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Why Did CAFE Regulations Hurt American Automakers? June 3, 2009

Posted by federalist in Regulation, Transportation.

The Corporate Average Fuel Economy (CAFE) regulations were enacted decades ago to improve the fuel efficiency of cars sold in the U.S.  Conventional wisdom is that U.S.-headquartered automakers reacted by turning out fleets of small, weak cars that they had to sell at a loss to boost their average fuel economy.  Meanwhile, foreign nameplates essentially ignored the CAFE standards.

I had always wondered why, and now I’m even more bewildered: It turns out that the civil penalties allowed under the law are a one-time fine of $50 per mpg below the target per vehicle sold.

For example, this year the CAFE standard is 27.5mpg for passenger cars (“light trucks,” a.k.a., SUVs, get their own category and lower standard).  Suppose a car maker ignored the standard and only sold enormous gas-guzzling sedans that on average get 20mpg.  At the end of the year they would owe a fine of $375 per car sold.  Is it worth building fleets of small cars nobody wants in order to avoid a fine of this magnitude?  This is no more than a few percent of the cost of a car!

Obviously the foreign companies got it right by essentially ignoring the disregarding the law, factoring the fine into the price they charge, and selling only what people want to buy at that price: Year after year BMW, Mercedes, Volkswagen, Porsche, et. al. simply coughed up a few million dollars in fines and went about their business.  (One suspects that American car makers easily spent more just lobbying for more loopholes to squeeze through to avoid fines.)



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