It is exceedingly rare for Congress to pass something that reduces regulations, lowers prices for consumers, and reduces federal deficits by billions of dollars. Thankfully, this is the result of a provision in the One Big Beautiful Bill (OBBB) Act.
Section 40006 of the OBBB addresses the Corporate Average Fuel Economy (CAFE), concerning energy efficiency in automobiles. By zeroing out a penalty on manufacturers for failing to increase efficiency on the government’s arbitrary schedule, Washington is lightening its burden on the economy.
The CAFE Problem
Congress first enacted the CAFE standard in 1975, and it has become increasingly stringent. Key policy rationales for the rule were questionable at the time and further eroded over the subsequent half-century.
First, the notion that consumers are generally indifferent to fuel economy is utterly absurd, since people are sensible enough to balance fuel economy with their practical needs. Because fuel is a significant factor in the operational cost of a vehicle, manufacturers can gain an advantage over comparable offerings from a competitor by increasing engine efficiency.
Second, the U.S. oil and gas industry has invested heavily in exploration and production, allowing the country to shift from being highly dependent on oil imports to being a net exporter. This means that energy security no longer justifies the rule.
Under the Biden administration, the CAFE standard instead became a tool for a radical environmental agenda that sought to force Americans to buy electric vehicles (EVs), which was not the original intent of Congress.
As the federal government increased the fleet efficiency requirement beyond what was possible for gas-powered engines, manufacturers had to increase EV production as a share of all vehicles – regardless of consumer demand – to avoid onerous fines.
Regulatory Relief
By reducing the CAFE fine to zero, the OBBB defangs the regulation and will allow consumers and manufacturers to determine the future of vehicle efficiency. Congress used the same approach to deal with a similarly large federal rule in the 2017 Tax Cuts and Jobs Act.
The “individual mandate” to purchase health insurance was one of the most controversial aspects of the Obamacare suite of legislation. When Congress and President Trump lowered the insurance mandate’s penalty to zero, the mandate became impractical to enforce and is now irrelevant. They have repeated this success with CAFE through the OBBB.
Budgetary Impact
Analysis of the OBBB by the Congressional Budget Office (CBO) estimates that the elimination of the CAFE penalty would reduce federal revenues by roughly $200 million as no fines would be paid by automakers.
The CBO also estimated that eliminating the CAFE penalty would reduce federal spending by $1.2 billion and generate a revenue increase of $1.57 billion, for $2.77 billion in deficit reduction. These effects would be the result of fewer federal tax credits being provided for EVs as manufacturers produce and consumers purchase unsubsidized vehicles. However, the OBBB separately eliminates these EV subsidies completely, producing even more savings.
That said, according to Congressional staff the CBO analysis did not include another near-certain deficit-reducing result of the change.
Under the CAFE regime, the CBO expected a steady reduction in the share of gas-powered vehicles, depressing gas tax revenue and increasing deficits in the Highway Trust Fund (HTF). With the penalty’s removal, gas tax revenue will likely be higher than pre-OBBB projections for future years, thus reducing deficits for both the HTF account and the federal government overall. This effect will be modest at first but could compound into billions of dollars in annual savings down the line.
Winning the Battle
The OBBB’s neutering of the CAFE standard is a win for proponents of consumer choice and deregulation. However, legislators should recognize that the CAFE penalty can return in the future through the reconciliation process. Fully repealing the underlying statute through legislation is the best method for ensuring a long-term victory.
