Passenger Vehicle Fuel Economy: Preliminary Observations on	 
Corporate Average Fuel Economy Standards (06-MAR-07,		 
GAO-07-551T).							 
                                                                 
Concerns over national security, environmental stresses, and	 
economic pressures from increased fuel prices have led to the	 
nation's interest in reducing oil consumption. Efforts to reduce 
oil consumption will need to include the transportation sector.  
For example, several Members of Congress have introduced bills	 
proposing changes to the corporate average fuel economy (CAFE)	 
program. This program includes mile per gallon standards for	 
light trucks and cars that manufacturers must meet for vehicles  
sold in this country. This testimony is based on ongoing work for
this committee. This testimony describes (1) recent and proposed 
changes to CAFE standards; (2) observations about the recent	 
changes, the existing CAFE program, and NHTSA's (National Highway
Traffic Safety Administration) capabilities to further		 
restructure CAFE standards; and (3) initial observations about	 
how the CAFE program fits in the context of other approaches to  
reduce oil consumption. To address these issues, we reviewed	 
program legislation, rule makings, and operational documents.	 
Also, we interviewed officials from NHTSA, the Department of	 
Energy, Environmental Protection Agency, the auto industry, labor
unions, and the insurance industry. Finally, we contacted several
recognized experts in fuel economy and safety. Our report will be
issued in July 2007.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-551T					        
    ACCNO:   A66487						        
  TITLE:     Passenger Vehicle Fuel Economy: Preliminary Observations 
on Corporate Average Fuel Economy Standards			 
     DATE:   03/06/2007 
  SUBJECT:   Alternative fuels					 
	     Energy consumption 				 
	     Energy efficiency					 
	     Fuel consumption					 
	     Fuel research					 
	     Motor vehicles					 
	     Program evaluation 				 
	     Standards						 
	     Standards evaluation				 
	     Transportation					 
	     EPA Corporate Average Fuel Economy 		 
	     Program						 
                                                                 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-551T

   

     * [1]Background
     * [2]NHTSA Recently Raised and Restructured Light Truck CAFE Stan

          * [3]NHTSA Recently Increased Standards and Reformed the Light Tr
          * [4]NHTSA Has Not Raised the Car CAFE Standard Since 1990 but Ha

     * [5]A Majority of Industry Stakeholders and Experts Support NHTS

          * [6]Stakeholders and Experts Support Recent Restructuring of Lig
          * [7]Experts Have Recommended Further Refinements to the CAFE Pro
          * [8]NHTSA and Experts Identified Ways to Improve NHTSA Capabilit

     * [9]Other Federal Programs Also Seek to Reduce Oil Consumption i

          * [10]Contact Information

     * [11]GAO's Mission
     * [12]Obtaining Copies of GAO Reports and Testimony

          * [13]Order by Mail or Phone

     * [14]To Report Fraud, Waste, and Abuse in Federal Programs
     * [15]Congressional Relations
     * [16]Public Affairs

Testimony

Before the Committee on Commerce, Science, and Transportation, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Tuesday, March 6, 2007

PASSENGER VEHICLE FUEL ECONOMY

Preliminary Observations on Corporate Average Fuel Economy Standards

Statement of Katherine Siggerud, Director
Physical Infrastructure

GAO-07-551T

Mr. Chairman and Members of the Committee:

We appreciate the opportunity to provide testimony on the nation's
approach to reducing oil consumption through fuel efficiency standards.
Concerns over national security, environmental stresses, and economic
pressures from increased fuel prices have led to the nation's interest in
reducing oil consumption. Several Members of Congress have introduced
bills proposing to mandate fuel economy increases, such as increasing car
standards from the current 27.5 miles per gallon (mpg) to 40 mpg within 10
years. In addition, the President recently announced a nationwide goal to
reduce oil consumption 20 percent from the levels that the administration
projects would otherwise occur by 2017.

Efforts to reduce oil consumption will need to include the transportation
sector, because transportation in the United States currently accounts for
68 percent of the nation's oil consumption. And, within the transportation
sector, 60 percent of the oil consumed is consumed by cars and light
trucks. In the aftermath of the energy crisis of the early 1970s, Congress
developed the Corporate Average Fuel Economy (CAFE) program to help reduce
the fuel used by light trucks and cars. Under the CAFE program,
manufacturers must ensure that the vehicles in their fleets, on average,
meet a specified mpg standard or pay a penalty. The National Highway
Traffic Safety Administration (NHTSA) within the Department of
Transportation (DOT) is primarily responsible for setting and enforcing
CAFE standards. Many changes in automotive technologies and the auto
industry have occurred since the program was designed in the 1970s. These
developments, along with the concerns mentioned above, have led to some
changes in the CAFE program, along with calls to further alter the
program, including raising CAFE standards or revising how the program
applies the standards.

