CAFE Standards, Cash for Clunkers, and How to Destroy The Used Car Market

There was a hidden gem in the OBBBA (One Big Beautiful Bill Act).

I admit, I wasn't holding out much hope in the OBBBA aside from making the Trump Tax Cuts permanent, but there's one more thing that hits home for me.

The removal of fines related to federal CAFE (Corporate Average Fuel Economy) standards. CAFE standards were an albatross around the next of automobile industry since 1978 (when the rules went into effect).

The CAFE standard rules are still there, but there are no fines imposed for violating those rules. It's basically the same thing they did for the Obamacare insurance mandate. It's still there, but there are no taxes/fines if you violate it.

For 50 years, the federal government has been forcing fuel economy standards on auto companies. If the average fuel economy of the cars sold in a year exceeded a federal standard, the companies had to cough up enormous penalties.

Passed in 1975 as a way to deal with an energy crisis (that was caused by government price controls), “corporate average fuel economy” (CAFE) standards – required the fleet of cars sold by an automaker to achieve an arbitrary miles-per-gallon goal. If they missed the goal, they paid hefty annual fines.

From the beginning, these standards were a disaster, forcing automakers to radically downsize their fleet, which research showed cost thousands of lives because, all things being equal, smaller, lighter cars are less safe than larger ones.

In fact, a 2002 National Academy of Sciences found that these fuel economy standards not only boosted the cost of cars, but may have caused as many as 2,600 more traffic fatalities just in 1993.

The standards, which were ratcheted up year after year, also wildly distorted the car market. To meet them, automakers had to sell more small cars than consumers wanted to buy, which meant heavily discounting them, and then making the cost up by jacking up prices on the bigger cars most buyers wanted or needed. Carmakers routinely paid extravagant fines for failing to meet the standards. Last year, Chrysler had to write a check to Uncle Sam for more than $190 million.

Chrysler didn't have to pay more than $190 million in fines -- their customers did. But it wasn't just Chrysler -- it was pretty much every major car manufacturer in the world -- for a total of $105 billion in fines paid.

CAFE standards were never about increasing efficiency, that was the lie that was told to the public. Check this out from 2012.

The latest "corporate average fuel economy" (CAFE) standards will require the average fuel economy of all the cars an automaker sells to almost double to 54.5 miles per gallon by 2025.

Automakers largely back the new standard. Lots of fuel-saving technologies exist today, with more in the offing, they say. But the industry also admits the mandate will require significant change in the kind of cars automakers build and sell.

"Electric vehicles will play a huge role in getting there," Wade Newton of the Alliance of Automobile Manufacturers told IBD. That's because traditional gas-powered cars today come nowhere near that 2025 goal. And whether they ever will isn't clear.

Even the tiny Smart car gets just 36 miles a gallon. And no hybrid on the market today meets Obama's mileage goal. Plus the rules will require every car, large and small, to dramatically improve its fuel economy.

The Honda Fit would need to get 61 mpg by 2025, according to the National Highway Traffic Safety Administration. That's double what it gets today. How Honda can possibly close that gap is anyone's guess.

In contrast, the EPA gives electric cars huge "miles per gallon equivalent" ratings. The all-electric Nissan Leaf gets a 99 "mpge" rating, the Volt a 60.

How many people out there knew that their 2025 vehicle, whatever that might be, should get 54.5 MPG? Even the newest hybrids "meet the standard" in estimated MPG. But it's doubtful that they would live up to it in real-world scenarios. And the Honda Fit, no way it's going to 61 MPG with an ICE engine. But then, it was never supposed to, Americans were supposed to be forced into ever more expensive hybrid and EV options -- because of Climate Change. Never mind that we were supposed to reach the "critical warming point" -- for the last 40 years -- and it just keeps getting moved forward every 10 years or so.

The idea was to have the public think that CAFE standards were about making ICE (Internal Combustion Engines) more efficient -- but that was never the goal. The true goal was to have ICE engines effectively outlawed through legislation. Legislation that the vast majority of the public was unaware of.

The honest truth is that none of this has anything to do with the environment. If it did, real solutions would be championed -- but they're not -- only hair-brained schemes that result in money changing hands are offered as "solutions." A lot of that money is in the form of government subsidies (read tax dollars).

Isn't it funny how when the government subsidies are axed, the demand for eco-friendly products immediately goes down?

Remember the government program "Cash for Clunkers?" That's where the government ordered dealerships to destroy millions of fully functioning automobiles and effectively collapse the used car market.

I wrote about Cash for Clunkers (3) times in August of 2009, here, here and here.

Cash for Clunkers was a nightmare because it removed all of the cheap used cars from the market, cars that sell for cash. You know the kind, the ones that people just starting out might buy.

Government interference in the economy is like Rumpelstiltskin. There's always a price to pay for messing with the economy.

Sure, you might sell more new cars, but you'll sell them to people who can't really afford them. Stopping those people from advancing economically, and that's never a good thing.

Now that the $105 billion in additional cost which was added to the US car market has been alleviated, perhaps car prices will come down a bit.

What do you think?

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