Four Reasons the CAFE Rollback is Meaningless

Four Reasons the CAFE Rollback is Meaningless

The July 2018 rollback of the CAFE (Corporate Average Fuel Economy) standards has roused debate, but any change that occurs is likely to be minimal at best.

What are the CAFE standards?

Originally issued in 2007 by the Bush administration and modified in 2012 by the Obama administration, the CAFE standards support fuel efficiency and mitigate greenhouse gas emissions by requiring automakers to meet increasingly stringent requirements, averaged across their model lineups. The standard increases the average gas mileage that the US car park (in the aggregate) must achieve yearly.

In July 2018, the Trump administration announced a rule to amend the Obama-era regulations, freezing the previously announced CAFE regulations for model years 2021-2026 at the 2020 standards. The public comment period has closed and the final ruling is set to be published in March 2019.

As a result, onlookers would expect automakers to drop light but expensive materials – such as aluminum, magnesium, and carbon fiber – from their cars like hot potatoes.

Fuel Economy Still Expected to Grow Through 2020 – and Maybe Beyond

However, automakers are likely to continue lightweighting – reducing fuel consumption by lowering the weight of their vehicles, often by replacing steel with lighter materials – in the foreseeable future for a number of reasons.

First, motor vehicles have long development cycles; it can take several years for a vehicle to move from the design phase to the production line. One reason the rules are being relaxed only for 2020 model years and beyond is that the change in regulations wouldn’t impact vehicles produced before then – those cars have already been designed to meet the standards and manufacturers are unlikely to change them late in the game.

Second, good fuel efficiency can be attractive to consumers, and manufacturers are unlikely to give up a valuable competitive strategy. Manufacturers look for ways to differentiate their fleet, and great gas mileage is a selling point. Furthermore, the consumer shift to SUVs and away from sedans has been primarily spurred by low gas prices, decreasing consumer interest in fuel efficiency in favor of vehicle comfort and function. If gas prices increase markedly or exhibit significant volatility, fuel efficiency will be a stronger selling point, and carmakers will want to ensure their fleet can still compete. In other words, they need to hedge their bets.

Third, because the rule is issued by a government agency, and fuel efficiency and carbon emissions are politically charged topics, the rule is subject to reversal by a future administration with different political goals. The long lead time on the rule change magnifies the uncertainty about a possible reversal, incentivizing manufacturers to move cautiously.

Finally, under the current rules, California receives a waiver to create its own standards, which are more stringent than the federal ones. California will likely sue the EPA and NHTSA if the state’s waiver is revoked. As companies will not wish to manufacture cars for two different markets in the US, they will likely keep designing cars to California standards until the lawsuit and any appeals are resolved.

CAFE Repeal Effects are Minimal

While the CAFE repeal seems like a big deal for automakers selling into the US market, the long production schedules, fuel efficiency incentives, and possibility of policy reversal make the likelihood of automakers taking advantage of the change slim. Should the rule change be preserved past 2020, carmakers may begin to alter their bills of materials and let fuel efficiency fall. Until then, however, any effect on fuel economy is likely to be minimal.

Want to Learn More?

Want to know more about lightweighting? We have you covered! For additional information and analysis of US industry trends, see Sheet Metal: United States, a report published by the Freedonia Focus Reports division of The Freedonia Group. This report forecasts to 2023 US sheet metal demand and shipments in nominal US dollars at the manufacturer level. Total demand is segmented by material in terms of:

  • hot-rolled steel
  • cold-rolled steel
  • aluminum
  • copper
  • other metals such as nickel, titanium, and zinc

Total demand is also segmented by market as follows:

  • transportation equipment
  • building products
  • machinery
  • appliances, electrical equipment, and electronics
  • other markets such as packaging, furniture, and storage products

To illustrate historical trends, total demand, total shipments, the various segments, and trade are provided in annual series from 2008 to 2018.

While you’re there, check out some of our related reports, which include:

About the Author

Owen Stuart is a Market Research Analyst with Freedonia Focus Reports. He conducts research and writes a variety of Focus Reports, and his experience as an analyst covers multiple industries.