My testimony today will discuss (1) recent and proposed changes to the
CAFE standards; (2) observations about the recent changes, the existing
CAFE program, and NHTSA's capabilities to further revise CAFE standards;
and (3) observations about how the CAFE program aligns with other
approaches and options for reducing oil consumption. My comments are based
on ongoing work for this committee, and therefore my comments reflect our
preliminary observations. We plan to issue our report in July 2007. To
obtain information on the CAFE program and recent and proposed changes to
the program, we reviewed relevant U.S. code and program guidance,
including rule making documents, and interviewed a wide range of program
stakeholders, including NHTSA, the Environmental Protection Agency (EPA),
the Department of Energy (DOE), the applicable automobile workers trade
union (UAW), industry groups representing the automobile manufacturers,
automotive safety experts, insurance industry representatives, and
environmental advocates. To obtain information about recent program
revisions and NHTSA's plans and capabilities to further revise CAFE
standards, we interviewed NHTSA officials, experts in fuel economy and
safety as well as reviewed CAFE program budgets, key studies, and other
documentation. To obtain information on how the CAFE program aligns with
other approaches and options for reducing oil consumption by cars and
trucks, we interviewed experts in fuel economy and other industry
stakeholders. We selected these experts by contacting officials who worked
on a 2002 National Academy of Sciences report on CAFE standards. During
conversations with these experts, we asked them for additional experts we
should contact. We also contacted officials in selected foreign countries
with programs designed to reduce oil consumption for passenger vehicles.
We conducted our work for this statement from September 2006 through
February 2007 in accordance with generally accepted government auditing
standards.

In summary:

           o In 2003, NHTSA raised light truck CAFE standards from 20.7 mpg
           in 2004 to 22.2 mpg in 2007. Subsequently, NHTSA restructured the
           CAFE program for trucks using a method that categorizes light
           trucks based on their size. This new method is meant to help
           address potential safety consequences and other issues that had
           previously been cited as negative consequences of raising CAFE
           standards. The nation's CAFE standard for cars has changed little
           over the past 2 decades, for example CAFE standards for cars have
           not risen above 27.5 mpg since 1990. Furthermore, Congress
           included provisions in DOT's appropriations acts from fiscal years
           1996 through 2001 preventing NHTSA from spending any funds to
           change CAFE standards. The Secretary of Transportation recently
           asked Congress for the ability to restructure CAFE standards for
           cars. More recently, as part of the Administration's plan to meet
           the President's oil reduction goal the Secretary of Transportation
           submitted a plan to Congress that would allow NHTSA to restructure
           the car CAFE program based on an attribute of the vehicle, such as
           size. This plan mirrors NHTSA's recent changes to the light truck
           program. In addition, several Members of Congress have introduced
           legislation to raise CAFE standards.

           o The majority of experts with whom we spoke believe that CAFE
           standards are an important approach to reducing oil consumption;
           and NHTSA's recent reform of the light truck standards addresses
           other concerns, including safety and competition among individual
           car companies, among others. However, these experts also
           identified some further revisions to the CAFE program that could
           be considered in determining ways to further optimize the CAFE
           program, including:

                        o evaluating a size-based approach for cars similar
                        to the one implemented for light trucks to address
                        safety and other concerns and encourage fleet-wide
                        improvements in fuel efficiency;

                        o considering harmonizing light truck and car
                        standards to have an integrated program and reduce
                        incentives to classify vehicles as light trucks;

                        o reassessing the length of time for which standards
                        are set to reduce costs for manufacturers;

                        o allowing trading of CAFE credits between vehicle
                        classes and among manufacturers to provide additional
                        incentives and flexibility in meeting CAFE standards;
                        and,

                        o evaluating the need for the distinction between
                        domestic and foreign vehicles when calculating CAFE
                        to simplify the program and recognize changes in
                        where automobiles are manufactured.

           Further, experts and NHTSA officials also identified ways NHTSA
           could improve its capabilities to revise CAFE standards including:

                        o obtaining additional expertise on automotive
                        engineering to review product plans automakers submit
                        in the CAFE rule-making process;

                        o updating a 2002 National Academy of Sciences study
                        that included information on the potential impact of
                        technologies that could improve fuel economy; and

                        o identifying a valuation of greenhouse gas emissions
                        used in analysis to estimate the costs and benefits
                        of changes to CAFE standards.

           o Finally, while the CAFE program is an important program in the
           nation's efforts to reduce oil consumption, other policies and
           programs exist or have been proposed to help the nation reduce oil
           consumption by the transportation sector that could complement
           CAFE. We will be reporting in more detail on how these options
           align with the CAFE program in July 2007. We will also identify
           policies that potentially decrease the effectiveness of the CAFE
           program in reducing oil consumption. For example, experts with
           whom we spoke identified the program that grants manufacturers a
           1.2 mpg CAFE credit toward meeting its fuel economy standard for
           selling flexible fuel vehicles, even though these vehicles are not
           often run on fuel other than gas.
			  
			  Background

           Congress enacted the 1975 Energy Policy and Conservation Act (the
           Energy Act) during the aftermath of the energy crisis created by
           the Arab oil embargo of 1973 and 1974 to reduce oil consumption by
           the transportation sector in the United States.1 The act
           established what is commonly known as the CAFE program, which
           requires that manufacturers meet separate fuel economy standards
           for passenger cars and light trucks.2 To reduce oil consumption,
           the program uses fuel consumption standards--measured in mpg--that
           cars and light trucks must meet. In addition to decreasing oil
           consumption by increasing the mileage driven on a gallon of gas,
           an increase in the standards also decreases tailpipe emissions,
           including greenhouse gases.

           A manufacturer's compliance is based on a comparison of a
           manufacturer's fleet-wide fuel economy average against the
           appropriate CAFE standard.3 The Energy Act grants NHTSA the
           authority to calculate a car and light truck figure for each
           manufacturer, measuring compliance of domestically produced and
           imported cars, separately. The law considers a vehicle domestic if
           at least 75 percent of the cost of the vehicle to the manufacturer
           is attributable to value added in the United States, Mexico, or
           Canada.

