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Executive Summary
In the wake of the 1973 oil crisis, the U.S. Congress
passed the Energy Policy and Conservation Act of 1975, with
the goal of reducing the country's dependence on foreign
oil. Among other things, the act established the Corporate
Average Fuel Economy (CAFE) program, which required
automobile manufacturers to increase the sales-weighted av-
erage fuel economy of the passenger car and light-duty truck
fleets sold in the United States. Today, the light-duty truck
fleet includes minivans, pickups, and sport utility vehicles.
Congress itself set the standards for passenger cars, which
rose from 18 miles per gallon (mpg) in automobile model
year (MY) 1978 to 27.5 mpg in MY 1985. As authorized by
the act, the Department of Transportation (DOT) set stan-
dards for light trucks for model years 1979 through 2002.
The standards are currently 27.5 mpg for passenger cars and
20.7 mpg for light trucks. Provisions in DOT's annual ap-
propriations bills since fiscal year 1996 have prohibited the
agency from changing or even studying CAFE standards.
In legislation for fiscal year 2001, Congress requested that
the National Academy of Sciences, in consultation with the
Department of Transportation, conduct a study to evaluate
the effectiveness and impacts of CAFE standards.) In par-
ticular, it asked that the study examine the following, among
other factors:
1. The statutory criteria (economic practicability, tech-
nological feasibility, need for the United States to con-
serve energy, the classification definitions used to dis-
tinguish passenger cars from light trucks, and the effect
of other regulations);
2. The impact of CAFE standards on motor vehicle
safety;
3. Disparate impacts on the U.S. automotive sector;
iConference Report on H.R. 4475, Department of Transportation arid
Related Agencies Appropriations Act, 2001. Report 106-940, as published
in the Congressional Record, October 5, 2000, pp. H8892-H9004.
1
4. The effect on U.S. employment in the automotive
sector;
5. The effect on the automotive consumer; and
6. The effect of requiring separate CAFE calculations for
domestic and nondomestic fleets.
In response to this request, the National Research Coun-
cil (NRC) established the Committee on the Effectiveness
and Impact of Corporate Average Fuel Economy (CAFE)
Standards. In consultation with DOT, the NRC developed a
statement of work for the committee. The committee's work
was to emphasize recent experience with CAFE standards,
the impact of possible changes, and the stringency and/or
structure of the CAFE program in future years. The commit-
tee held its first meeting in early February 2001. In effect,
since the congressional appropriations language asked for
the report by July 1, 2001, the committee had less than 5
months (from February to late June) to complete its analysis
and prepare a report for the National Research Council's ex-
ternal report review process. In its findings and recommen-
dations, the committee has noted where analysis is limited
and further study is needed.
Following the release of the Republication copy of this
report in July 2001, the committee reviewed its technical
and economic analyses. Several changes were made to the
results, as reported in a letter report released in January 2002,
which is reprinted in Appendix F below. These changes have
been incorporated in this report also.
The CAFE program has been controversial since its in-
ception. Sharp disagreements exist regarding the effects of
the program on the fuel economy of the U.S. vehicle fleet,
the current mix of vehicles in that fleet, the overall safety of
passenger vehicles, the health of the domestic automobile
industry, employment in that industry, and the well-being of
consumers. It is this set of concerns that the committee was
asked to address.
These concerns are also very much dependent on one an-
other. For example, if fuel economy standards were raised,
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EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS
the manner in which automotive manufacturers respond
would affect the purchase price, attributes, and performance
of their vehicles. For this reason, the mix of vehicles that a
given manufacturer sells could change, perhaps resulting in
a greater proportion of smaller and lighter vehicles; this, in
turn, could have safety implications, depending on the even-
tual mix of vehicles that ended up on the road. If consumers
are not satisfied with the more fuel-efficient vehicles, that in
turn could affect vehicle sales, profits, and employment in
the industry. Future effects would also depend greatly on the
real price of gasoline; if it is low, consumers would have
little interest in fuel-efficient vehicles. High fuel prices
would have just the opposite effect. In addition, depending
on the level at which fuel economy targets are set and the
time the companies have to implement changes, differential
impacts across manufacturers would probably occur depend-
ing on the types of vehicles they sell and their competitive
position in the marketplace. Thus, understanding the impact
of potential changes to CAFE standards is, indeed, a difficult
and complex task.
