In August 2012, the federal government adopted the second of two rules  dramatically increasing the fuel economy and decreasing greenhouse gas emissions from cars and light trucks.
The first rule, adopted in April 2010, raises the average fuel economy of new passenger vehicles to 34.1 miles per gallon (mpg) for model year 2016, a nearly 15 percent increase from 2011. The second rule, finalized in August 2012, will raise average fuel economy to up to 54.5 mpg for model year 2025, for a combined increase of more than 90 percent over 2011 levels. Fuel economy could reach 54.5 mpg if the automotive industry chooses to meet the greenhouse gas target only through fuel economy improvements.
The standards were adopted by the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) with the cooperation of major automakers and the state of California. Together, the standards represent the largest step taken by the federal government directed at climate change. Passenger vehicles were responsible for 17 percent of U.S. greenhouse gas emissions in 2011 , and the August 2012 standards through 2025 will reduce the carbon intensity of these vehicles by 40 percent from 2012 to 2025.
Other important benefits include improving U.S. energy security and saving drivers money.
The rule for model years 2017 to 2025 is projected to cut annual U.S. oil imports by an additional 6 percent by 2025 from what would happen otherwise, or 400,000 barrels per day. When combined with the rule for model years 2012 to 2016, U.S. oil imports are expected to decline by over 2 million barrels per day by 2025 , equivalent to one-half of the oil we import from OPEC countries each day according to EPA.
Most of the U.S. transportation sector relies on oil as the single energy source, meaning any disruption can hurt the economy. A study by EPA and the Oak Ridge National Laboratory  estimated that cutting demand for oil would produce an energy security benefit for the nation's economy of $13.91 (in 2011 dollars) for each barrel saved. In total, the rule for model years 2017 to 2025 is expected to save approximately 4 billion barrels of oil over the life of vehicles sold during this period.
Higher vehicle costs for fuel efficiency improvements will be far outweighed by fuel savings, with the average driver saving about $8,000 net over the lifetime of a model year 2025 car compared to a model year 2010 car.
Another rule adopted in August 2011 established the first-ever fuel economy and greenhouse gas standards for medium- and heavy-duty vehicles, which include tractor-trailers, large pickups and vans, delivery trucks, buses, and garbage trucks. These standards are projected to save a combined $50 billion in fuel costs, 530 million barrels of oil, and 270 million metric tons of carbon emissions over the lifetime of vehicles for model years 2014 to 2018.
President Obama directed  EPA and the Department of Transportation to propose new rules by March 2015, with final implementation a year later, for medium- and heavy-duty vehicles for model years after 2018. According to a C2ES analysis , new standards could improve the fuel economy of these vehicles by an additional 15 percent, reducing annual emissions by 50 million metric tons of CO2-equivalent in 2035.
Transportation is second only to electricity generation as a source of U.S. greenhouse gas emissions.
The federal government has regulated fuel economy through standards for cars and light-duty trucks for decades. The 1973 Arab oil embargo prompted Congress to pass legislation in 1975 that introduced Corporate Average Fuel Economy (CAFE) standards for new passenger vehicles only. The purpose was to improve the fuel economy of the passenger vehicle fleet to reduce oil imports.
NHTSA, an agency within the U.S. Department of Transportation (DOT), administered the original CAFE program while EPA was responsible for establishing the testing and evaluation protocol for assessing compliance and calculating the fuel economy for each manufacturer. These responsibilities are the same today.
CAFE is the sales-weighted average fuel economy (in mpg) of the passenger cars or light-duty trucks for a manufacturer's fleet. See Calculating Light-Duty Vehicle CAFE Then and Now below for details of how EPA determines compliance. NHTSA fines manufacturers that are out of compliance. NHTSA has so far collected almost $819 million in fines  over the life of the CAFE program.
Since 1975, a number of changes have been made to the standards. Figure 1 provides an annotated history of the U.S. CAFE standards. A number of other countries have also instituted fuel economy standards, with most establishing more aggressive targets than the United States. See here  for more details.
FIGURE 1: Fuel economy standard for passenger vehicles from MY1978-2025.
1. 1978-1985: Congress sets car standard (1978-1985)
6. Bush Admin issues new truck targets (2005-2007)
Under the federal Clean Air Act, California is the only state with the ability to set air emission standards for motor vehicles, as long as these standards are as stringent as the federal standards and the state receives a waiver from the EPA. Once California receives an EPA waiver, other states can adopt California's standards .
In 2002, California enacted the Clean Cars Law (AB 1493) to set vehicle emissions standards for greenhouse gases. In April 2007, the Supreme Court ruled that the EPA has the authority to regulate greenhouse gas emissions from the transportation sector under the Clean Air Act. In December 2007, a judge threw out a lawsuit by automakers attempting to block California from implementing AB 1493. The intersection of fuel economy standards and greenhouse gas emission standards was beginning to become clear (see here  for more on California vehicle standards).
