Credit Trading in the US Corporate Average Fuel Economy (CAFE) Standard

The 1975 Energy Policy and Conservation Act authorized a credit banking system for individual auto manufacturers, allowing them to carry credits forward and backward for up to three model years. This program was expanded by the 2007 Energy Independence and Security Act to allow manufacturers to trade credits with each other and to transfer credits between their car and light truck fleets. Based upon the new provisions in EISA, the National Highway Traffic and Safety Administration established a credit trading and transferring scheme to help manufacturers meet their CAFE standard beginning with the 2011 model year.

Put simply, to determine whether a manufacturer is in compliance with the CAFE standard, NHTSA compares the manufacturer’s actual average fuel economy for a given fleet category (car or light truck) against the applicable standard for the same category, based on certified data provided by Environmental Protection Agency. If the manufacturer’s average exceeds the standard, then the manufacturer earns credits. If its actual average fuel economy does not meet the applicable standard, then it has a shortfall for that fleet.

In a shortfall situation, a manufacturer may comply by (1) carrying forward credits earned in a prior model year; (2) transferring credits from one of its fleets (cars or light trucks) to the fleet with the shortfall; (3) trading for credits (purchasing credits) from another manufacturer; (4) providing NHTSA with a plan to make up the difference in the next three years (carry back credits); or (5) paying a civil penalty.

This briefing focuses on the second and third methods of compliance.