Department of Transportation Proposes Dramatic Rollback of Corporate Average Fuel Economy (CAFE) Standards

On December 3, in connection with a highly publicized announcement in the Oval Office and a statement from the White House, the Department of Transportation proposed a rulemaking that would reset Corporate Average Fuel Economy (CAFE) standards for passenger cars and light trucks sold in the United States for model years 2022-2031.  Along with Congress’s recent elimination of civil penalties for CAFE noncompliance, the proposal would roll back more stringent fuel economy targets set in previous Administrations—including the first Trump Administration.  The proposed changes have significant implications for, among other things, the electric vehicle market.

The Proposed CAFE Standard

Under the Energy Policy and Conservation Act of 1975, as amended by the Energy Independence and Security Act of 2007, the Secretary of Transportation is required to set fuel economy standards for manufacturers’ automobile fleets.  Specifically, the National Highway Traffic Safety Administration (NHTSA), acting by delegation from the Secretary, sets the standard based on a “maximum feasible average fuel economy level” and is required to “consider technological feasibility, economic practicability, the effect of other motor vehicle standards of the Government on fuel economy, and the need of the United States to conserve energy.”

In recent years, auto manufacturers have seen CAFE standards rise and fall.  NHTSA completed rulemakings in 2022 and 2024 that would have culminated in an average fleet requirement of 50.4 miles per gallon in 2031.

The new proposal would substantially reduce CAFE requirements, and annual increases, so that they mandate an average of 34.5 mpg for model year 2031.  The proposal also estimates that under this new standard, most manufacturers will easily comply with the new proposed standards and will, in practice, reach an actual industrywide fuel economy average of 41.5 mpg in model year 2031.

The new proposal would mandate fuel economy levels not only below those set by the Biden Administration in 2022 and 2024, but also well below a rulemaking finalized in 2020 during the first Trump Administration.  That 2020 final rule (which was largely superseded by the subsequent Biden rulemakings) would have set CAFE requirements for model years 2021-26 that ended in a 40.4 mpg requirement for model year 2026.  The new proposal, by contrast, would set a fleetwide CAFE requirement of 30.4 mpg for model year 2026, and even by model year 2031 would still be well below the previous Trump requirement for model year 2026.

The following chart shows the dramatically differing levels of overall fleet requirements under the first Trump Administration, the Biden Administration, and the second Trump Administration for model year 2026—the only year for which all three Administrations set CAFE levels:

In a data point touted by the White House, NHTSA’s new proposal estimates that the proposed CAFE standards would “reduc[e] the average price of a vehicle by more than $900 by [model year] 2031.”  In the Preliminary Regulatory Impact Analysis accompanying the rulemaking proposal, NHTSA explained that this number was derived from the possible aggregate technology savings to manufacturers from the relaxed standards and assumed that all of “those savings are passed on to consumers (rather than, for example, to shareholders as increased gains, or to employees as increased compensation).”

The EV Question

The key point of contention in recent Administrations’ differing approaches to fuel economy is electric vehicles (EVs) and the extent to which they can be a factor in setting CAFE standards.  The governing statute for the CAFE program provides that when establishing standards, the agency “may not consider the fuel economy of dedicated automobiles” and “shall consider dual fueled automobiles to be operated only on gasoline or diesel fuel.”  A “dedicated automobile” under the statute is “an automobile that operates only on alternative fuel,” and “alternative fuel” in turn includes electricity.  “Dual fueled automobiles” include plug-in hybrid vehicles.

Although the last Administration disputed whether NHTSA may factor in EVs when setting CAFE standards, the EVs in a manufacturer’s fleet can be and are taken into account when determining the manufacturer’s compliance with an existing standard.  Because they do not consume conventional fuel such as gasoline or diesel, EVs’ fuel economy for CAFE purposes is instead determined by a measure called the petroleum-equivalency factor.  The Department of Energy sets the petroleum-equivalency factor and though it has varied over time and between vehicles, it generally gives EVs a dramatically higher equivalent fuel economy than vehicles that use conventional fuel.  This difference gives a big advantage in CAFE compliance to manufacturers that include EVs in their fleet.

NHTSA’s proposed rule explains that “the standards presented in this proposal significantly differ from those finalized in the 2020, 2022, and 2024 rules because, in formulating those prior standards, NHTSA considered both the fuel economy of EVs and [plug-in hybrid electric vehicles] and compliance credits that could be earned when a manufacturer over-complied with an applicable fuel economy standard impermissibly.”  Thus, as NHTSA noted, the current Administration’s position is that not only the Biden Administration but also the first Trump Administration improperly considered EVs in setting CAFE standards.