Back in December 2005, California had applied for an EPA waiver to implement its greenhouse gas standards. In March 2008, EPA denied California's waiver request. Upon taking office in January 2009, President Barack Obama ordered EPA to reconsider that denial.
In June 2009, EPA granted a waiver allowing California to regulate greenhouse gas emissions from vehicles within the state beginning with model year 2009. On September 15, 2009, EPA and NHTSA issued a joint proposal  to establish new vehicle standards for fuel economy and greenhouse gas emissions for model years 2012 to 2016, which were finalized on April 1, 2010. The joint proposal reflected an agreement among EPA, NHTSA, California, and most major automakers. California promptly agreed to adopt the federal standards in lieu of its own separate standard; and did so again  with the latest standards covering model years 2017 to 2025.
The latest passenger vehicle standards, finalized in August 2012 and published in the Federal Register in October 2012, cover passenger cars, light-duty trucks, and medium-duty passenger vehicles, from model year 2017 to 2025. The standards build off those set in April 2010 for model years 2012 to 2016. The standards are based on the vehicle's footprint, which is a measure of vehicle size (see Calculating Light-Duty Vehicle CAFE Then and Now).
Because NHTSA cannot set standards beyond model year 2021 due to statutory obligations and because of the rules' long time frame, a mid-term evaluation is included in the rule. Thus, standards for model years 2022 through 2025 are considered "augural" by NHTSA. The comprehensive evaluation by both EPA and NHTSA will allow for any compliance changes if necessary for the later years covered by the rule.
As seen in Table 1, the greenhouse gas standard from EPA requires vehicles to meet a target of 163 grams of carbon dioxide equivalent (CO2e) per mile in model year 2025, equivalent to 54.5 mpg if the automotive industry meets the target through only fuel economy improvements.
TABLE 1: Projected Emissions Targets under the Greenhouse Gas Standards (g CO2e/mi)
Combined Cars & Light Trucks
Combined Cars & Light Trucks
As seen in Table 2, the fuel economy standard from NHTSA requires vehicles to meet an estimated combined average of up to 48.7 mpg in 2025. This estimate is lower than the mpg-equivalent of the EPA target for 2025 mentioned above (54.5 mpg) , because it assumes that manufacturers will take advantage of flexibility available under the law designed to reduce the cost of compliance. See Light-Duty Vehicle Program Flexibilities for more information.
TABLE 2: Projected Fuel Economy Standard (mpg).
Combined Cars & Trucks
Combined Cars & Trucks
This table is based on CAFE certification data from model year 2010, a car-truck sales split from the Energy Information Administration's Annual Energy Outlook for 2012 , and future sales forecasts by JD Powers.
NHTSA and EPA released medium- and heavy-duty vehicle standards  for model years 2014 to 2018 in August 2011. Tighter standards for these vehicles for model years after 2018 are due to be proposed by March 2015 and finalized a year later. Table 3 defines the breakdown for medium- and heavy-duty vehicles by weight.
TABLE 3: Vehicle class breakdown for medium- and heavy-duty vehicles
Gross Vehicle Weight Rating (lb)
8,501 – 10,000
10,001 – 14,000
14,001 – 16,000
16,001 – 19,500
19,501 – 26,000
26,001 – 33,000
The medium- and heavy-duty standards for tractor-trailers, buses, etc., are the first of their kind in the world. The standards are divided into three segments:
1. Tractor-trailers, which are responsible for almost two-thirds of fuel consumption from medium- and heavy-duty trucks, will have to achieve about a 20 percent reduction in fuel consumption by model year 2018, or about 4 gallons of fuel every 100 miles traveled. The following table defines the fuel consumption standards for tractor-trailers.
TABLE 4: Fuel Consumption Standards for Tractor-Trailers
2014–2016 Model Year Gallons of Fuel per 1,000 Ton-Mile
2017 Model Year and Later Gallons of Fuel per 1,000 Ton-Mile
2. Heavy-duty pickup trucks and vans will have to improve fuel economy by model year 2018 by 10 percent for gasoline vehicles and by 15 percent for diesel vehicles, or one gallon of fuel per 100 miles traveled. The standards are phased in, increasing in stringency from model years 2014 to 2018. The standards rely on a "work" factor, which considers the vehicle's cargo capacity, towing capabilities, and whether it has 4-wheel drive. Similar to the light-duty standards, the standards are based on the manufacturer's sales mix. To provide flexibility, manufacturers can conform to the standards using one of two phase-in approaches:
3. Vocational vehicles (delivery trucks, buses, garbage trucks) will have to improve fuel economy by 10 percent by model year 2018, or about one gallon of fuel per 100 miles traveled. The following table defines the fuel consumption standards for vocational vehicles.
