New CAFE promises lower emissions and higher costs

A new menu

30 September 2009 18:36  [Source: ICB]

The US government estimates that the new CAFE standard will reduce greenhouse gases by up to 890m tonnes/year. But the change won't be cheap

 Rex Features/Chris Eyles

Consultants' corner:
Dan Montague and Brandon

THE CHRONICLE of Corporate Average Fuel Economy (CAFE) begins and ends with the price of a gallon of gasoline.

First passed by the US Congress in 1975, the federally mandated CAFE standard was a direct response to the 1973 oil embargo, which had driven pump prices skyward and sent legislators scrambling for recourse.

The original concept was simple - reduce fuel consumption by increasing miles per gallon (mpg), with financial penalties for noncompliance.

That concept has not changed and, because the US economy has enjoyed roughly three decades of stable fuel prices, neither has CAFE's original trajectory. The current 27.5mpg requirement for cars has been in place since 1990, while pickups have seen only a modest increase from 20mpg to just over 23mpg today.

In this critical way, the US auto industry has diverged from the European model of greater automotive regulation and increased taxation. But the US's less sustainable path has made the inevitable adjustment more onerous - especially as turf wars between state and federal entities over control of the new mandate have further complicated matters.

The state of California's passage of the Clean Car Law in 2002 initiated a political tug of war by charting a course for states to enforce their own vehicle emission standards. Eventually, 13 other states signed on with California to create unique regulations. However, before the coalition could enact the legislation, the states had to obtain a special waiver from the US Environmental Protection Agency (EPA).

The EPA denied California's waiver request in late 2007, firmly implying that a federal standard would be the official stance. California responded by suing the EPA in January 2008, but further action was delayed when the EPA decided to move forward with guidelines approved in the Energy Independence and Security Act (EISA) of 2007, and a final ruling was left to the next president. As if on cue, fuel prices flared up dramatically in mid-2008, prompting the Obama Administration to address energy independence and revamp the outdated legislation after taking office this year.

When President Barack Obama unveiled an updated, more stringent national fuel economy and emission standard in May 2009, a serious challenge was delivered to the deeply imperiled US automotive sector.

Building on the EPA's recommendation, the new CAFE regulation calls for a national fleet average equivalent of 35.5mpg (taking into account expected heating, ventilation and air conditioning system improvements) by 2016 (39mpg for cars and 30mpg for trucks), four years sooner than the CAFE benchmark outlined in the EISA. Each automaker will have fuel economy requirements based on their fleet's size, segmentation and mix. A vehicle's weight and dimensions will also be used to calculate a "carbon footprint," which will determine the fuel efficiency and emissions a vehicle will be required to meet annually.

Beginning with an interim target of 27.3mpg for the 2011 model year (MY), the standard will become effective beginning with the 2012MY. From that point, a roughly 5% improvement in fuel efficiency and emissions will be required each year leading up to the 35.5mpg benchmark for the 2016MY. The standard will be jointly administered by the US Department of Transportation (DOT) and the EPA. The DOT will oversee CAFE regulations, while the EPA will monitor emission reduction.

Because economic recovery
is still under way, a fuel
tax rise is not expected

From a global perspective, the EU equivalent to the US CAFE standard is 130g/km of carbon dioxide (CO2 ) emissions by 2012 (in Europe, vehicle emissions are measured rather than equivalent fuel economy). This correlates with a standard of about 41mpg - 82% higher than the combined CAFE requirement of 22.5mpg in 2008. Although the goal of 35.5mpg falls short of the loftier European target, the projected improvements in emissions and fuel consumption are nonetheless significant, while leaving room for future incremental improvements.

According to the National Highway Traffic Safety Administration, the proposed CAFE standards will save about 61.6bn gallons of fuel and reduce CO2 emissions by 656m tonnes, based on the more efficient vehicles that will be sold between 2012MY and 2016MY. The average cost of those vehicles is expected to rise $500-1,100, (€344-756) compared with current costs.

Final details of the legislation are subject to revision. Under one provision, automakers that sell fewer than 400,000 units a year in the US would not be required to meet the full 35.5mpg standard by 2016. They would be subject to a more lenient standard and given more time to meet the requirements.

This proposal has caused concern among some industry observers, who believe anything less than an all-inclusive standard would be falling short of the program's intended goal. However, the standard is expected to align vehicle efficiency efforts better with those in other developed regions around the world. Final approval of the bill is expected in the coming months, but it must first be accepted by the EPA, DOT and, ultimately, President Obama.

The new standard appears finally to have brought some clarity to the metrics automakers and suppliers must work to.

Several technologies are expected to contribute to achieving regulatory compliance, including engine downsizing, direct injection, turbocharging, broader use of diesel applications, and the introduction of plug-in and pure electric vehicles.

But doubts surround the industry's ability to bring advanced vehicles to market on a shortened timetable while research and development spending is under pressure. Also, a supply base exposed to less fuel-efficient vehicles, by either customer or product line, may find it difficult to sustain operations in an evolving regulatory environment, increasing supply chain risk.

Although the federal government has offered various programs to stimulate industry growth, including a vehicle sales tax credit and the CARS (Cash for Clunkers) program, further legislation applying fiscal pressure to consumers is likely to be needed to prompt a fundamental behavioral switch toward fuel-efficient vehicles.

One solution being considered is a significant increase in taxes at the pump. State and federal fuel taxes comprise 10-15% of the total net cost per gallon of gasoline - one of the lowest tax rates in the world. Should the US government decide to levy taxes similar to those of the European scheme, in which taxes comprise about 50% of net cost, fuel-efficiency would almost certainly become a top priority to consumers, albeit a costly one.

Because broader national economic recovery is still underway, a fuel tax rise is not expected in the short term as the government seeks to improve policies designed to shift the US fleet toward greater fuel efficiency.

Brandon Mason is a senior automotive analyst for AUTOFACTS. He leads the global powertrain forecast, specializing in advanced powertrain technology. He also oversees industry trends such as alternative fuels.

Dan Montague is a senior automotive analyst for AUTOFACTS. He leads the North American assembly forecast and regional outlook, with expertise in trend analysis, portfolio risk assessment, and strategic consulting.

PricewaterhouseCoopers' Automotive Institute (AUTOFACTS) group in Detroit, Michigan, US provides market analysis, strategy development, and competitive intelligence to leading automotive manufacturers, suppliers and support organizations. Learn more

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