           Congress set a standard for passenger cars (currently 27.5 mpg)
           but did not establish specific CAFE standards for light trucks in
           the Energy Act. Instead, the Energy Act grants NHTSA authority to
           establish both the structure of the CAFE program and the fuel
           economy standards for different classes of light trucks. Rather
           than Congress specifying a mpg target for light trucks as it did
           for passenger cars, NHTSA is required to set standards at the
           maximum feasible level using the same criteria and lead-time
           requirements used in setting standards for passenger cars.
           However, appropriations acts restricted NHTSA from increasing or
           otherwise changing CAFE standards from fiscal year 1996 through
           2001. For fiscal year 2002, Congress did not renew the multiyear
           freeze on NHTSA's CAFE rule-making responsibilities and the agency
           resumed efforts for future rule makings to raise CAFE standards
           for light trucks.

           The CAFE program is generally considered to have contributed to
           increasing the nation's fuel economy. For example, a 2002 NAS
           report found that the CAFE program has been particularly helpful
           in keeping fuel economy above levels to which it might have fallen
           due to the low and declining real price of gas. The NAS study
           estimated that if fuel economy had not improved, gas consumption
           and oil imports would have been about 14 percent higher than they
           were in 2002.

           To help meet CAFE standards, manufacturers may earn credits that
           can be used to help them meet fuel economy standards. For
           instance, if a manufacturer exceeds the required fuel economy in a
           certain year, it earns credits that can be applied to past or
           future model-year fuel economy numbers. Credits, however, cannot
           be passed between manufacturers or among fleets. In addition, the
           Alternative Motor Fuels Act of 1988 encourages the use of
           alternative fuels by giving credits to manufacturers toward
           meeting CAFE standards for producing cars that can run on
           alternative fuels4 in addition to gas. Under the resulting "Dual
           Fuel" program, manufacturers may earn up to a 1.2 mpg credit for
           producing vehicles through model year 2010 that are capable of
           using both regular gasoline and an alternative fuel.5 If a
           manufacturer does not meet the standards and has no credits to
           apply, it must pay a civil penalty.

           In addition to CAFE standards administered by NHTSA, Congress and
           other federal agencies have established programs to reduce oil
           consumption in the transportation sector. These programs include
           (1) vehicle acquisition requirements at federal agencies to
           purchase alternative fuel vehicles, (2) research and development
           of alternative fuels and new vehicle technologies, and (3) tax
           incentives for consumers purchasing fuel efficient vehicles like
           hybrids.

           In addition to NHTSA, other federal entities contribute to the
           nation's efforts to reduce oil consumption. For example, DOE
           coordinates federal research on strategies for reducing oil
           consumption; developing advanced technologies such as fuel cells;
           producing and using alternative fuels and more fuel efficient
           vehicle technology, as well as providing grants for research into
           such areas as plug-in hybrid6 technology and ways to expand the
           production and use of ethanol. In addition, the National Economic
           Council assists the administration in developing its energy
           initiatives.
			  
			  NHTSA Recently Raised and Restructured Light Truck CAFE Standards
			  and Has Not Raised the Car CAFE Standard Since 1990, but Has
			  Requested Authority to Make Changes

           NHTSA has recently raised the light truck CAFE standard and
           reformed the program using a method that categorizes light trucks
           based on their size, doing so in part to address potential safety
           concerns. CAFE standards for cars have not changed since 1990.
           This is due, in part, to past congressional prohibitions against
           NHTSA using any of its appropriation to raise fuel economy
           standards and, more recently, NHTSA's preference to tie raising
           the car standard to restructuring the program. Recently, the
           administration has submitted a proposal to restructure and
           increase passenger car CAFE standards. Members of Congress also
           have submitted proposals to change the CAFE standards.
			  
			  NHTSA Recently Increased Standards and Reformed the Light Truck
			  CAFE Program

           In April 2003, NHTSA released a final rule increasing light truck
           CAFE standards from 20.7 mpg in 2004 to 22.2 mpg in 2007. As part
           of this rule making, NHTSA explained the importance of increasing
           the CAFE standards for light trucks because of the growing market
           share of these vehicles. The impact of the light truck market on
           overall oil consumption in the United States had grown since the
           beginning of the CAFE program as market share for these vehicles
           has increased. Specifically, in 1980, shortly after the program
           began, light trucks composed about 20 percent of the new passenger
           vehicle market in the United States. By 2005, light trucks,
           including minivans, pickup trucks, and sport utility vehicles,
           accounted for about 50 percent of the new passenger vehicle market
           in the United States. The overall fuel economy of the U.S. vehicle
           fleet declined in the 1990s, in part due to the increased market
           share of light trucks. (See fig. 1 showing share of fleet composed
           by light trucks).

           Figure 1: Increased Share of Light Trucks in the U.S. Passenger
           Vehicle Market

           While NHTSA took these steps to raise CAFE standards for light
           trucks, the agency also began investigating reforming the light
           truck CAFE program in part to address safety concerns. A 2002
           National Academy of Sciences (NAS) report7 on the impact of CAFE
           standards8 stated that because the easiest way for an automobile
           manufacturer to increase vehicle fuel economy is to decrease
           vehicle weight, increases to CAFE standards were likely to have a
           negative impact on safety and result in more highway fatalities.
           The report recommended that NHTSA investigate implementing a CAFE
           system based on the attributes of a vehicle, such as size and/or
           weight, where there would be separate standards for vehicles with
           similar attributes.