TABLE 5: Fuel Consumption Standards for Vocational Vehicles.
Light Heavy-Duty Class 2b-5
Medium Heavy-Duty Class 6-7
Heavy Heavy-Duty Class 8
Fuel Consumption Mandatory Standards (gallons per 1,000 ton-miles) Effective for Model Years 2017 and later
Fuel Consumption Standard
Effective for Model Years 2016
Fuel Consumption Standard
Fuel Consumption Voluntary Standards (gallons per 1,000 ton-miles) Effective for Model Years 2013 to 2015
Fuel Consumption Standard
NHTSA and EPA designed the standards based on the kind of work the vehicles undertake. Heavy-duty pickup trucks and vans must meet a standard specified similarly to passenger vehicles, gallons of fuel per mile and grams of CO2e per mile. The other two categories must meet a standard based on the amount of weight being hauled (fuel consumed or grams of CO2e emitted per ton of freight hauled a defined distance).
U.S. fuel economy and greenhouse gas standards exist because individual drivers tend to value savings from fuel economy much less than society as a whole, which leads to more oil consumption than would occur if soceital benefits were taken into account. The benefits to society of higher fuel economy include, but are not limited to, reduced impacts on global climate, improved energy security, and overall consumer savings. But those benefits are not top of mind when a consumer buys a car.
In addition, when making purchasing decisions, most people assume a dollar today is worth more than a dollar in the future since the dollar today can be invested and grow in value over time. The value people assign to a dollar in the future compared to a dollar today is known as the discount rate, or the interest rate they would expect on a dollar invested today. For example, a discount rate of 20 percent means consumers assume they will make 20 percent interest annually on money invested today, which is unlikely. Thus, the higher the discount rate a consumer uses, the more likely a consumer is to invest that money instead of spending it on a product. Consumers can exhibit different discount rates depending on the product.
For passenger cars, David Greene  from Oak Ridge National Laboratory found that the value consumers place on fuel economy savings varies widely, but empirical research reveals a discount rate between 4 and 40 percent. The discount rate that society put on fuel savings is much closer to 4 percent, meaning consumers often substantially undervalue fuel economy compared to society.
Each automaker's fleet-wide average fuel economy consists of three potential fleets: domestic passenger cars, imported passenger cars, and light-duty trucks. (The split between domestic and imported cars exists to support domestic automobile production.) With its focus on fuel efficiency, the standard must capture the fuel economy of each vehicle traveling the same number of miles. The harmonic mean of the fleet accomplishes this task (versus the simpler arithmetic mean). That is, instead of dividing the sum of the fuel economy rates in mpg for each vehicle by the total number of vehicles (the arithmetic mean), the reciprocal of the arithmetic mean is used as follows:
Where Production is the number of vehicles produced for sale for each model and TARGET is the fuel economy target for the vehicle.
Before 2008, the target fuel economy was the same for all vehicles. In 2008, NHTSA changed the target to a bottom-up one based on attributes of each vehicle instead of a top-down uniform target across an entire automaker's fleet. The vehicle footprint target for light-duty trucks through model year 2016 and for automobiles through model year 2025 is determined as follows:
where FOOTPRINT is the product of the vehicle's wheelbase and average track width in square feet, a and b are high and low fuel economy targets that increase from 2012 to 2025 and are constant for all vehicles, and c and d are adjustment factors. Parameter c is measured in gallons per mile per foot-squared, and parameter d is measured in gallons per mile.
For light-duty trucks beginning in model year 2017, an additional variation of the TARGET calculation is considered. This additional variation establishes a "floor" term, which prevents any footprint target from declining between model years. The definitions of parameters a, b, c, and d correspond to e, f, g, h, accordingly. However, the values of these parameters are different.
The idea behind an attribute-based standard is that the level of difficulty of meeting the standards is the same for smaller and larger vehicles. A uniform standard, on the other hand, is easier to meet for smaller vehicles (i.e., those with a smaller footprint) than for larger vehicles.
The EPA and NHTSA programs have a number of features to make compliance for manufacturers more cost-effective, while also encouraging technological innovation like plug-in electric vehicles . Since there are two programs to comply with, the details of both programs are stipulated below.
EPA has also included credit multipliers for CNG equivalent to plug-in hybrid electric vehicles: 1.6 in model year 2017 and a phase down to 1.3 by model year 2021. Unlike electric and fuel cell vehicles, GHG emissions from CNG vehicles will be measured by EPA.
In contrast, NHTSA does not believe it has the legal authority to offer credit multipliers. Existing legal authority does allow NHTSA to incentivize alternative fuels, like natural gas, however, by dividing vehicle fuel economy by 0.15; in other words, an electric, fuel cell, or CNG vehicle that has a fuel economy of 15 mpg-equivalent will be treated as a 100 mpg-equivalent vehicle.