The Department of Transportation announcement accompanying the proposal criticized the Biden-era rulemakings for establishing a “backdoor electric vehicle mandate.”  In June 2025, NHTSA published an “interpretive rule” indicating that the agency now did not consider it permissible to account for EVs in setting CAFE standards, and would exercise enforcement discretion while it finalized new standards.

Other Big Changes in the Proposal

Apart from resetting fuel economy standards, the proposal would also eliminate a system of tradeable compliance credits that have long been part of the CAFE program.  Manufacturers that “overachieve” in CAFE compliance—often through EV production—are awarded credits that they can use to make up for deficient fuel economy in other parts of their fleet or for other model years.  In addition, manufacturers with compliance credits have been allowed to sell those credits to other manufacturers to make up for their own compliance shortfalls and avoid civil penalties.

These tradeable credits have, according to NHTSA’s proposal, “resulted in a windfall for EV-exclusive manufacturers that sell credits to other non-EV manufacturers.”  The proposal would eliminate tradeable credits between manufacturers starting in model year 2028, with model year 2027 being the last year that manufacturers can use traded credits to achieve compliance.  Manufacturers will still be able to use compliance credits to make up for their own shortfall in other parts of their fleet or other model years.

The proposal would also, starting in model year 2028, reclassify many vehicles previously categorized as light trucks into the passenger vehicle category.  NHTSA explained that although this change will not affect the overall fleet CAFE levels, which include both light trucks and passenger vehicles, it will result in a higher average fuel economy for each vehicle category broken out because many larger vehicles that are primarily used to carry passengers, such as crossover utility vehicles and minivans, will move into the passenger vehicle category.

Takeaways

• The seesawing CAFE standards across Administrations have been a major challenge for auto manufacturers that have multiyear production cycles and must plan long term. Unless courts provide clarification of the appropriate way to set standards—or unless Congress changes the CAFE statute to provide more certainty—it is entirely possible that a future Administration will make further changes in one direction or the other.  A future Congress could also restore the civil penalties that were eliminated in July.
• A finalized CAFE rule is not imminent. CAFE rulemakings are exceedingly complex—the final rule issued in 2024 took up 415 dense pages in the Federal Register.  The new proposal was released more than 10 months after a January memo from Secretary Duffy instructing NHTSA “to commence an immediate review and reconsideration of all existing fuel economy standards applicable to all models of motor vehicles produced from model year 2022 forward” was issued.  It likely took many late nights for NHTSA’s rulemaking officials to complete the proposal before the end of 2025.  After receiving comments on the proposal, the agency will need additional time to draft and publish a final rule.
• The notice and comment period for this proposal will likely attract numerous comments from companies, organizations, and individual members of the public interested in the outcome of this rulemaking. Any party with a stake in CAFE standards should consider participating in that comment process—both to make its views known as well as to ensure that those views are part of the administrative record that the agency must consider when finalizing the rule.  CAFE rulemakings have regularly been followed by extensive litigation and this one is likely to be no exception.
• Because it covers model years 2022-31, the proposed rule not only applies to future model years, but also would retroactively loosen the requirements that apply to past production fleets. Although manufacturers of course cannot change the fuel economy of vehicles that are already on the road, and the CAFE statute normally only covers standards for future model years, this retrospective change could affect enforcement matters.  NHTSA explained that it was amending the standards for previous years “to rectify placing manufacturers in a situation where they violate unlawful standards.”
• The abolition of tradeable compliance credits is a much less significant development now than it would have been before Congress’s recent elimination of CAFE civil penalties. Unless a future Congress restores the civil penalties, the utility and value of traded credits will be greatly reduced even before the trading program sunsets in model year 2028.
• The rollback in CAFE standards, coupled with recent legislative changes such as Congress’s elimination of civil CAFE penalties and the $7,500 tax credit for EVs, has major implications for the economics of the EV market in the United States. These policy shifts may also accelerate a growing gap in vehicle types sold between the U.S. and the rest of the world.  In recent months, some U.S. manufacturers have announced plans to pull back on the production of EVs as well as batteries for those vehicles.  In the meantime electric vehicles have gained substantial ground in other parts of the world.  For example, more than half of new sales in China are electric vehicles.  And in the first 10 months of 2025, more than 60% of new cars registered in the EU were also fully electric or hybrids.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.