In addition to the requirement that companies meet sepa-
rate fleet averages for the automobiles and light-duty trucks
they sell, there are other provisions of the CAFE program
that affect manufacturers' decisions. For example, a manu-
facturer must meet the automobile CAFE standard separately
for both its import and its domestic fleet (the two-fleet rule),
where a domestic vehicle is defined as one for which at least
75 percent of its parts are manufactured in the United States.
Also, CAFE credits can be earned by manufacturers that pro-
duce flexible-fuel vehicles, which can run interchangeably
on gasoline or an alternative fuel, such as ethanol.
Why care about fuel economy at all? It is tempting to say
that improvements in vehicle fuel economy will save money
for the vehicle owner in reduced expenditures for gasoline.
The extent of the annual saving will depend on the level of
improvement in the fuel economy (in miles per gallon of
gasoline), the price of gasoline, and the miles traveled per
year, as well as on the higher cost of the vehicle attributable
to the fuel economy improvement. While a strong argument
can be made that such savings or costs are economically
relevant, that is not by itself a strong basis for public policy
intervention. Consumers have a wide variety of opportuni-
ties to exercise their preference for a fuel-efficient vehicle if
that is an important attribute to them. Thus, according to this
logic, there is no good reason for the government to inter-
vene in the market and require new light-duty vehicles to
achieve higher miles per gallon or to take other policy mea-
sures designed to improve the fuel economy of the fleet.
There are, however, other reasons for the nation to con-
sider policy interventions of some sort to increase fuel
economy. The most important of these, the committee be-
lieves, is concern about the accumulation in the atmosphere
of so-called greenhouse gases, principally carbon dioxide.
Continued increases in carbon dioxide emissions are likely
to further global warming. Concerns like those about climate
change are not normally reflected in the market for new ve-
hicles. Few consumers take into account the environmental
costs that the use of their vehicle may occasion; in the par-
lance of economics, this is a classic negative externality.
A second concern is that petroleum imports have been
steadily rising because of the nation's increasing demand for
gasoline without a corresponding increase in domestic sup-
ply. The demand for gasoline has been exacerbated by the
increasing sales of light trucks, which have lower fuel
economy than automobiles. The high cost of oil imports
poses two risks: downward pressure on the strength of the
dollar (which drives up the costs of goods that Americans
import) and an increase in U.S. vulnerability to macroeco-
nomic shocks that cost the economy considerable real out-
put. Some experts argue that these vulnerabilities are an-
other form of externality that vehicle purchasers do not factor
into their decisions but that can represent a true and signifi-
cant cost to society. Other experts take a more skeptical view,
arguing instead that the macroeconomic difficulties of the
1970s (high unemployment coupled with very high inflation
and interest rates) were due more to unenlightened monetary
policy than to the inherent difficulties associated with high
oil prices. Most would agree that reducing our nation's oil
cat -
import bill would have favorable effects on the terms of
trade, and that this is a valid consideration in deliberations
about fuel economy.
The committee believes it is critically important to be
clear about the reasons for considering improved fuel
economy. Moreover, and to the extent possible, it is useful to
try to think about how much it is worth to society in dollar
terms to reduce emissions of greenhouse gases (by 1 ton,
say) and reduce dependence on imported oil (say, by 1 bar-
rel). If it is possible to assign dollar values to these favorable
effects (no mean feat, the committee acknowledges), it be-
comes possible to make at least crude comparisons between
the beneficial effects of measures to improve fuel economy
on the one hand, and the costs (both out-of-pocket and more
subtle) on the other.
In conducting its study, the committee first assessed the
impact of the current CAFE system on reductions in fuel
consumption, on emissions of greenhouse gases, on safety,
and on impacts on the industry (see Chapters 1 and 2~. To
assess the potential impacts of modified standards, the com-
mittee examined opportunities offered by the application
of existing (production-intent) or emerging technologies,
estimated the costs of such improvements, and examined
the lead times that would typically be required to introduce
such vehicle changes (see Chapter 3~. The committee re-
viewed many sources of information on technologies and
the costs of improvements in fuel economy; these sources
included presentations at its meetings and available reports.