           In response, NHTSA released a rule in April 2006 that reforms the
           structure of the CAFE program for light trucks and continues to
           increase light truck CAFE standards for model years 2008 to 2011.
           Under the new rule, fuel economy standards are established based
           upon truck size instead of having one average standard for all
           light trucks. Each truck is assigned a fuel economy "target" based
           on a measure of vehicle size called "footprint," the product of
           multiplying a vehicle's wheelbase (the distance from front to the
           rear axles) by its track width (the horizontal distance between
           the tires). (See fig. 2 for a display of how the standard applies
           to trucks of different sizes).

           Figure 2: Application of Reformed Light Truck CAFE Standards to
           Light Trucks of Different Sizes for Model Year 2011

           According to NHTSA officials, the reformed CAFE approach may
           enable the country to achieve larger reductions in oil
           consumption, while enhancing safety and preventing adverse
           economic consequences. Under the current standard, manufacturers
           of smaller light trucks may already exceed the fleet CAFE standard
           and, therefore, have little incentive to increase fuel economy.
           However, under the reformed standards, the required overall fuel
           economy of the light truck fleet will rise over time. In addition,
           the reformed standards include larger vehicles such as sport
           utility vehicles, but not pickup trucks, weighing between 8,500
           and 10,000 pounds that previously were exempt from the CAFE
           program. NHTSA estimates that including these vehicles in the CAFE
           program will save 7.8 billion gallons of fuel over the life of the
           vehicles sold between 2008 and 2011.9 In addition to these
           expected fuel savings, the reformed CAFE standards offer enhanced
           safety by discouraging downsizing of vehicles since, as vehicles
           become smaller, the applicable fuel economy target becomes more
           stringent. In addition, according to NHTSA, the reformed CAFE
           standards spread the regulatory cost burden for fuel economy
           improvements more broadly across the industry instead of
           concentrating it more exclusively on the manufacturers who may
           produce heavier, less fuel efficient vehicles.
			  
			  NHTSA Has Not Raised the Car CAFE Standard Since 1990 but Has
			  Requested Authority to Make Changes

           The 1975 Energy Act established CAFE standards for passenger cars
           for model years 1978 to 1980 and 1985 and thereafter. The
           standards called for manufacturers to produce vehicles averaging
           18 mpg in 1978, rising to 27.5 mpg by 1985.10 In the 1980s, NHTSA
           reduced the CAFE standard for cars, and the agency did so for
           model years 1986 to 1989. NHTSA raised the car CAFE standard back
           to 27.5 mpg for the 1990 model year and has made no changes to the
           standard since then. See table 1 showing CAFE standards over time.

           Table 1: Fuel Economy Standards for Passenger Cars and Light
           Trucks, Model Years 1985 through 2007, in miles per gallon
			  
Model year Passenger cars Light trucks 
1985                 27.5         19.5 
1986                 26.0         20.0 
1987                 26.0         20.5 
1988                 26.0         20.5 
1989                 26.5         20.5 
1990                 27.5         20.0 
1991                 27.5         20.2 
1992                 27.5         20.2 
1993                 27.5         20.4 
1994                 27.5         20.5 
1995                 27.5         20.6 
1996                 27.5         20.7 
1997                 27.5         20.7 
1998                 27.5         20.7 
1999                 27.5         20.7 
2000                 27.5         20.7 
2001                 27.5         20.7 
2002                 27.5         20.7 
2003                 27.5         20.7 
2004                 27.5         20.7 
2005                 27.5         21.0 
2006                 27.5         21.6 
2007                 27.5         22.2 

           Source: NHTSA.

           NHTSA officials cited several reasons for not raising the CAFE
           standard over 27.5 mpg. First, for several years, Congress
           specifically prevented NHTSA from making any adjustments to CAFE.
           Beginning in fiscal year 1996 and lasting through fiscal year
           2001, Congress included language in DOT's appropriations acts
           preventing NHTSA from expending any appropriated funds for rule
           makings to adjust CAFE standards, for either cars or trucks.
           Second, although NHTSA officials state that the agency has the
           legislative authority to raise CAFE standards for cars above 27.5
           mpg, as specified by the Energy Act, these officials stated the
           Energy Act prevents NHTSA from restructuring the program, for
           example, by developing a size-based standard as it recently did
           for light trucks.11 NHTSA is reluctant to raise the car standards
           without restructuring the program as it is concerned about the
           effect on safety, competition between auto manufacturers, and
           other issues.

           However, in 2007 the NHTSA Administrator submitted proposed
           legislation to Congress that, if enacted, would give the Secretary
           of Transportation the authority to restructure and increase CAFE
           standards for cars. The proposal calls for the fuel economy
           standard to be the maximum level that NHTSA believes the
           manufacturers could achieve in a specific model year. The proposal
           would also give NHTSA the power to base the standard on one or
           more vehicle attributes similar to the light truck standard. In
           addition, the proposal calls for a credit trading system among
           manufacturers. If a manufacturer exceeds the mileage standard, it
           can sell its credits to another manufacturer or a broker. The
           proposal does not provide a specific goal or mpg standard; but,
           like the light truck standard, it sets an average fuel economy
           standard that is the maximum feasible average fuel economy level
           that the Secretary of Transportation decides the manufacturers can
           achieve in a specific model year. NHTSA officials indicate that
           they may follow a process similar to the rule-making process they
           followed to recently reform and set new light truck standards.

