On Tuesday, the EPA released draft regulations to increase the Corporate Average Fuel Economy (CAFE) numbers for vehicles sold in the United States. CAFE has been with us since the 1970's and is aimed at the average MPG figure for an automaker's fleet. The idea is for sales of inefficient heavy trucks and SUVs to be offset by sales of more efficient, lighter, vehicles. CAFE has long been a sore point for many automakers, because of the byzantine rules and regulations that define how the numbers are calculated and various perceived loopholes. To make things worse, several states (notably California, where a large percentage of this country's vehicles are sold) adopted their own, stricter, CAFE standards. The automakers lobbied for years against any rise in CAFE standards, arguing that the market should decide what vehicles are produced and sold, not the government.

Well it's a new day for the industry, and with the U.S. government owning 60% of General Motors, it's not likely that GM is going to be lobbying against major government regulations any time soon. The new standard calls for a dramatic increase in CAFE, starting with the 2012 model year and climbing approximately 5% annually. By the 2016 model year, the CAFE standard will be 35.5 mpg for cars. One silver lining for automakers is that the new standard harmonizes with California's standards, allowing the manufacturers to plan with certainty towards one national standard.

There's a cost to achieving this new standard. The EPA estimates it will cost the auto industry nearly $60 billion to comply, while raising the costs for consumers by as much as $1300 per new vehicle. The EPA also says, however, that it would only take 3 years to pay off that cost in lower fuel bills, and that over the life of a vehicle the regulation will save over $3000 through better gas mileage.

Much more significantly, however, the EPA regulation also regulates carbon emissions. You may recall that the ACES bill currently before the Senate is Congress' attempt to cap carbon and implement a carbon trading scheme like the one operating in the E.U. The N.Y. Times says the bill is drifting into a "Potomac fog" and will either be watered down to exclude carbon cap and trade or not pass at all.

If that happens, however, the EPA can still regulate carbon under the Clean Air Act. The new CAFE regulation does that for cars and trucks, and EPA administrator Lisa Jackson said that it was certainly a "possibility" could propose carbon regulations from other industries in the next year. If that happens, a de-facto carbon cap will take shape in the United States, without the flexibility (and potential profits) of a trading scheme. It won't happen that easily though. A weakened auto industry may roll over on a carbon cap, but other industries not so dependent on a government bailout will spend millions and tie up proposed regulations in court for years to come.