In April, the National Highway Traffic Safety Administration (NHTSA) announced new CAFE (Corporate Average Fuel Economy) standards that automakers must meet through 2026. Unfortunately, the new rule is likely to lead to a shortage of new cars in essence. in the coming years while massively increasing the price of battery electric vehicles (EV) as well as internal combustion engine (ICE) cars.
In 1975, CAFE standards were created by the Energy Policy Conservation Act in response to the oil embargo imposed by the Organization of Arab Petroleum Exporting Countries in 1973. CAFE imposes fines on car and truck manufacturers if they fail to meet minimum targets for weighted sales. average fuel consumption, expressed in miles per gallon (mpg).
NHTSA’s new rule calls for a massive 40% increase in mpg by 2026. Fuel efficiency must increase 8% in 2024 and 2025 model year automobiles, and 10% in new year automobiles 2026 model, to achieve a fleet average of 49 mpg for cars and trucks. Historically, most manufacturers have been able to increase mpg year over year by around 3%. So, increasing the average mpg by 10% is a tall order.
Adding insult to injury, the Environmental Protection Agency (EPA) has separately defined carbon dioxide (CO2) vehicle fleet emission limits. By 2026, cars will have to produce an average of 132 grams of CO2 per mile (g/mile) and light trucks average 187g/mile for a fleet average of 161g/mile, a 28% decrease from 2022. If vehicles do not meet this standard, the EPA will not certify them for sale.
The challenge with this decision is that no car with an internal combustion engine, i.e. every automobile that runs on gasoline, currently emits CO2 at this extremely low level. The lowest-emitting car is the 2022 Toyota Prius Eco at 159 g/mile. Trucks like the Ford F-150, Dodge Ram and Chevrolet Silverado, the country’s three most popular automobiles by sales, emit 407 to 550 g/mile, depending on engine size.
To meet these new NHTSA and EPA standards so quickly, manufacturers will need to significantly increase research and development spending, which will increase the price of new ICE-powered vehicles and force manufacturers to build a large portfolio of electric vehicle models.
Another factor that will exacerbate this shortage is the waiver granted to California to exempt the Golden State from Section 209 of the Clean Air Act, which prohibits any state from adopting emissions standards more stringent than the federal standard. California’s Advanced Clean Cars program requires 35% of car sales in the state to be electric vehicle sales by 2026, rising to 50% of all sales by 2030. Additionally, 16 states and the District of Columbia opted for the California program.
NHTSA, EPA and California are essentially pushing manufacturers to phase out production of ICE vehicles in favor of electric vehicles. Naturally, this will accelerate the demand for products needed to manufacture car batteries, which will increase the cost of electric vehicles.. Ford recently announced that due to rising material costs, the Mach E EV costs $25,000 more to manufacture than the equivalent-sized gas-powered Edge. Nationally, the average price of electric vehicles is currently more than $15,000 higher than the cost of gas-powered vehicles, and the gap is widening.
Additionally, we’re likely looking at a shortage of ICE-powered vehicles, as few models will meet the new emissions requirements. Vehicle affordability will be worsened by rising interest rates. With lower sales volume, manufacturers will be forced to raise prices for electric vehicles and gasoline-powered vehicles. Off-market price customers will keep their older, less safe vehicles that have higher emissions and consume more fuel. Of course, the lack of new vehicles will likely exacerbate the shortage of used vehicles, which has led to soaring prices for used vehicles in recent months.
The law of unintended consequences almost always follows even the best-intentioned law or regulation, and it certainly will here. Few people have an idea of the full impact of these regulations, although we will all know soon. My advice is simple: prepare to pay a lot more for a new car in the years to come, if you are able to find one.