           In addition to this proposed legislation, several Members of
           Congress have submitted bills that have some similarities to the
           Secretary's proposal but, if enacted, would set a specific fuel
           economy mpg standard for manufacturers to meet, rather than allow
           NHTSA to determine the maximum feasible level. For example, one
           bill calls for cars and light trucks achieve a combined CAFE
           average of 35 mpg by 2019.12 Another bill would raise CAFE
           standards for passenger cars to 40 mpg by 2017.13 These are only
           selected examples of the many bills currently pending in Congress
           on this topic.
			  
			  A Majority of Industry Stakeholders and Experts Support NHTSAï¿½s
			  Recent CAFE Revisions, While Recommending Further Refinements
			  to the CAFE Program and Ways for NHTSA to Improve Its Capability
			  to Revise Standards

           The majority of industry stakeholders and experts with whom we
           spoke supported NHTSA's revisions to the light truck standards,
           and many of them specifically stated that NHTSA should consider
           further refinements to the CAFE program, such as restructuring the
           car CAFE standards based on the size of the vehicle. In addition
           to these refinements, stakeholders and experts identified issues
           about both the appropriate information for NHTSA's rule making
           deliberations and NHTSA's capabilities to most effectively revise
           car CAFE standards. For example the model that NHTSA uses to
           estimate the impact that changes in CAFE standards will have on
           oil consumption does not currently place a dollar value on the
           reduction of carbon emissions. If NHTSA is able to revise car
           standards, it may be an opportunity to consider how to value
           greenhouse gas emissions. Furthermore, many experts indicated that
           the agency would benefit from some additional expertise, for
           example, on automotive engineering to, among other duties, review
           product plans automakers submit in the CAFE rule-making process.
			  
			  Stakeholders and Experts Support Recent Restructuring of Light
			  Truck Standards

           While it is impossible to determine the extent to which NHTSA's
           recent restructuring of the light truck CAFE standards will reduce
           oil consumption since the standards will not take full effect
           until vehicle model year 2011, experts and industry stakeholders
           whom we interviewed generally praised the restructuring. Many,
           including representatives from the insurance industry,
           specifically praised the restructured CAFE program for removing
           most incentives manufacturers may have had to reduce vehicle
           weight in order to meet CAFE standards, and thereby make vehicles
           less safe. A number of experts also noted that the restructured
           standards treated all manufacturers more equitably, in that each
           company would now have an incentive to use additional fuel
           efficient technologies across its light truck fleets, rather than
           only in selected vehicles needing a boost to meet CAFE standards.

           Auto industry representatives with whom we spoke also supported
           the restructuring because it seemed to spread the burden of
           compliance evenly across the industry. Also, industry
           representatives stated that the reformed light truck standard did
           not favor big or small vehicles, so manufacturers could produce a
           range of vehicles that appeal to different segments of the market.

           A few experts with whom we spoke expressed concern regarding the
           reformed standards, stating that NHTSA did not raise CAFE
           standards far enough or that the system could not guarantee oil
           savings because manufacturers could choose to build--and consumers
           might elect to buy--trucks with the largest footprints, which must
           meet lower fuel economy standards than smaller trucks.
			  
			  Experts Have Recommended Further Refinements to the CAFE Program

           Many of the experts with whom we spoke identified several
           refinements to the CAFE program that could improve the program by
           improving safety, making the program more equitable for
           manufacturers, or reducing the costs that manufacturers incur to
           comply with the program. In addition to increasing fuel efficiency
           standards to reduce oil consumption, further refinements may help
           address safety concerns and improve the efficiency of the CAFE
           program. Some of these potential changes include the following:

           o Evaluating footprint approach for cars: Currently, the car
           standard uses a single, mpg standard as opposed to the recently
           reformed light truck standard, which uses a footprint-based
           standard. The majority of the experts with whom we spoke believed
           that changing the structure of the light truck program to a
           footprint-based standard was positive, and many of them
           specifically stated that NHTSA should be allowed to evaluate a
           similar structure for the car program. They believe that such a
           structure will provide similar safety benefits to those expected
           with the revised truck program and would also treat car companies
           more equitably.

           o Harmonizing light truck and passenger vehicle standards:
           Currently, light truck and car standards are separate. However, of
           those experts that expressed an opinion, almost all thought the
           car and light truck CAFE programs should be harmonized if a
           footprint system was instituted for cars as it has been for light
           trucks. Experts noted several advantages of harmonizing the
           programs, including reducing the current incentive for
           manufacturers to reclassify vehicles from cars to light trucks in
           order to be able to comply with a lower CAFE standard. One expert
           also noted that harmonizing cars and light trucks was appropriate,
           given that light trucks are now primarily used as passenger
           vehicles rather than as cargo and agricultural vehicles, as was
           the case when CAFE was instituted.

           o Reassessing the length of time for which CAFE standards are set:
           Currently, NHTSA sets new CAFE standards generally for 2 to 4
           years at a time with the first new year of standards beginning 18
           months after the completion of a rule-making process. Of those
           that expressed an opinion, almost all the experts with whom we
           spoke stated that setting standards for about 7 to 10 years out
           reduces costs for manufacturers by allowing the manufacturers to
           capitalize on normally scheduled plans to redesign models.

