The Corporate Average Fuel Economy standards: A history of compliance and analysis of manufacturer response in the short run

The centerpiece of the US fuel conservation strategy is the Corporate Average Fuel Economy (CAFE) regulation. This monograph reviews the history of the regulation, past analyses of the intended and unintended effects of the regulation, and presents additional analyses that shed light on the short-run effects of the regulation. Chapter 1 describes the purpose of the regulation and the main arguments for and against the use of fuel economy standards to reduce national fuel consumption. In Chapter 2, the requirements of the regulation are explained, and a brief history is presented, describing manufacturer compliance with the standards using data from the NHTSA and EPA. Chapter 3 reviews past studies that address some of the intended and unintended consequences of CAFE standards. A particular focus of the literature is on the short-run effect of CAFE standards on prices and production. The expected incentive of fuel economy standards is to alter relative prices, shifting the production mix toward higher fuel economy vehicles. Chapters 4 and 5 maintain a short-run focus to further investigate the mix shifting effects of CAFE. Chapter 4 extends past analyses of the mix shifting effect by presenting a simple model of multiproduct duopoly that incorporates economies of scope. Specifically, the cost structure of joint production exhibits variable cost complementarities, which can attenuate the incentives intended by CAFE standards. In Chapter 5, a simulation following Greene (1991) is used to address the tradeoff between the cost of mix shifting and the cost of noncompliance in the short run. Given the design of the regulation's penalty for noncompliance, it is important to understand this short-run tradeoff. Chapter 6 concludes.