Congress Eliminates Corporate Average Fuel Economy (CAFE) Penalties for Passenger Cars and Light Trucks

In one of its many changes, the One Big Beautiful Bill Act, enacted on July 4, 2025, eliminated civil penalties for noncompliance with federal fuel economy standards.  Specifically, Section 40006 of the Act amends the language of the Corporate Average Fuel Economy (CAFE) statute to reset the maximum civil penalty to $0.00.  Although the statute and its implementing regulations otherwise remain in place, this amendment removes any civil penalties for producing passenger cars and light trucks that do not meet fuel economy requirements.

First established in 1975 in response to the gas crisis of the early 1970s, the CAFE statute empowers the Department of Transportation to set average fuel economy standards for vehicle fleets.  Acting by delegation, the National Highway Traffic Safety Administration (NHTSA) has periodically promulgated rules that set CAFE standards for vehicle model years.  Recent rulemakings have attracted considerable attention, including debates over whether standards may account for the production of electric vehicles, based on those vehicles’ petroleum-equivalent fuel economy values calculated by the Department of Energy.

NHTSA finalized its most recent standard-setting rulemaking in 2024, covering passenger cars and certain types of trucks and vans for upcoming model years.  The standard set in that rulemaking culminated in requiring model year 2031 passenger cars to achieve an average fuel economy of about 50.4 miles per gallon.

In January 2025, however, the Trump administration announced that it would revisit NHTSA’s recent standard-setting rulemakings.  And in June, the agency issued an “interpretive rule” revising its view of its statutory authority and announcing that the agency would limit its enforcement of existing standards.

Until the One Big Beautiful Bill Act, the penalties for noncompliance with CAFE standards were substantial and had risen over time.  In 2024, NHTSA set penalties at $17 per vehicle for each tenth of a mile per gallon that a manufacturer’s average fuel economy fell below the applicable standard.  At this penalty level, if a manufacturer produced 100,000 vehicles that fell short of the standard by an average of one mile per gallon, the company would owe $17 million in penalties.  For model years 2011 through 2020, the most recent years for which data is publicly available, manufacturers paid more than $1.1 billion in civil penalties for CAFE noncompliance.

Another consequence of CAFE penalties was the creation of a system of tradeable compliance credits.  A company whose fleet exceeded the standard for a model year would earn credits based on how much it “overachieved.”  The company could then apply the credits to offset penalties for other model years in which did not meet the standard.  Alternatively, the company could sell its credits to other manufacturers to help them avoid penalties.  Historically, companies have paid for the vast majority of their compliance shortfalls with credits rather than civil penalties.  The price of those credits was not set by the government, but rather by negotiations between the manufacturers.  Because CAFE noncompliance will carry no economic consequences going forward, the market for those credits is likely to diminish substantially.

Notably, the newly passed law is not retroactive.  It only eliminates penalties in model years for which the manufacturer has not yet received a notice of a noncompliance penalty.  Manufacturers remain liable for the penalties they have already incurred.  Also notably, the elimination of these civil penalties does not automatically sunset.  These penalties will remain zeroed out unless Congress acts to change the CAFE statute again.

Key Takeaways

• To the extent the prospect of CAFE penalties has driven manufacturers’ production strategy, the elimination of those penalties will change their incentive structure. Companies will face no civil penalties for failing to meet stringent fuel economy requirements.  Conversely, the likely reduction in the value of CAFE compliance credits will affect electric vehicle manufacturers that rely on the sale of those credits as a source of revenue.  The One Big Beautiful Bill Act also disincentivized electric vehicles in other ways, particularly by eliminating tax credits for the purchase of new and used electric vehicles.
• At the same time, automotive manufacturing cannot and does not turn on a dime. Vehicle production cycles are yearslong, manufacturing plans are long-term, and many companies have committed to investments in electric vehicles.  It remains to be seen what effect, if any, this statutory change will have on those plans, given uncertainty about the longevity of this development.
• Along those lines, a future Congress could restore civil penalties without having to reenact the CAFE statute as a whole. Manufacturers that change their production plans on the assumption that there will be no penalties for noncompliance may have to make significant adjustments if the penalties return.
• Moreover, public companies often have corporate policies that require compliance with applicable law. Manufacturers will want to consider whether continued adherence to fuel economy standards is advisable, regardless of the civil penalties or lack thereof.
• Though civil penalties have been eliminated, the CAFE statute otherwise remains on the books. Companies will still have obligations under the statute and its implementing regulations.  Among other things, companies will have to determine their fuel economy averages and submit reports on their CAFE compliance multiple times a year.  A failure to report accurate fuel economy information can lead to investigation and substantial civil fines.  Past instances of allegedly faulty reporting to NHTSA have resulted in major civil penalties.
• The elimination of civil penalties applies only to light vehicles. It does not affect the separate statutory and regulatory fuel efficiency regime for medium- and heavy-duty vehicles.  Fuel efficiency rules for those vehicles remain in place, as do the considerable penalties for noncompliance — up to $51,668 for each vehicle or engine.
• Other regulatory requirements relating to fuel use and engine type will also continue to apply to vehicles. Federal greenhouse gas emissions standards, promulgated by EPA, remain in place, at least for now.  Moreover, Congress recently used its authority under the Congressional Review Act to repeal California’s federal waiver to set more stringent standards, though California and other states have sued to block that action.

The elimination of civil penalties for CAFE noncompliance is a significant development.  Manufacturers and equipment suppliers will want to consider its implications as they make future decisions about their products.

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.