           o Allowing CAFE credit trading between vehicle classes and among
           manufacturers: Currently, if manufacturers exceed the required
           fuel economy in a certain year, they earn credits that can be
           applied to past or future model-year fuel economy numbers. Such
           credits applied to previous model years are known as "carry-back"
           credits, while those applied to future model years are known as
           "carry-forward" credits. These credits cannot be traded among
           manufacturers or between fleets (that is, between cars and
           trucks). Of those who expressed an opinion, many of the experts
           with whom we spoke thought that the manufacturers should have
           greater flexibility in trading CAFE credits than is now afforded
           under the "carry-forward carry-back" approach. Economists in
           particular noted that credit trading both between vehicle classes
           within a manufacturer' own fleet and credit trading among
           manufacturers would reduce the compliance costs of CAFE for
           manufacturers, since manufactures for whom it would be very costly
           to achieve a CAFE standard for a particular line could trade with
           another line where exceeding the standard would be less costly.

           o Removing the distinction between domestic versus import vehicles
           to calculate CAFE standards: Currently, the CAFE program
           determines a manufacture's compliance with CAFE car standards for
           its domestic- and foreign-made fleets, separately. According to a
           labor union official, this distinction was designed as a way to
           keep some small car production within the country and thus protect
           workers that produce small cars domestically. Of those who
           expressed an opinion, almost all the experts we spoke to believe
           that CAFE compliance should no longer be calculated separately for
           domestic and import fleets. Industry representatives noted that
           cars produced in Canada and Mexico count as domestic vehicles and
           that many foreign manufacturers make vehicles in the United
           States, thus the distinction is not as meaningful as it once was.
           However, the union believes that if this incentive is removed,
           automakers will continue producing small cars in foreign markets,
           but close domestic plants producing small cars, thus adversely
           impacting U.S. jobs.
			  
			  NHTSA and Experts Identified Ways to Improve NHTSA Capabilities
			  to Reform the CAFE Program

           As discussed above, the Secretary of Transportation has submitted
           legislation to Congress that, if enacted, would give the Secretary
           of Transportation the authority to revise CAFE standards for cars.
           Many of the experts with whom we spoke raised some concerns about
           NHTSA's capabilities to revise CAFE standards. These experts
           identified several ways NHTSA could improve its capabilities to
           revise CAFE standards in the future. In some instances, NHTSA
           officials acknowledged the benefit of these potential
           improvements.

           o Expanding staff expertise and levels: Two experts with whom we
           spoke cited the congressional prohibition on any work at NHTSA to
           increase CAFE standards in the 1990s as a reason the agency lost
           qualified, experienced staff. An expert stated that in the past,
           NHTSA was more aggressive at critiquing cost estimates and product
           plans that automakers submitted when the agency was determining
           how much of an increase in CAFE standards the auto manufacturers
           could handle technologically. Several experts believed that NHTSA
           currently does not have the capacity to do this sort of checking.
           NHTSA officials disagreed with this assessment but stated that
           additional staff with automotive engineering skills would help
           them in future CAFE rule makings and that they will hire an
           additional person with an automotive engineering background. NHTSA
           officials agreed that they are, to a degree, dependent on the
           information automakers provide them about product plans and future
           technological capabilities in enhancing fuel economy.

           o Updating the NAS report: NHTSA officials involved in setting the
           reformed light truck standard told us they relied extensively on
           the 2002 NAS report that evaluated CAFE standards. Specifically,
           these officials cited the report's assessment of the impact on
           fuel economy and cost of emerging automotive technologies as
           crucial to their decision making about how high to raise future
           CAFE standards and how quickly to require future increases. Also,
           NHTSA officials stated that because the report had been peer
           reviewed, it was even more useful and mitigated criticism
           regarding the agency's assumptions. NHTSA officials and several
           experts whom we interviewed supported updating the study, as the
           original information is now 5 years old and rapidly becoming
           outdated, since technologies on automotive technologies change
           quickly, and cost information also varies over time. For example,
           NHTSA officials pointed out that the study did not include an
           assessment of alternative technologies, such as electric hybrids.
           These officials and experts stated that it would be ideal to
           complete such an update before NHTSA issues a new car or light
           truck fuel economy standard, and NHTSA has request funding for
           such a study in its 2008 budget proposal to Congress.

           o Identifying a valuation for greenhouse gas emissions: Several
           stakeholders and experts told us they were concerned about certain
           inputs that NHTSA officials used in the computer model maintained
           by DOT's Volpe Research Center. NHTSA uses this model as a tool to
           help estimate the fuel savings that will result from CAFE
           increases and to estimate how likely it is that the manufacturers
           will comply with future CAFE standards.14 Specifically, some
           experts were critical of the fact that NHTSA and Volpe staff
           assigned a "zero" dollar value to the benefit of reductions in
           greenhouse gas emission that would result from an increased
           standard. NHTSA officials stated they did this because the
           scientific community had not reached a consensus on the value that
           should be assigned to carbon dioxide, though researchers have
           developed a range of values that could be considered in giving a
           dollar value to greenhouse gas reductions. Therefore, according to
           one expert, the results of the model may underestimate the total
           dollar benefits to society of raising CAFE standards, since the
           dollar value of reduced greenhouse gas emissions was not included
           in the model's results. If the car CAFE program is revised, it may
           provide an opportunity to revisit how to value a decrease in
           greenhouse gas emissions through improved fuel efficiency.
			  
