Cars, SUVs and pickup trucks sold in the U.S. are quickly becoming more fuel efficient, in large part because Federal rules require them to be. Many domestic and overseas manufacturers meet the rising Corporate Average Fuel Economy (CAFE) standards by trimming vehicle weight and working technical innovations into their new models. But they also have a few regulatory tricks up their sleeves that consumers may not know about. When a carmaker’s fleet of passenger vehicles exceeds the standard in a given year it can bank credits and use them in a subsequent year when it might be falling short. And it can buy or sell credits with other automakers. Finally, if a company’s fleet doesn’t meet the rules it can simply pay a fine to the Federal government and pass that cost along to buyers by raising the price of its vehicles.
CAFE requirements, set by the U.S. Environmental Protection Agency, were flat for two decades because of lack of political will, automaker resistance and consumer apathy. President George Bush bumped them up slightly, then Barack Obama pushed them up significantly. Most companies that sell passenger vehicles in the U.S. are meeting the steadily rising standards (roughly 34 miles per gallon in 2014), putting them on track for increases that will continue through 2025. By then the average fleet will have to get 54.5 mpg (for graphs of the data see my Graphic Science column in the November issue of Scientific American).
In recent years the Big Three American makers—GM, Ford and Chrysler—have just met or slightly exceeded the standards. Companies such as Toyota and Honda have consistently surpassed the benchmarks, banking the difference. If, for example, the standard is 34.6 mpg and a company’s fleet achieves 36.6, it earns a credit it can apply to a subsequent year. A credit equals one-tenth of the difference, so in this case the 2-mpg gap would result in a credit of 0.2 mpg. “The company can also exchange the credits between its car and light truck fleets, but it has to use the credits fairly quickly; they only last a few years,” explains Brandon Schoettle, sustainability project manager at the University of Michigan Transportation Research Institute.
Automakers can earn credits in other ways, Schoettle notes. For example, they can reduce emissions out of their vehicles’ tailpipes, say by improving engine or exhaust systems. They also obtain credits for selling so-called flex-fuel vehicles than can burn gasoline or fuel that has a high ethanol content. Electric cars and hybrid vehicles garner credits too. (For a list of credits held by manufacturers, see here.)
Manufacturers can also trade credits. A company that has banked them can sell them to a company that is coming up short, although “the process is complicated, and it involves money, so companies don’t do this much,” Schoettle says.
A few companies just plan on exceeding the standards, paying resulting fines, and working that cost into the price of its cars. They tend to be manufacturers that make their name on sports cars that have high-power engines. The fines are based on how much the vehicles exceed the standard for a given year and on how many vehicles are sold. Porsche, for example, might sell a few thousands vehicles in the U.S. each month, and Ferrari might sell a few hundred. In 2009 Porsche paid $1.1 million in fines for its passenger cars and Ferrari paid $885,000 for its cars, according to the National Highway Traffic Safety Administration, which keeps track of the penalties (yes, the payments and reporting seem to take a while). Mercedes, however, paid $6.9 million, due primarily to volume of sales.
Odd issues arise, as well. In May 2014 Volvo paid $4.6 million for its 2012 car fleet, and in March 2014 Jaguar paid $9.8 million—not for cars, but for its light trucks, basically it Land Rover line.
Companies do not like to pay fines, of course, but “if they’re really going to have the performance of a sports car,” and the technology that requires, Schoettle says, “they’re just not going to be able to meet CAFE.” In these cases, evidently, what consumers want and are willing to pay for prevails.
Photo courtesy of James Benjamin Bleeker on Wikimedia Commons