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«EXECUTIVE SUMMARY In 1987, the fuel economy of the new U.S. car and truck fleet reached a peak of nearly 26 miles per gallon. By 2004, it had fallen ...»

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Fuel Economy Fraud 1

EXECUTIVE SUMMARY

In 1987, the fuel economy of the new U.S. car and truck fleet reached a peak of nearly 26 miles

per gallon. By 2004, it had fallen to 24.4 miles per gallon, hovering around a 20-year low. This

backsliding occurred because fuel economy standards have remained essentially unchanged over the

past 20 years and automakers have increasingly exploited loopholes in Congressional and regulatory language. In addition, a flawed U.S. tax code actually provides financial incentives for consumers to switch to gas guzzlers. While most of these loopholes have been around for decades, government has either turned a blind eye to them or made them larger.

This report documents three major loopholes in fuel economy standards and two major cracks in the tax code, and highlights the possibility that a whole new set of loopholes could be created as the Bush administration considers radical changes to the federal fuel economy standards program.

Finally, we suggest solutions for closing or modifying these loopholes. The six loopholes considered

are:

 The non-passenger loophole (or “truck” loophole)—allows automakers to misclassify minivans, SUVs, station wagons, and even some cars as non-passenger vehicles, thereby qualifying them to meet a lower fuel economy standard. Congress or the National Highway Traffic Safety Administration (NHTSA) must modernize the definition of non-passenger vehicles to end this gaming.

 The 8,500-pound loophole—exempts the largest pickups, vans, and SUVs from fuel economy standards altogether and denies consumers any fuel economy information on these vehicles. NHTSA must move to include these vehicles in the fuel economy program, since standards for them are both practical and necessary.

 The dual-fuel loophole (recently extended by the 2005 energy bill)—gives automakers extra credit toward meeting fuel economy standards in exchange for manufacturing vehicles that can run on alternative fuels but almost never do. Congress should either eliminate this failed program or fix it by tying credits more directly to actual alternative fuel use.

 The luxury SUV tax loophole—provides small-business owners with significantly higher tax breaks for large luxury trucks than smaller trucks or cars, regardless of the owner’s needs.

Congress must create a reasonable limit on tax breaks for larger trucks and update the amounts for smaller vehicles.

 The gas guzzler loophole—excludes SUVs, minivans, and pickups from paying a tax on excessive fuel use despite the fact that tax applied to gas-guzzling cars has effectively reduced their numbers. Congress should require trucks that get less than 17.5 mpg on the CAFE test to pay progressively higher taxes based on the amount of gas they guzzle.

 The next loophole?—attribute-based standards—a potential new set of loopholes that could be created if the government imposes new fuel economy standards based on vehicle attributes without also introducing an oil savings “backstop.” NHTSA must include a backstop in any attribute-based system.

–  –  –

While the most effective step that could be taken to cut U.S. oil dependence is higher fuel economy standards for every car and truck on the road, closing regulatory and tax loopholes is an important first step. Not only would this save oil in the near term, but it would also avoid the erosion of any future fuel economy increases and ensure that the planned benefits are realized.

Below are summaries of each of the five loopholes investigated in this report. A potential new loophole, attribute-based standards, is also discussed. The full body of the report contains additional details on each.

1. The Non-Passenger Vehicle Loophole When Congress created the Corporate Average Fuel Economy (CAFE) program in the 1970s, it distinguished between passenger and non-passenger automobiles. Passenger automobiles were defined as any vehicle manufactured primarily for transporting 10 or fewer people and excluded vehicles capable of off-highway operation. This was done in an attempt to increase the fuel economy of all cars and light trucks while accommodating the extreme cargo-hauling requirements of commercial operators such as farmers and contractors.

This definition backfired, however, as automakers exploited it to replace station wagons with more profitable minivans and SUVs. Because millions of these vehicles are misclassified as nonpassenger vehicles (which are only required to meet a fuel economy standard 25 percent lower than the passenger vehicle standard), an extra 16 billion gallons of gasoline was consumed in 2004 while consumers were stuck with an extra $30 billion in gasoline costs. This loophole is often called the SUV or light-truck loophole as a result.