It also used consultants under its direction to facilitate its
work under the tight time constraints of the study. Some of
the consultants'work provided analyses and information
that helped the committee better understand the nature of
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EXECUTIVE SUMMARY
previous fuel economy analyses. In the end, however, the
committee conducted its own analyses, informed by the
work of the consultants, the technical literature, and pre-
sentations at its meetings, as well as the expertise and judg-
ment of its members, to arrive at its own range of estimates
of fuel economy improvements and associated costs. Based
on these analyses, the implications of modified CAFE stan-
dards are presented in Chapter 4, along with an analysis of
what the committee calls cost-efficient fuel economy lev-
els. The committee also examined the stringency and struc-
ture of the current CAFE system, and it assessed possible
modifications to it, as well as alternative approaches to
achieving higher fuel economy for passenger vehicles,
which resulted in suggestions for improved policy instru-
ments (see Chapter 5~.
FINDINGS
Finding 1. The CAFE program has clearly contributed to
increased fuel economy of the nation's light-duty vehicle
fleet during the past 22 years. During the 1970s, high fuel
prices and a desire on the part of automakers to reduce costs
by reducing the weight of vehicles contributed to improved
fuel economy. CAFE standards reinforced that effect. More-
over, the CAFE program has been particularly effective in
keeping fuel economy above the levels to which it might
have fallen when real gasoline prices began their long de-
cline in the early 1 980s. Improved fuel economy has reduced
dependence on imported oil, improved the nation's terms of
trade, and reduced emissions of carbon dioxide, a principal
greenhouse gas, relative to what they otherwise would have
been. If fuel economy had not improved, gasoline consump-
tion (and crude oil imports) would be about 2.8 million bar-
rels per day greater than it is, or about 14 percent of today's
consumption.
Finding 2. Past improvements in the overall fuel economy
of the nation's light-duty vehicle fleet have entailed very
real, albeit indirect, costs. In particular, all but two members
of the committee concluded that the downweighting and
downsizing that occurred in the late 1970s and early 1980s,
some of which was due to CAFE standards, probably re-
sulted in an additional 1,300 to 2,600 traffic fatalities in
1993.2 In addition, the diversion of carmakers' efforts to
improve fuel economy deprived new-car buyers of some
amenities they clearly value, such as faster acceleration,
greater carrying or towing capacity, and reliability.
2A dissent by committee members David Greene and Maryann Keller on
the impact of downweighting and downsizing is contained in Appendix A.
They believe that the level of uncertainty is much higher than stated and
that the change in the fatality rate due to efforts to improve fuel economy
may have been zero. Their dissent is limited to the safety issue alone.
3
Finding 3. Certain aspects of the CAFE program have not
functioned as intended:
The distinction between a car for personal use and a
truck for work use/cargo transport has broken down,
initially with minivans and more recently with sport
utility vehicles (SUVs) and cross-over vehicles. The
car/truck distinction has been stretched well beyond
the original purpose.
The committee could find no evidence that the two-
fleet rule distinguishing between domestic and foreign
content has had any perceptible effect on total employ-
ment in the U.S. automotive industry.
The provision creating extra credits for multifuel ve-
hicles has had, if any, a negative effect on fuel econ-
omy, petroleum consumption, greenhouse gas emis-
sions, and cost. These vehicles seldom use any fuel
other than gasoline yet enable automakers to increase
their production of less fuel efficient vehicles.
Finding 4. In the period since 1975, manufacturers have
made considerable improvements in the basic efficiency of
engines, drive trains, and vehicle aerodynamics. These im-
provements could have been used to improve fuel economy
and/or performance. Looking at the entire light-duty fleet,
both cars and trucks, between 1975 and 1984, the technol-
ogy improvements were concentrated on fuel economy: It
improved by 62 percent without any loss of performance as
measured by 0-60 mph acceleration times. By 1985, light-
duty vehicles had improved enough to meet CAFE standards.
