Cyrillic Partners

Corporate Average Fuel Economy (CAFE) standards set the minimum gas milage an automobile maker’s fleet can obtain and has been a matter of contention for years.

Congress is expected to vote on higher standards for miles per gallon Wednesday. SFGate has a good quick history of the legislation:

If the bill passes, it would shake up the fuel economy of the U.S fleet, which has been stagnant for two decades. After Congress passed the program in 1975, fuel economy of passenger cars doubled in 10 years, from 14 miles a gallon to 28 miles per gallon by 1986. But as oil prices dropped in the late 1980s, automakers began selling SUVs, trucks and sedans that were bigger and more powerful - features consumers enjoyed.

Critics complained that, without any push from Washington, auto companies have let fuel economy flatline. Current law requires 27.5 miles per gallon for cars - the same as a decade ago - and 22.2 miles per gallon for light trucks.

Generally speaking, the position of V and I is that government should stay out of the way of the “invisible hand” of the marketplace for solving social problems. One of the big problems with legislation of this type is the bizarre incentive structure it establishes. And every piece of legislation has its loop holes.

CAFE is the perfect example. The legislation was designed, in part, to give farmers a break. It recognized that there was a subset of the U.S. population that needed serious trucks for agricultural work and it didn’t want to screw those people over.

But times change (always faster than Congress legislates) and light trucks became increasingly popular for the general public as commuter vehicles. The SUV became a favorite tool for suburban “soccer moms.” And automakers classified SUVs as light trucks, which are held to a lower CAFE standard.

So as SUVs became more popular, the percentage of vehicles on the road that had to actually achieve the 27.5 mpg fleet average decreased. I don’t know the stats, but I’d wager that the mpg average of all vehicles on the road was actually much, much closer to the light truck standard than anyone in Washington ever imagined.

So much for the “standard.”

More on this legislation later.

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