When CAFE was created, less than 20 percent of automobile sales were classified as nonpassenger vehicles, and more than two-thirds of those were pickups with a seating capacity of no more than three persons. By 2004, the non-passenger class had swelled to nearly 50 percent of sales, despite the fact that pickups and cargo vans—the original non-passenger automobiles—had dwindled to less than 15 percent. This dramatic growth was propelled by the rise of the minivan in the 1980s and the SUV in the 1990s.





These vehicles provided significant profits to automakers because they were basically modifications of relatively inexpensive cargo vans and pickup trucks. This profitability, however, would have been reduced if these vehicles had to meet the stronger safety and fuel economy standards of passenger vehicles, so automakers took advantage of, and even helped expand, loopholes in the fuel economy law to ensure these vehicles were classified as non-passenger autos despite their clear passenger-carrying duties.

–  –  –

the fuel economy of every automobile currently classified as a non-passenger vehicle to well over the passenger vehicle standard of 27.5 mpg.

The simplest solution for Congress would be to eliminate the non-passenger category entirely, since it has outlived its usefulness and has been so badly abused. The simplest approach for the National Highway Traffic Safety Administration (NHTSA) would be to raise the fuel economy of the non-passenger category to the same level as the passenger standard. If done by 2011, this would cut oil demand 1.2 million barrels per day by 2025 and would save consumers nearly $30 billion in that year alone (Table ES-2). All of this could be done while retaining the same vehicle size and acceleration available to consumers today, and with improved safety.

–  –  –

The second problem is that Congress assumed vehicles capable of off-highway operation would not be used primarily for transporting people, as is the case with today’s SUVs. In fact, SUVs are rarely used off-highway; their four-wheel drive merely represents an added safety and utility feature. The simplest and safest solution would be to eliminate off-highway capability as a qualification for non-passenger vehicles. Until Congress is willing to make this change, NHTSA (which is responsible for defining the specific vehicle features that qualify for off-road classification) must tighten the off-highway definition to limit the number of vehicles that qualify.

The third contributor to the non-passenger loophole is the fact that NHTSA oversimplified the passenger and non-passenger categories into passenger cars and light trucks. Because cargo vans and pickups once accounted for the vast majority of non-passenger vehicles, it probably seemed logical to simplify the classifications by applying the term “truck.” That same logic would suggest that a vehicle derived from a truck must also be a non-passenger vehicle, but this is not true of minivans and most SUVs. Nevertheless, vehicles whose rear seats can be removed to make room for cargo—including minivans, smaller two-wheel drive SUVs, and even cars such as the Chrysler PT Cruiser, Dodge Magnum, Ford Freestyle, and Subaru Outback—qualify as nonpassenger vehicles. If NHTSA eliminates this provision, and Congress eliminates the off-highway provision, only pickups and cargo vans would be classified as non-passenger vehicles.

–  –  –

large pickups, vans, and SUVs such as the Ford Excursion, GMC Yukon XL, and Hummer H2, many of which conveniently exceed the 8,500-pound limit by no more than 100 pounds.1 Despite the fact that most off-the-shelf technologies that can be used to improve light-truck fuel economy can also be used on CLDTs, the 8,500-pound barrier has never been lifted. This has left a loophole responsible for an estimated 900 million gallons of excess gasoline and diesel consumption in 2005, costing consumers another two billion dollars. Adding insult to injury, Congress also exempted CLDTs from fuel economy labeling requirements, denying purchasers of these vehicles the information necessary to even consider fuel costs in their decision.

Farms and other businesses that require these bigger vehicles deserve to save money on gasoline and reduce their operating costs, especially with gasoline prices at their all-time high.

With current technology, the fuel economy of CLDTs could be raised from an estimated CAFE value of 17 mpg to at least 27.5 mpg. NHTSA should therefore close this loophole by simply including these vehicles in the existing fuel economy regulations that apply to light trucks. At a minimum, this would eventually erase the current excess gasoline and diesel demand created by these vehicles.