Thereafter, technology improvements were concentrated
principally on performance and other vehicle attributes (in-
cluding improved occupant protection). Fuel economy re-
mained essentially unchanged while vehicles became 20 per-
cent heavier and 0-60 mph acceleration times became, on
average, 25 percent faster.
Finding 5. Technologies exist that, if applied to passenger
cars and light-duty trucks, would significantly reduce fuel
consumption within 15 years. Auto manufacturers are al-
ready offering or introducing many of these technologies in
other markets (Europe and Japan, for example), where much
higher fuel prices ($4 to $5/gal) have justified their develop-
ment. However, economic, regulatory, safety, and consumer-
preference-related issues will influence the extent to which
these technologies are applied in the United States.
Several new technologies such as advanced lean exhaust
gas aftertreatment systems for high-speed diesels and direct-
injection gasoline engines, which are currently under devel-
opment, are expected to offer even greater potential for re-
ductions in fuel consumption. However, their development
cycles as well as future regulatory requirements will influ-
ence if and when these technologies penetrate deeply into
the U.S. market.
The committee conducted a detailed assessment of the
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EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS
technological potential for improving the fuel efficiency of
10 different classes of vehicles, ranging from subcompact
and compact cars to SUVs, pickups, and minivans. In addi-
tion, it estimated the range in incremental costs to the con-
sumer that would be attributable to the application of these
engine, transmission, and vehicle-related technologies.
Chapter 3 presents the results of these analyses as curves
that represent the incremental benefit in fuel consumption
versus the incremental cost increase over a defined baseline
vehicle technology. Projections of both incremental costs
and fuel consumption benefits are very uncertain, and the
actual results obtained in practice may be significantly higher
or lower than shown here. Three potential development paths
are chosen as examples of possible product improvement
approaches, which illustrate the trade-offs auto manu-
facturers may consider in future efforts to improve fuel effi-
ciency.
Assessment of currently offered product technologies
suggests that light-duty trucks, including SUVs, pickups, and
minivans, offer the greatest potential to reduce fuel consump-
tion on a total-gallons-saved basis.
Finding 6. In an attempt to evaluate the economic trade-offs
associated with the introduction of existing and emerging
technologies to improve fuel economy, the committee con-
ducted what it called cost-efficient analysis. That is, the com-
mittee identified packages of existing and emerging tech-
nologies that could be introduced over the next 10 to 15 years
that would improve fuel economy up to the point where fur-
ther increases in fuel economy would not be reimbursed by
fuel savings. The size, weight, and performance characteris-
tics of the vehicles were held constant. The technologies,
fuel consumption estimates, and cost projections described
in Chapter 3 were used as inputs to this cost-efficient
analysis.
These cost-efficient calculations depend critically on the
assumptions one makes about a variety of parameters. For
the purpose of calculation, the committee assumed as fol-
lows: (1) gasoline is priced at $1.50/gal, (2) a car is driven
15,600 miles in its first year, after which miles driven de-
clines at 4.5 percent annually, (3) on-the-road fuel econ-
omy is 15 percent less than the Environmental Protection
Agency's test rating, and (4) the added weight of equipment
required for future safety and emission regulations will ex-
act a 3.5 percent fuel economy penalty.
One other assumption is required to ascertain cost-effi-
cient technology packages the horizon over which fuel
economy gains ought to be counted. Under one view, car
purchasers consider fuel economy over the entire life of a
new vehicle; even if they intend to sell it after 5 years, say,
they care about fuel economy because it will affect the price
they will receive for their used car. Alternatively, consumers
may take a shorter-term perspective, not looking beyond,
say, 3 years. This latter view, of course, will affect the iden-
tification of cost-efficient packages because there will be
many fewer years of fuel economy savings to offset the ini-
tial purchase price.
The full results of this analysis are presented in Chap-
ter 4. To provide one illustration, however, consider a mid-
size SUV. The current sales-weighted fleet fuel economy
average for this class of vehicle is 21 mpg. If consumers
consider only a 3-year payback period, fuel economy of 22.7
mpg would represent the cost-efficient level. If, on the other
hand, consumers take the full 14-year average life of a ve-
hicle as their horizon, the cost-efficient level increases to 28
mpg (with fuel savings discounted at 12 percent). The longer
the consumer's planning horizon, in other words, the greater
are the fuel economy savings against which to balance the
higher initial costs of fuel-saving technologies.
