The newspaper headlines on the U.S. Department of Transportation’s proposed CAFE (corporate average fuel economy) standards for MY2011-2015 announced in late April emphasized praise from environmentalists and concern from Detroit about what Transportation Secretary Mary Peters described as “aggressive but achievable standards.” But one has to go beyond those headlines—and the skimpy articles themselves, too—to the actual Federal Register notice and preliminary regulatory impact analysis (RIA) to get the “real” story behind these proposed standards, which will be finalized by the end of the year.
The proposed CAFE standards for autos and light trucks are based to some extent on a wing and a prayer. The RIA is rife with uncertainty, which NHTSA (U.S. National Highway Traffic Safety Administration) unit of DOT freely admits. Will automakers introduce technologies earlier than anticipated? Will they pay fines rather than meet the CAFE standard for a given year because the new technology is too expensive? Will consumers value the gas-saving properties of new models enough to purchase them? Will those gas-saving properties actually be the same on the road as in the lab? There are many such questions whose potential answers, in MY2011-2015, lie along a wide spectrum.
The proposed standards outlined by the DOT on April 22 are based on its best guess of the answers to all of these questions. The standards were developed by the DOT to meet the terms dictated by the Energy Independence and Security Act (EISA) passed by Congress last December: 35 mpg CAFE by 2020. That 35 mpg is the average for a company’s combined fleet of light trucks and cars; the EISA requires the DOT to establish annual CAFE standards for 2011-2015 first.
The MY2011-2015 standards DOT proposed are aggressive. They exceed the 3.3% average annual increase needed to reach the 35-mpg-by-2020 target. For passenger cars, this means an increase in fuel economy from the current 27.5 mpg standard to an industry average of 35.7 mpg by 2015. For light trucks, the proposal calls for increases from 23.5 mpg in 2010 to 28.6 mpg in 2015.
There is absolutely no assurance that Ford Motor Co., General Motors Corp., Chrysler LLC—or even Prius-providing Toyota Motor Corp.—will be able to meet these proposed standards, and one has to read deep into the NHTSA documentation to find this out. For example, on page 316 of the Federal Register notice, one finds this sentence: “NHTSA is proposing standards that it estimates will entail the risk that some manufacturers will exhaust available technologies in some model years.”
There are other disquieting aspects in the 376-page preliminary RIA. In making estimates of which technologies might be available, NHTSA relied on work done in 2002 by the U.S. National Academy of Sciences (NAS). The NAS report of that year was thorough, and it was peer-reviewed; but it is, at this point, six years old. Moreover, NHTSA and the U.S. EPA essentially assumed that the third of the three tiers of technology that the NAS described (the “emerging” technologies group) was here and now, and the proposed CAFE numbers for 2011-2015 assume technology levels in certain instances beyond that third NAS tier. That explains why the RIA contains this telling sentence: “Our preference remains to rely upon peer-review and credible studies, such as the 2002 NAS report; however, we believe that the estimates made by the joint EPA/NHTSA team are accurate and defensible."
The cost to manufacturers for using emerging technologies in passenger cars would be $16 billion for MY2011-2015. As a result, the price of cars can be expected to increase. Via savings at the pump, consumers would recover the added cost in an average of 56 months, according to the RIA. The payback assumption is based on gasoline prices ranging from $2.26 per gallon in 2016 to $2.51 in 2030. How NHTSA arrived at those numbers is anyone’s guess. Nonetheless, if gas prices stay about where they are now, in the $3.50 range, in 2016 consumers will be looking at a faster payback for these more expensive, more fuel-efficient cars.
The only good news in the proposed standards for OEMs is that NHTSA would preempt state CAFE mandates. That, of course, is meant to rule out California’s CO2 tailpipe emissions rule, which would result in even lower CAFE numbers than the ones NHTSA is proposing. Sen. Barbara Boxer (D-CA) and Rep. Peter Welch (D-VT) had already introduced bills earlier this year forcing the EPA to allow California to implement its standards, something EPA Administrator Stephen Johnson has the authority to do, but has decided not to. The bill is called the Right to Clean Vehicles Act. After NHTSA announced its proposed CAFE standards, governors from 12 states, including California, wrote a letter to President Bush threatening to sue the federal government if the state preemption in the NHTSA proposed rule is made fina.
Everyone, including automakers, agrees that passenger cars and light trucks must become more fuel efficient. But metaphorically, if the companies are forced down a path strewn with lots of potential potholes, axles are going to break and wheels could come off.