Further, if NHTSA were to increase the light-truck fuel economy standard to match the passenger auto standard, we could save another 177,000 barrels of oil per day and cut consumer fuel costs by nearly four billion dollars (Table ES-3). Congress should also step in and require that all automobiles have posted fuel economy values; until that happens, NHTSA should develop a voluntary fuel economy reporting system.

–  –  –

3. The Dual-Fuel Loophole The dual-fuel loophole allows manufacturers to produce, without penalty, fleets of cars and trucks that average as much as 1.2 mpg below the required CAFE standards. In return, they must sell dual-fuel vehicles—cars and trucks that can run on either gasoline or an alternative fuel.

While this sounds good in theory, most of these vehicles never actually run on alternative fuel. As a result, this loophole will increase U.S. oil dependence by about 80,000 barrels per day in 2005 alone, while enabling automakers to avoid as much as $1.6 billion in CAFE fines to date. And now that this loophole has been extended through 2010 and possibly 2014, the total increase in oil dependence could reach 200,000 barrels per day in 2015.

The problem with the program that created the dual-fuel loophole, the Alternative Motor Fuels Act, was the assumption that if vehicles were capable of running on an alternative fuel, a market would develop for that fuel. More than a decade after the program began, government data show that dual-fuel vehicles use an alternative fuel less than one percent of the time 1 The original congressional language also excludes the Hummer H1, which has a GVWR of 10,200 pounds.

Fuel Economy Fraud 5 (automakers get credit for an alternative fuel being used half the time). This is hardly surprising considering that only about 400 of the nearly 200,000 gas stations in the United States carry the fuel that most dual-fuel vehicles could use: E85 (a blend of 85 percent ethanol and 15 percent gasoline)—and one-third of those are in Minnesota.

Because of this loophole, a dual-fuel vehicle that gets 20 mpg running on gasoline receives credit as if it were achieving better than 30 mpg. The biggest abusers of this loophole— DaimlerChrysler, Ford, and GM—thereby save money they would otherwise have to spend on improvements to their vehicles’ actual fuel efficiency, and avoid paying fines even though their fleets actually fall short of federal fuel economy targets. Ultimately, consumers foot the bill by paying more at the pump.

There are two ways to fix the dual-fuel loophole. The first is to simply eliminate it. NHTSA had the opportunity to end this failed program, but instead opted to extend it through 2008 despite data indicating the Alternative Motor Fuels Act had actually increased oil dependence. The 2005 energy bill took things a step further and extended the loophole through 2010—with an option for NHTSA to extend it yet again, through 2014.

Since Congress is unlikely to retreat on this issue, an alternative solution is to reform the system so it is more closely tied to the actual use of alternative fuels. First, dual-fuel credits could be based on the assumption that alternative fuels are used 20 percent of the time instead of 50 percent. Even with this reduction in credits, the loophole would remain a profitable incentive for automakers to produce dual-fuel vehicles. At the same time, the current 1.2 mpg credit toward an automaker’s overall fleet fuel economy could be split in half: the first 0.6 mpg could still be applied regardless of the actual use of alternative fuels, but the remaining 0.6 mpg would be tied to increased use of alternative fuels. The full 1.2 mpg credit would only be available once the actual use of alternative fuels reaches 20 percent.

This set of reforms would continue to encourage the sale of at least as many dual-fuel vehicles as are currently sold, while reducing the program’s negative impact on oil dependence. It would also encourage automakers to help ensure the vehicles they sell actually end up using alternative fuels. Automakers could invest in increased use of alternative fuels through direct financial support for new E85 fueling stations, local government efforts to create or expand E85 fueling infrastructure, and customer education. These investments could be recouped by continuing to sell dual-fuel vehicles, and automakers would also avoid having to pay fines.

4. The Luxury SUV Tax Loophole Small-business owners who purchase heavier light-duty trucks are eligible for generous tax deductions. Because these deductions are so much larger than those for cars or lighter trucks, this has encouraged many self-employed lawyers, realtors, and accountants to purchase gas-guzzling luxury SUVs “for business use,” regardless of whether such a vehicle has a valid business purpose.



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