The committee cannot emphasize strongly enough that
the cost-efficient fuel economy levels identified in Tables
4-2 and 4-3 in Chapter 4 are not recommended fuel economy
goals. Rather, they are reflections of technological possibili-
ties, economic realities, and assumptions about parameter
values and consumer behavior. Given the choice, consumers
might well spend their money on other vehicle amenities,
such as greater acceleration or towing capacity, rather than
on the fuel economy cost-efficient technology packages.
Finding 7. There is a marked inconsistency between press-
ing automotive manufacturers for improved fuel economy
from new vehicles on the one hand and insisting on low real
gasoline prices on the other. Higher real prices for gasoline-
for instance, through increased gasoline taxes would cre-
ate both a demand for fuel-efficient new vehicles and an
incentive for owners of existing vehicles to drive them less.
Finding 8. The committee identified externalities of about
$0.30/gal of gasoline associated with the combined impacts
of fuel consumption on greenhouse gas emissions and on
world oil market conditions. These externalities are not nec-
essarily taken into account when consumers purchase new
vehicles. Other analysts might produce lower or higher esti-
mates of externalities.
Finding 9. There are significant uncertainties surrounding
the societal costs and benefits of raising fuel economy stan-
dards for the light-duty fleet. These uncertainties include the
cost of implementing existing technologies or developing
new ones; the future price of gasoline; the nature of con-
sumer preferences for vehicle type, performance, and other
features; and the potential safety consequences of altered
standards. The higher the target for average fuel economy,
the greater the uncertainty about the cost of reaching that
target.
Finding 10. Raising CAFE standards would reduce future
fuel consumption below what it otherwise would be; how-
ever, other policies could accomplish the same end at lower
cost, provide more flexibility to manufacturers, or address
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EXECUTIVE SUMMARY
inequities arising from the present system. Possible alter-
natives that appear to the committee to be superior to the
current CAFE structure include tradable credits for fuel
economy improvements, feebates,3 higher fuel taxes, stan-
dards based on vehicle attributes (for example, vehicle
weight, size, or payload), or some combination of these.
Finding 11. Changing the current CAFE system to one
featuring tradable fuel economy credits and a cap on the
price of these credits appears to be particularly attractive. It
would provide incentives for all manufacturers, including
those that exceed the fuel economy targets, to continually
increase fuel economy, while allowing manufacturers flex-
ibility to meet consumer preferences. Such a system would
also limit costs imposed on manufacturers and consumers
if standards turn out to be more difficult to meet than ex-
pected. It would also reveal information about the costs of
fuel economy improvements and thus promote better-
informed policy decisions.
Finding 12. The CAFE program might be improved signifi-
cantly by converting it to a system in which fuel economy
targets depend on vehicle attributes. One such system would
make the fuel economy target dependent on vehicle weight,
with lower fuel consumption targets set for lighter vehicles
and higher targets for heavier vehicles, up to some maxi-
mum weight, above which the target would be weight-inde-
pendent. Such a system would create incentives to reduce
the variance in vehicle weights between large and small ve-
hicles, thus providing for overall vehicle safety. It has the
potential to increase fuel economy with fewer negative ef-
fects on both safety and consumer choice. Above the maxi-
mum weight, vehicles would need additional advanced fuel
economy technology to meet the targets. The committee be-
lieves that although such a change is promising, it requires
more investigation than was possible in this study.
Finding 13. If an increase in fuel economy is effected by a
system that encourages either downweighting or the produc-
tion and sale of more small cars, some additional traffic fa-
talities would be expected. However, the actual effects would
be uncertain, and any adverse safety impact could be mini-
mized, or even reversed, if weight and size reductions were
limited to heavier vehicles (particularly those over 4,000 lb).
Larger vehicles would then be less damaging (aggressive) in
crashes with all other vehicles and thus pose less risk to other
drivers on the road.