			  Other Federal Programs Also Seek to Reduce Oil Consumption in the
			  Transportation Sector

           While the CAFE program is an important program in the nation's
           efforts to reduce oil consumption, other policies and programs
           currently exist to help the nation reduce oil consumption in the
           transportation sector. The White House National Economic Council's
           2006 Advanced Energy Initiative and the Department of Energy's
           Strategic Plan both highlight a number of ongoing programs and
           initiatives in the transportation sector, such as developing and
           deploying alternative fuels that can help reduce oil consumption.
           Other existing programs include CAFE credits for manufacturers of
           "flex fuel" vehicles capable of running on gasoline or alternative
           fuels, a federal vehicle acquisition program requiring federal
           agencies buy vehicles capable of running on alternative fuels,15
           tax incentives for consumers purchasing fuel efficient vehicles
           like hybrids, and taxes to discourage the purchase of cars with
           low fuel efficiency, known as the "gas guzzler" tax. We will be
           reporting in July 2007 on the extent to which these programs
           complement or contradict the goals of the CAFE program. We will
           also report on other proposals to reduce oil consumption by cars
           and light trucks and their potential effects.

           However, many of the experts with whom we spoke have pointed out
           that the program granting manufacturers a maximum of 1.2 mpg CAFE
           credit toward meeting fuel economy standards for flex-fuel
           vehicles, currently may be actually increasing oil consumption
           among passenger vehicles. Specifically, the credit allows
           manufacturers to build these vehicles to meet a lower CAFE
           standard, and this credit is granted regardless of whether
           consumers are actually running the vehicles on gas or E85 (a blend
           of 85 percent ethanol).16 As a result, flex fuel vehicles fueled
           with gasoline are generally less efficient than non-flex fuel
           models because these vehicles have to meet a lower fuel efficiency
           standard than non-flex fuel models. Also, manufacturers have
           generally put this flex-fuel capacity in their larger, less
           efficient models. NHTSA officials pointed out, however, that they
           view this credit as providing an incentive to auto manufacturers
           to bring vehicles to the market that can run on E85 and other
           alternative fuels, which would help expand the infrastructure to
           make these fuels available to consumers.
			  
1Pub. L. 94-163.

2For CAFE purposes, NHTSA currently defines light truck as a four-wheel
vehicle which is designed for off-road operation or which is designed to
perform certain functions such as transporting more than 10 people or
transporting property in an open bed. This includes most pickup trucks,
minivans, and sport utility vehicles. The most recent standards NHTSA set
will apply to trucks up to 10,000 lbs. and pickup trucks up to 8,500 lbs.

3For example, manufacturers meet the standard if the average mpg of all
the vehicles they manufacture in a year meet the CAFE standard for that
year. Manufacturers have had to meet mpg of 27.5 for cars since 1990. EPA
performs the tests that determine what mpg each manufacturer's model
obtains. A model's CAFE figure generally differs from the window sticker a
new vehicle displays showing its fuel economy. The window sticker mpg is
determined through a different methodology than the CAFE figure.

4Alternative fuels are fuels other than conventional fossil fuels and
include ethanol, hydrogen, and batteries.

5NHTSA has the authority to continue this credit through rule making.

6Hybrid technology refers to vehicles that run on both a gasoline-powered
engine and an electric battery. Plug-in hybrids are vehicles that recharge
their battery at battery charging stations.

7"Effectiveness and Impact of Corporate Average Fuel Economy (CAFE)
Standards," National Academy of Sciences (Washington, D.C.: 2002).

8Congress requested that the National Academy of Science, in consultation
with DOT, conduct a study to evaluate the effectiveness and impacts of
CAFE Standards.

971 Fed. Reg. 17566 (2006).

10The Secretary of Transportation issued interim standards for 1981 to
1984.

11The Energy Act includes a so-called legislative veto provision allowing
either the House of Representatives or the U.S. Senate to disapprove any
attempt to increase CAFE standards above the current 27.5 mpg level (or
decrease them below 26.0 mpg). However, since the Energy Act was passed,
the Supreme Court has held that such legislative vetoes are
unconstitutional.

12S. 357, 110th Congress.

13S. 183, 110th Congress.

14NHTSA also uses the model to predict the effect of efficiency-increasing
technologies on specific vehicle models and to calculate the resultant
CAFE levels among vehicle manufacturers resulting from changes in CAFE
standards. The model also predicts impact on energy use, and other
monetary and nonmonetary externalities.

15We recently issued a report on the U.S. Postal Service's attempts to
comply with this federal requirement. GAO, U.S. Postal Service:
Vulnerability to Fluctuating Fuel Prices Requires Improved Tracking and
Monitoring of Consumption Information, [24]GAO-07-244 (Washington, D.C.:
Feb. 16, 2007).

16In 2006, there were about 1,000 E85 stations across the country (mostly
in the Midwest) compared with 176,000 stations selling gas.

           Mr. Chairman, this concludes my statement. I would be pleased to
           answer any questions that you or other Members of the Committee
           may have at this time.
			  
			  Contact Information

           For further information on this statement, please contact
           Katherine Siggerud at (202) 512-2834 or [email protected] .
           Individuals making key contributions to this testimony statement
           include Farah B. Angersola, Catherine Colwell, Colin Fallon, Joah
           G. Iannotta, Elizabeth A. Marchak, and Raymond Sendejas.
			  
