passenger cars and toward light trucks has been occurring in the new vehicle market since CAFE standards were implemented. The standard for light trucks is lower, giving automakers a chance to better meet consumer demand while reducing their compliance costs. As Graphic 7 in the previous section illustrates, the share of passenger cars in total new vehicle production peaked at 78% in 1979, the year after CAFE standards took effect.[56] By 2017, only 53% of new vehicles produced were passenger cars, while 47% were light trucks. Light trucks averaged 27% lower fuel efficiency than passenger cars in 2018, which offsets some of the benefit of CAFE standards.
This shift towards light trucks serves to increase profits for foreign automakers. Jacobsen finds that a one-mpg increase in the CAFE standard for light trucks increases Toyota’s and Honda’s sales of light trucks in the U.S. by 2.6% and 1.5%, respectively, while European automaker see their sales of light trucks increase by 2.7%. Meanwhile, GM, Ford and Chrysler see their sales of light trucks fall by 13.8%, 10.2% and 7.8%, respectively.[57]
Given Asian automakers’ superior ability to increase fuel efficiency and the European automakers’ willingness to simply pay the noncompliance fine, CAFE standards serve to increase the sales, market share, and profit of foreign automakers at the expense of the domestic Big Three automakers.
[*] During this period, the CAFE standards benefited Chrysler, with Kleit estimating they help grow the company’s profits by $1 billion. At this time, Chrysler was producing smaller cars than GM or Ford, which allowed it to meet the CAFE standard for its overall fleet and allowed the company to expand its production of larger cars that, by themselves, would not meet the standard. GM and Ford, on the other hand, had to scale back their production of large cars to meet a higher CAFE standard, which helped Chrysler’s competitive advantage, and ultimately, its profit. See Andrew Kleit, “The Effect of Annual Changes in Automobile Fuel Economy Standards,” Journal of Regulatory Economics 2 (1990): 162, https://tinyurl.com/yckkr58p.
[†] There are a couple of potential explanations for why the Big Three does not elect to pay the fine as well. One is that they want to avoid damage to their reputation and the potential legal liability, in the form of shareholder lawsuits, associated with paying the fine. Another is that the fine would substantially cut into domestic automakers’ profits. The Big Three collectively sold 7.6 million vehicles in 2018 in the U.S. Falling one mpg short of the CAFE standards would cost them, collectively, $420 million in fines annually, which is much larger than the fines paid by BMW or Mercedes. The maximum fine these automakers paid was $27 million by BMW in 2001, though in many years they pay much less. See “Summary of CAFE Civil Penalties Collected” in the CAFE Public Information Center, https://tinyurl.com /yc5kk73e. See also David Austin and Terry Dinan, “Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes,” Journal of Environmental Economics and Management 50, no. 3 (2005): 562-582, https://tinyurl.com /sfv8y4su. See also Andrew Kleit (1990), “The Effect of Annual Changes in Automobile Fuel Economy Standards,” Journal of Regulatory Economics 2 (1990): 151-172, https://tinyurl.com /yckkr58p.