CAFE standards tax heavier, less fuel-efficient vehicles and subsidize lighter, more fuel-efficient ones. In the short run, automakers respond to an increase in CAFE standards by changing the mix of vehicles they sell.[58] In the case of the Big Three, this means increasing their sales of lighter, higher-mileage vehicles and reducing their sales of heavier, less fuel-efficient ones. This can be accomplished by lowering the price of small cars and light trucks relative to the price of large cars and trucks. Kleit estimates that for GM, every dollar by which CAFE standards increase the company’s production costs, the price of small cars falls by $0.84, the price of small trucks falls by $1.17, and the price of a small SUV falls by $0.30. In contrast, the price of a large passenger car rises by $0.23, the price of a large truck rises by $0.25, and the price of a large SUV rises by $1.17.[59]
In the medium to long run, automakers can comply with CAFE standards by reducing a vehicle’s weight and acceleration and making technological improvements that increase fuel efficiency. But these increase the cost of manufacturing the vehicle, which is passed on to consumers in the form of a higher price, particularly in the long run.[60] Federal Reserve Bank of Chicago economists Thomas Klier and Joshua Linn in 2012 estimated that the cost of complying with an increase in CAFE standards is split between consumers and automakers in the short run, or a year or two after the increase, but fall disproportionately on consumers in the long run, or after five years from the increase. In the short run, consumers are estimated to lose $6.5 billion in value from purchasing a new vehicle, even when accounting for improvements to gasoline mileage, while automakers’ profits fall by $9.1 billion. In the medium run, automakers can cut their losses by half while consumers’ losses increase to $7.8 billion. These additional costs represent almost a 10% increase in spending by consumers on new vehicles, according to the U.S. Bureau of Economic Analysis.[61] Altogether, CAFE standards impose about a 6-7% annual loss of value to consumers.
Other research finds similar results. The Congressional Budget Office estimates that consumers pay a disproportionate share of the cost associated with a 10% reduction of gasoline consumption through CAFE standards. It estimates that consumers lose between $2.2 and $2.4 billion in value, while automakers lose between $800 million and $1.2 billion in profits.[62] Jacobsen estimates that the costs of a one-mpg increase in CAFE standards are largely split between automakers and consumers in the first year of the increase, costing consumers $11.2 billion in value and automakers $8.8 billion in profits.[63] After 10 years following the increase, the majority of the cost is passed on to consumers, who lose $24.1 billion; automakers lose $5.5 billion, according to Jacobsen.
The Big Three automakers pay almost all the costs borne by automakers from CAFE standards. Klier and Linn find essentially no change in the profit of the foreign automakers whose fleet easily exceeds the CAFE standards, and they find an increase in profits for other foreign automakers that opt to pay the noncompliance fine. Profits for the Big Three firms, which as a group struggle to meet the standard, fall by $12.5 billion.[64]