Must-know: The US Corporate Average Fuel Economy standards

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Must-know: The fuel economy and its impact on the US oil industry (Part 2 of 6)

(Continued from Part 1)

U.S. CAFE standards

In the U.S., fuel economy is expressed in terms of miles per gallon (or mpg). Every new car and light-duty truck sold in the United States is required to have a fuel economy label.

An example of a fuel economy label is shown above. The label contains the mpg estimates that are designed to help consumer’s compare and shop for vehicles. It’s also used to monitor compliance with mandated fuel economy standards, such as the Corporate Average Fuel Economy (or CAFE) standard.

CAFE regulations, first enacted by Congress in 1975, require vehicle manufacturers like Ford Motors (F), General Motors (GM), Honda Motors (HMC), and Tata Motors (or TTM) to comply with the fuel economy standards set by the Department of Transportation (or DOT). It’s important to note that most of these companies are a part of the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total International Stock ETF (VXUS).

The Environmental Protection Agency (or EPA) is responsible for administering the CAFE program. It provides all of the fuel economy data that is used on the fuel economy label, or window sticker, on all new cars and light trucks. The National Highway Traffic and Safety Administration (or NHTSA), a part of DOT, is responsible for monitoring CAFE compliance. It’s authorized to assess penalties based on the information EPA supplies and to modify the standards.

This data is also used by the U.S. Department of Energy (or DOE) and the Internal Revenue Service (or IRS) to collect “gas guzzler” taxes.

The Fuel Economy Guide

The Fuel Economy Guide is an annual publication jointly published by the DOE and the EPA. The guide contains the fuel economy estimates for all cars and light trucks in the U.S. It also includes detailed information about alternative fueled vehicles, the range of fuel economy for different classes of vehicles, a list of fuel economy leaders, and tips for improving fuel economy.

Gas Guzzler Tax

The Gas Guzzler Tax is imposed on manufacturers of new cars that don’t meet required fuel economy levels, to discourage the production and purchase of fuel-inefficient vehicles. The tax is collected by the IRS and paid by the manufacturer. The amount of the tax is displayed on the vehicle’s fuel economy label.

The following sections in the series discuss fuel economy standards in the U.S. in greater detail.


Continue to Part 3

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