Aiming to achieve an ambitious fuel-economy goal of 48.7 mpg by 2025, the U.S. EPA and NHTSA increased the stringency of the CAFE standard and introduced a new regulatory mechanism in 2012. SUVs then gained sales share by 12 %-points while sedans quickly lost share by 15 %-points between 2012 and 2018, heightening concerns that the rapid market shift substantially affected the effectiveness and welfare effects of the standard. This paper identifies the factors that have provoked the sales shift from sedans to SUVs and pickup trucks and evaluates the regulatory design of the revised CAFE standard under the market shift. We estimate a structural model of the system of supply and demand for 4,690 new vehicle models offered in the U.S. from 2005 to 2018 in the presence of the CAFE standards. We find that households exhibit an increasing preference for SUVs over sedans and this trend has been robust irrespective of the development of primary vehicle attributes, household income, age, and gas prices. Importantly, the market shift has also been driven by the regulatory design of the CAFE standard itself. We find strong evidence that the standards for sedans were too stringent and those for pickup trucks were too lenient. As a result, the effectiveness of the CAFE standard has been diluted nearly by half. The results almost unanimously suggest that raising standards on SUVs and pickup trucks is likely to achieve higher average fuel economy and generate net welfare gain from new vehicles.

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