US finalizes lower fuel economy regulations
The US has issued final corporate average fuel economy (CAFE) regulations for 2022 to 2031 model years. We explore how these changes affect the automotive market and the different players within it.
Key changes
The US has issued final corporate average fuel economy (CAFE) regulations for 2022 to 2031 model years. Key changes:
• Reclassifying most SUVs and crossovers as passenger cars
• Eliminating the ability to trade credits to meet compliance
• Ending off-cycle credits
NHTSA positions new rule as making vehicles less expensive
The latest rule adjusts the regulations which were finalized under President Joe Biden and which fundamentally required battery electric vehicles to be a larger part of the market. NHTSA issued proposed changes in December 2025; the final rule has been adjusted but substantially remains.
The agency says changes are a path to making vehicles more affordable, as well as increasing road safety. NHTSA said, “because the finalized standards would lower the cost of newer vehicles, more of the base household travel demand will be satisfied by safer, newer vehicles, and simultaneously, newer vehicles will have lower fuel economy, leading to fewer miles being driven and resulting in a further reduction in fatalities and fuel expenditures.”
Whether the rule will make cars less expensive is a tenuous conclusion. It presumes that automakers will be able to forego installing some expensive emissions technology, but automakers are also responding to consumer demand and developing technologies for a global market. The rule does provide more flexibility for automakers to produce vehicles aligned with consumer demand as much or more than with regulations.
Regulatory interpretation
According to the Trump Administration interpretation, NHTSA only has authority to set corporate average fuel economy regulations based on gasoline-powered and diesel-powered internal combustion engine vehicles and including credits or impact of battery electric or plug-in hybrid electric vehicle sales is not legal under the statutes. This is the basis of the revised rules. It also means that a comparison of this set of rules versus the prior is not an apples to apples comparison.
The new regulations also do not discourage the use of electrification in meeting compliance, and NHTSA does expect some electrification will be necessary for compliance. Automakers with higher levels of electrification may be over-compliant in some vehicles, which will still help the company reach overall compliance. The Department of Energy’s Petroleum Equivalency Factor (PEF) formula for calculating EV equivalency will be used in determining specific automaker compliance.
The change in perspective and rule development means these standards are much less stringent on the face, but they also aim to be feasible without reliance on EVs.
New targets provide path to 34.5 mpg fleet average in 2031 model year
NHTSA’s final rule aims for 0.90% improvement in passenger car fuel economy each year from 2023 through 2029, though in 2030 a 0.3% drop is expected related to vehicle reclassification, and in 2031 model year, the target is for fuel economy to improve by 0.5%. For trucks, NHTSA is requiring a 1.5% improvement each model year from 2023 to 2029, with a 14.9% decline in 2030 model year on reclassification impact, and a 0.5% increase in for 2031 model year.
End of inter-manufacturer credit trading
As part of the overall corporate average fuel economy (CAFE) program, automakers earn credits for every one-tenth of a mile a vehicle is over compliant, multiplied by the number of vehicles the company sold in that compliance category. Automakers can transfer credits between categories in their own vehicle lineups up to a 2-mpg benefit. This continues under the new rules.
NHTSA finalized ending the manufacturer credit trading system with the 2028 model year. Automaker credits -- whether purchased or earned from their own overcompliance -- can be carried over three years backward or five years forward, which has long been a feature of the program.
Credits purchased through the 2027 model year can be carried forward to 2032 model year, which provides transition time for automakers who have used trading credits as a compliance pathway. This change will have more impact in the next decade, aside from over-compliant companies losing the revenue-generation option of selling credits.
A step toward stability?
Though the final rule should bring some stability to the industry, over the past two decades, the regulatory environment has changed with each president; another change cannot fully be ruled out. In addition, the Environmental Protection Agency (EPA) has yet to set future regulations for the Tier 4 particulate emissions; the proposed Tier 4 regulations will be difficult, even if more lenient, and the industry remains concerned that those regulations are finalized soon as well.
Relative to the Tier 4 EPA regulations, which cover particulate tailpipe matter, there is concern that proposed targets for 2029 model year forward may be unattainable without significantly increased EV volume. The EPA has proposed a phase one of holding NMOG and NOX regulations for 2027 and 2028 model year at the 2026 model year level of 30 grams/mile and then dropping to 21 grams per mile in 2029, with further step downs through 2031 model year.