			  GAOï¿½s Mission

           The Government Accountability Office, the audit, evaluation and
           investigative arm of Congress, exists to support Congress in
           meeting its constitutional responsibilities and to help improve
           the performance and accountability of the federal government for
           the American people. GAO examines the use of public funds;
           evaluates federal programs and policies; and provides analyses,
           recommendations, and other assistance to help Congress make
           informed oversight, policy, and funding decisions. GAO's
           commitment to good government is reflected in its core values of
           accountability, integrity, and reliability.
			  
			  Obtaining Copies of GAO Reports and Testimony

           The fastest and easiest way to obtain copies of GAO documents at
           no cost is through GAO's Web site ( www.gao.gov ). Each
           weekday, GAO posts newly released reports, testimony, and
           correspondence on its Web site. To have GAO e-mail you a list of
           newly posted products every afternoon, go to www.gao.gov and
           select "Subscribe to Updates."
			  
			  Order by Mail or Phone

           The first copy of each printed report is free. Additional copies
           are $2 each. A check or money order should be made out to the
           Superintendent of Documents. GAO also accepts VISA and Mastercard.
           Orders for 100 or more copies mailed to a single address are
           discounted 25 percent. Orders should be sent to:

           U.S. Government Accountability Office 441 G Street NW, Room LM
           Washington, D.C. 20548

           To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax:
           (202) 512-6061
			  
			  To Report Fraud, Waste, and Abuse in Federal Programs

           Contact:

           Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
           [email protected] Automated answering system: (800) 424-5454 or
           (202) 512-7470
			  
			  Congressional Relations	

           Gloria Jarmon, Managing Director, [email protected] (202)
           512-4400 U.S. Government Accountability Office, 441 G Street NW,
           Room 7125 Washington, D.C. 20548
			  
			  Public Affairs

           Paul Anderson, Managing Director, [email protected] (202)
           512-4800 U.S. Government Accountability Office, 441 G Street NW,
           Room 7149 Washington, D.C. 20548

(542111)

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

www.gao.gov/cgi-bin/getrpt?GAO-07-551T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Katherine Siggerud on (202) 512-2834 or
[email protected].

Highlights of [26]GAO-07-551T , a testimony before the Committee on
Commerce, Science, and Transportation, U.S. Senate

March 6, 2007

PASSENGER VEHICLE FUEL ECONOMY

Preliminary Observations on Corporate Average Fuel Economy (CAFE)
Standards

Concerns over national security, environmental stresses, and economic
pressures from increased fuel prices have led to the nation's interest in
reducing oil consumption. Efforts to reduce oil consumption will need to
include the transportation sector. For example, several Members of
Congress have introduced bills proposing changes to the corporate average
fuel economy (CAFE) program. This program includes mile per gallon
standards for light trucks and cars that manufacturers must meet for
vehicles sold in this country.

This testimony is based on ongoing work for this committee. This testimony
describes (1) recent and proposed changes to CAFE standards; (2)
observations about the recent changes, the existing CAFE program, and
NHTSA's (National Highway Traffic Safety Administration) capabilities to
further restructure CAFE standards; and (3) initial observations about how
the CAFE program fits in the context of other approaches to reduce oil
consumption. To address these issues, we reviewed program legislation,
rule makings, and operational documents. Also, we interviewed officials
from NHTSA, the Department of Energy, Environmental Protection Agency, the
auto industry, labor unions, and the insurance industry. Finally, we
contacted several recognized experts in fuel economy and safety. Our
report will be issued in July 2007.

The National Highway Traffic Safety Administration (NHTSA), the agency
responsible for setting CAFE standards for cars and light trucks--such as
sport utility vehicles, minivans and pickup trucks--recently raised CAFE
standards for light trucks to reduce oil use and restructured this part of
the program to help address safety, among other issues. However, the CAFE
standard for cars has changed little over the past 2 decades. In 1975,
Congress established CAFE standards for cars rising to 27.5 miles per
gallon (mpg) by 1985 but did not allow NHTSA to restructure how car
standards are applied. As part of the administration's plan to meet the
President's recently stated goal to reduce oil use by 20 percent over the
administration's projected levels by 2017, the NHTSA Administrator
submitted a plan to Congress that would allow NHTSA to reform the car CAFE
program in a manner similar to NHTSA's recent changes to the light truck
program.

The majority of experts with whom we spoke stated that CAFE standards are
an important approach to reducing oil consumption and NHTSA's recent
reform of light truck standards addresses previous safety and competitive
concerns, among others. However, they also identified some ways to further
refine the CAFE program such as considering harmonizing light truck and
car standards. Further, NHTSA officials identified ways to improve the
agency's capabilities to administer the program. For example, the agency
would benefit from some additional expertise on automotive engineering.
Finally, several experts observed that the model that NHTSA uses to help
set CAFE standards does not fully account for the impact of greenhouse gas
emissions.

While the CAFE program is an important program in the nation's efforts to
reduce oil consumption, other policies and programs exist to help the
nation reduce oil consumption in the transportation sector. We will report
on how these programs align with the CAFE program in our report to be
issued in July 2007. For example, according to experts with whom we spoke,
CAFE's effectiveness in reducing oil consumption is hampered by a
provision granting manufacturers a 1.2 mpg CAFE credit toward meeting its
fuel economy standard for selling flexible fuel vehicles, even though
these vehicles are not often run on fuel other than gas.

2005 U.S. Oil Consumption within the Transportation Sector (Numbers may
not add to 100% due to rounding)

References

Visible links
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-244
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-551T
*** End of document. ***