Finding 14. Advanced technologies including direct-
injection, lean-burn gasoline engines; direct-injection com-
3Feebates are taxes on vehicles achieving less than the average fuel
economy coupled with rebates to vehicles achieving better than average
fuel economy.
pression-ignition (diesel) engines; and hybrid electric ve-
hicles have the potential to improve vehicle fuel economy
by 20 to 40 percent or more, although at a significantly
higher cost. However, lean-burn gasoline engines and die-
sel engines, the latter of which are already producing large
fuel economy gains in Europe, face significant technical
challenges to meet the Tier 2 emission standards estab-
lished by the Environmental Protection Agency under the
1990 amendments to the Clean Air Act and California's
low-emission-vehicle (LEV II) standards. The major prob-
lems are the Tier 2 emissions standards for nitrogen oxides
and particulates and the requirement that emission control
systems be certified for a 120,000-mile lifetime. If direct-
injection gasoline and diesel engines are to be used exten-
sively to improve light-duty vehicle fuel economy, signifi-
cant technical developments concerning emissions control
will have to occur or some adjustments to the Tier 2 emis-
sions standards will have to be made. Hybrid electric ve-
hicles face significant cost hurdles, and fuel-cell vehicles
face significant technological, economic, and fueling in-
frastructure barriers.
Finding 15. Technology changes require very long lead
times to be introduced into the manufacturers' product lines.
Any policy that is implemented too aggressively (that is, in
too short a period of time) has the potential to adversely
affect manufacturers, their suppliers, their employees, and
consumers. Little can be done to improve the fuel economy
of the new vehicle fleet for several years because production
plans already are in place. The widespread penetration of
even existing technologies will probably require 4 to 8 years.
For emerging technologies that require additional research
and development, this time lag can be considerably longer.
In addition, considerably more time is required to replace
the existing vehicle fleet (on the order of 200 million ve-
hicles) with new, more efficient vehicles. Thus, while there
would be incremental gains each year as improved vehicles
enter the fleet, major changes in the transportation sector's
fuel consumption will require decades.
RECOMMENDATIONS
Recommendation 1. Because of concerns about greenhouse
gas emissions and the level of oil imports, it is appropriate
for the federal government to ensure fuel economy levels
beyond those expected to result from market forces alone.
Selection of fuel economy targets will require uncertain and
difficult trade-offs among environmental benefits, vehicle
safety, cost, oil import dependence, and consumer prefer-
ences. The committee believes that these trade-offs right-
fully reside with elected officials.
Recommendation 2. The CAFE system, or any alternative
regulatory system, should include broad trading of fuel
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EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS
economy credits. The committee believes a trading system
would be less costly than the current CAFE system; provide
more flexibility and options to the automotive companies;
give better information on the cost of fuel economy changes
to the private sector, public interest groups, and regulators;
and provide incentives to all manufacturers to improve fuel
economy. Importantly, trading of fuel economy credits
would allow for more ambitious fuel economy goals than
exist under the current CAFE system, while simultaneously
reducing the economic cost of the program.
Recommendation 3. Consideration should be given to de-
signing and evaluating an approach with fuel economy
targets that are dependent on vehicle attributes, such as ve-
hicle weight, that inherently influence fuel use. Any such
system should be designed to have minimal adverse safety
consequences.
Recommendation 4. Under any system of fuel economy
targets, the two-fleet rule for domestic and foreign content
should be eliminated.
Recommendation 5. CAFE credits for dual-fuel vehicles
should be eliminated, with a long enough lead time to limit
adverse financial impacts on the automotive industry.
Recommendation 6. To promote the development of
longer-range, breakthrough technologies, the government
should continue to fund, in cooperation with the automotive
industry, precompetitive research aimed at technologies to
improve vehicle fuel economy, safety, and emissions. It is
only through such breakthrough technologies that dramatic
increases in fuel economy will become possible.
Recommendation 7. Because of its importance to the fuel
economy debate, the relationship between fuel economy and
safety should be clarified. The committee urges the National
Highway Traffic Safety Administration to undertake addi-
tional research on this subject, including (but not limited to)
a replication, using current field data, of its 1997 analysis of
the relationship between vehicle size and fatality risk.
Representative terms from entire chapter:
fuel consumption
