CAFE — corporate average fuel economy — is a term that has been an integral part of the US auto industry since the OPEC oil embargoes of the 1970s. When gasoline was in short supply, it made sense for the government to encourage automakers to design more fuel efficient cars. One way to do that was to impose financial penalties if certain minimum fuel economy targets were not met.
Initially, those targets were quite modest, but over time they have ratcheted up considerably, to the point where the latest rules, which were written as the Biden administration, raise the standard for passenger cars sold in the US to 65 miles per gallon — up from 48 miles per gallon today.
Under the current CAFE rules, a manufacturer is fined $16 for every tenth of a gallon below the standard its cars and trucks achieve. That number is then multiplied by the total number of vehicles that company produced. That can be a big number. According to Brad Plumer and Jake Ewing of the New York Times, General Motors has paid more than $128 million in penalties since 2022, while Stellantis — parent company of Jeep, RAM, and Chrysler — has paid almost $583 million in penalties since 2018, according to government data.
And where does that money go? Most of it has gone to Tesla. Under the CAFE program, manufacturers whose average fuel economy exceeds the current standard can sell credits to those who don’t. Companies that manufacture only electric vehicles — like Tesla and Rivian — are the primary beneficiaries. In fact, some cynics suggest that Tesla was designed from the start as a way to harvest the income from selling those CAFE credits.
In fact, for several quarters, that income is the only thing that has put the company in the black. That has been a significant factor in keeping Tesla’s stock price high, which in turn has made its major shareholder the wealthiest person in human history. Some will be indignant at the insinuation that Musk deliberately hatched a plan to grab the lion’s share of CAFE credit income and others will slam him for being such an opportunist. But the truth of the matter is the system was in place long before Musk or Tesla arrived on the scene. Taking advantage of opportunities is part and parcel of being successful in business.
But the gravy train is about to come to a screeching halt if Republicans in Congress have their way. Revoking, repealing, or redefining the CAFE program would take a prodigious amount of work. Under the Administrative Procedures Act, such revisions require carefully planned steps that included opportunities for public comment and reams upon reams of data. Even then, somebody is sure to challenge the outcome in court. It could be years before the Red Team is able to push its dastardly plan across the finish line.
Keep CAFE, Ditch The Fines
Or you can do an end run and neuter the whole CAFE process in one fell swoop. How? Congress can simply vote to reduce the penalty for noncompliance to zero. That is precisely the plan being circulated in the halls of Congress, according to Plumer and Ewing.
Naturally, there would be winners and losers if the plan actually becomes law. Companies that have worked the hardest to meet the spirit of the CAFE rules would suffer. Toyota is often criticized on these pages for dragging its feet on EVs, but its hybrids are more fuel efficient than most cars from the Detroit automakers. Honda and Hyundai have also been pulling their weight when it comes to bringing efficient cars to market.
GM — which doesn’t need a weatherman to know which way the wind blows — recently cancelled plans to expand the production of electric motors at a facility near Buffalo, NY. Instead, it now says it will invest $888 million into building V-8 gasoline engines for pickup trucks and sport utility vehicles. “This new generation of engines is expected to deliver stronger performance than today’s engines while benefiting fuel economy and reducing emissions,” GM claims.
Crosstown rival Stellantis — which is the perennial winner of the “Least Fuel Efficient Vehicles In America” prize — issued a statement saying it “supports improving fuel efficiency as evidenced by the range of powertrain options in our lineup, but the current standards are out of sync with the market and the Senate proposal is necessary to preserve affordability and freedom of choice.”
This is a favorite trick of the auto industry to blame regulations for every penny of higher sticker costs. It’s never about inflation, or making cars and trucks safer, or adding touchscreens and computers. It’s always the fault of those damned regulations! And there is a sinister undertone to the “freedom of choice” argument. In a perfect world, shouldn’t consumers be “free” to use DDT on their gardens or Freon in their air conditioners? Why can’t we vape on an airplane if we want to or drive on the left side of the road?
