The US Department of Transportation (DOT) has put forward a proposal to significantly alter the Corporate Average Fuel Economy (CAFE) standards, aiming to reduce the fuel economy requirements for vehicles sold in the US. This move marks a potential shift in the regulatory landscape for the automotive industry.
On December 5, 2025, the DOT’s National Highway Traffic Safety Administration (NHTSA) released a notice of proposed rulemaking (NPRM) titled the “Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule III for Model Years 2022 to 2031 Passenger Cars and Light Trucks” (SAFE III). The proposed rule suggests a complete overhaul of the CAFE program, which was initially set up by Congress in 1975. According to DOT estimates, the proposed changes could lower the initial cost of new vehicles by about $900 in 2031 compared to current projections.
If implemented, SAFE III would dramatically lower fuel economy targets for passenger vehicles, including light trucks, over a span of ten model years and introduce several major changes to the CAFE framework.
The timeline for the adoption and implementation of these new standards remains unclear. NHTSA is accepting public feedback on the proposal until January 20, 2026. Given the complexity of the proposal and the expected volume of comments, it may take several months for NHTSA to finalize the new standards. Additionally, any finalized standards are likely to face legal challenges that could extend the process by over a year.
Proposed Reduction in Fuel Economy Standards
The NPRM suggests significantly relaxing fuel economy requirements for vehicles produced in model years 2022 through 2031. This unprecedented change would retroactively affect standards for model years 2022 to 2025 and likely through MY 2026, although these vehicles have largely been produced already. Consequently, the revised standards might not impact vehicles from those years but would reset the baseline for future standards. NHTSA has also indicated that it will not enforce the more stringent standards currently in place from MY 2022 onwards, raising legal questions about retroactive changes.
In terms of miles per gallon (MPG), the proposed standards aim for a fleetwide average of about 34.5 MPG by MY 2031.[1] This figure is significantly lower than the current standards, which project an average of 50.4 MPG by MY 2031, and is nearly 6 MPG less than the standards set by the first Trump Administration for MY 2026.
Main Changes to the CAFE Program
The reduced stringency in the proposed standards results from two primary changes: a lower base level for MY 2022 and slower rates of increase for subsequent years. These adjustments are driven by significant policy changes in how “maximum feasible” fuel economy levels are determined, including assumptions about technology adoption, costs, and other variables. Key proposed changes include:
- Excluding electric vehicles and plug-in hybrids from the baseline fleet, which lowers the starting point for calculating future standards.
- Removing consideration of compliance credits in assessing the feasibility of fuel economy standards.
- Reclassifying many light trucks as passenger vehicles and applying a unified set of standards to this expanded category starting in MY 2028.
- Ending the consideration of off-cycle and air-conditioning efficiency improvements for standard-setting from MY 2028 onwards.
From the reset MY 2022 level, the proposal suggests increasing standard stringency by 0.5 percent annually through MY 2026, 0.35 percent for MY 2027, and 0.25 percent annually through MY 2031. These rates are considerably slower than those set by the Biden Administration. The chart below illustrates the annual increases in stringency for current standards compared to the proposed NPRM standards.[2]
Discontinuation of Credit Trading
Starting in MY 2028, NHTSA plans to cease allowing manufacturers to trade compliance credits. This “credit trading” has been an alternative compliance method, especially for electric vehicle manufacturers. The NPRM suggests that credit trading has advantaged EV-exclusive manufacturers and diverted investments from improving fuel economy. The proposal aims to end credit trading to promote steady improvements across fleets. The rule would allow a transition period until MY 2028 for manufacturers to adjust their compliance strategies.
Alignment with Broader Policy Changes
The proposed revisions to the CAFE program align with broader efforts by the Trump Administration and Congress to reshape energy, environmental, and transportation policies. This initiative is part of a larger strategy to roll back policies perceived to hasten the transition from fossil fuels to alternative energy sources. Key changes include:
- Repealing California’s authority to set stricter emissions standards. Congress has disapproved waivers that allowed California to impose stricter standards than federal limits. This move, challenged in court, has created regulatory uncertainty.
- Removing tax incentives for EVs and penalties for CAFE non-compliance. The One Big Beautiful Bill Act (OBBBA) eliminated federal tax credits for EV purchases and set the monetary penalty for CAFE non-compliance to $0, removing financial incentives for compliance.
- Proposing to rescind the GHG endangerment finding. The EPA has proposed to overturn its 2009 finding that serves as the basis for vehicle GHG emissions regulation. If successful, this would remove the federal legal foundation for GHG standards for new vehicles.
- Streamlining deregulatory actions. A new federal memorandum aims to facilitate further deregulatory actions by DOT and other agencies.
Potential Impacts and Continuing Uncertainty
The SAFE III proposal may lead to a significant recalibration of US fuel economy standards. Although a summary chart in the NPRM indicates that fleetwide average fuel economy achieved in MY 2022 could meet new standards through MY 2027, the long-term effects remain uncertain.[3] Given the history of regulatory changes by successive administrations, the industry faces ongoing uncertainty, particularly as it plans its long design and production cycles.
With Congress effectively removing the financial penalties for non-compliance, the motivation for manufacturers to meet CAFE standards has diminished. This legislative change will likely end compliance credit trading even before the NPRM’s proposed date.
The public comment period for the NPRM closes on January 20, 2026, with a public hearing set for January 7, 2026.
[1] NHTSA standards are based on vehicle footprint formulas and do not prescribe fleet average MPG requirements. Actual average MPG of compliant fleets will vary based on vehicle mix and design changes.
[2] The chart is derived from NPRM Table I-1, referring to current standards as the “No-Action Alternative.” See SAFE III NPRM 90 Fed. Reg. 56438, 56446.
[3] SAFE II NPRM Table I-2: Estimated Required and Achieved CAFE Levels (mpg) for Passenger Cars and Light Trucks, Preferred Alternative. 90 Fed. Reg. 56438, 56448.
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