What is omitted entirely from the conversation is any thought about not making the Earth so hot that humans will no longer be able to thrive in many places. What about the freedom to exist at all?
But I digress. What you will not hear anywhere else is how the automakers gamed the system. After the Great Economic Meltdown in 2007, GM and FiatChrysler (now Stellantis) went shuffling up the back stairs of the White House looking for help to stave off bankruptcy. The Obama administration said it would do what it could but it wanted something in return — tighter fuel economy standards. The companies readily agreed. In fact, GM promised it would use the money it got from Uncle Sugar primarily to bring more economical cars to market. All it wanted was a little wiggle room on the CAFE standards for larger vehicles.
That made perfect sense to the Obamans, and so the “footprint rule” was brought into play. It allowed larger, heavier vehicles to meet lower fuel economy standards. Almost as soon as the ink dried on the paperwork, GM, Ford, and Stellantis began killing off their passenger cars and putting their money into developing SUVS and pickup trucks. Voila! After watching hundreds of millions of dollars worth of auto industry ads, Americans decided they didn’t want no stinking sedans. They wanted trucks and SUVs — the larger the better.
The Chevrolet Malibu, Cruze, and Impala? Gone. Chevy S-10? Gone. Ford Focus, Fusion, and Ranger? Gone. Chrysler 300 and Dodge Dart? Gone. The Chevy Volt made a brief appearance, but soon sank beneath the waves.
And here’s the other thing. There is no direct connection between CAFE numbers and EPA fuel economy numbers. People hear that cars are supposed to get 65 mpg in 2031 and go crazy. But here’s the thing. THERE ARE NO CARS MADE BY AMERICAN AUTOMAKERS THAT HAVE TO MEET THAT STANDARD ANYMORE! Ford, GM, and Stellantis stopped making them so they wouldn’t have to comply and nobody noticed or cared. And yet, Republicans continue to beat their breasts and play the “Ain’t it awful how the deep state engages in such blatant government overreach” game.
The truth is that the 48 mpg CAFE standard in effect right now has almost no effect on the vehicles for sale at your local Ford, GM, or Stellantis dealer. CAFE numbers are calculated based on complex formulas that are unrelated to real world driving, Because of the enormous slippage between CAFE and EPA, the best cars for sale today get about 32 mpg. Is that so awful?
Tesla Will Take It On The Chin
After we cut through all the political posturing, the company that will be hurt the most by this is Tesla. After spending almost $300 million of his own money, Elon’s reward is that the cars Tesla makes will no longer be eligible for the $7500 federal tax credit because the Big Beautiful Bill is going to eliminate it. And Tesla will no longer be raking in hundreds of millions of dollars in CAFE credits because, if there are no fines, there will be no money to distribute to those who have credits for sale.
There year ago, Musk argued for stricter CAFE penalties. Way to go, Elon. You sure played your cards right this time! You must be so proud of yourself. Now you know what happens when amateurs try to play with professionals.
As a final thought, it will surprise some of you to hear that I am actually glad to see the CAFE scheme get blown out of the water. It was so convoluted and complex that ordinary people had no idea how it worked; it was riddled with exceptions and exclusions; and it made it far too easy for people to play the “government overreach” card.
Instead, the focus should be on educating consumers so they demand more fuel efficient vehicles. Let’s honor the consumers’ right to freedom of choice by allowing them to vote with their wallets for a world that is not melting in part because of the cars and trucks we drive. One of the bedrock principles of a successful business was articulated years ago by Sy Syms, who maintained that, “An educated consumer is our best customer.” As is always the case, if the people will lead, their leaders will follow!
Democrats were too clever by half when they constructed a plethora of rules-based strictures they thought were safe from attack by the opposition. In reality, those rules gave their opponents a club they could use to beat Democrats over the head with and they were only too happy to use it. It’s time to stop doing that and to craft smarter ways to address a warming planet that work toward progressive goals instead of against them. Blowing up the CAFE rules may be the perfect opportunity for progressives to begin creating a new playbook.
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