Cleantech Market Intelligence
New CAFE Rules, Same Old Failure
Last week, President Obama proposed new Corporate Average Fuel Economy (CAFE) rules that raise the average fuel economy for cars and light trucks combined to 35.5 mpg by 2016. In this new rule, he also gave the authority to the EPA to regulate tailpipe emissions from vehicles – this is completely new. If you saw the announcement last week, you saw a “strong” coalition of everyone and their brother standing behind the president during the announcement. Automakers were there because this will now give them one standard to build vehicles towards (no more special state emissions requirements). Governors were Arnold Schwarzenegger was happy because the new rules will match California’s tougher emissions requirements. And even environmentalists appear happy because the new rules raise fuel standards and limit emissions.
However, all is not well (and none of it matters because CAFE rules won’t work anyway, but we’ll come back to this point in a moment). The CAFE rules have been held steady for cars at 27.5 miles per gallon since 1990, and light trucks have been slowly increasing to where now in 2009 trucks must get 23.1 mpg combined fuel economy. However, this does not mean that if you were to run out a buy a new Ford Expedition that it is going to get 23.1 mpg. What it means is that your Expedition can get 16 mpg because Ford also makes the Escape Hybrid that gets 32 mpg (note that I’m not meaning to pick on Ford specifically here, you could replace Ford with ANY automaker into this example, Toyota, Honda, GM, Chrysler, Hyundai… yes, any of them). So, while automakers argue that CAFE helps spur development of vehicles like the Escape Hybrid, environmentalists have argued that CAFE helps automakers get away with declaring small vehicles like the Chrysler PT Cruiser a truck because it gets helps improve the overall truck gas mileage but totally ignores the emissions question. And in truth, both are right.
It would seem that President Obama’s new rules to combine the car and light truck standards to 35.5 mpg by 2016 will get rid of this questionable “horse trading” of cars to trucks, while raising the overall economy of the fleet. Plus, the new emissions rules will help enforce the mileage rules because vehicles that don’t get higher mileage won’t meet the emissions rules anyway. Sounds like the perfect combination, but as I mentioned earlier, it won’t work.
The ongoing problem with CAFE is that it ignores consumer demand and offers automakers too many loopholes for building lower mileage vehicles. The fact is that consumers who are paying $2 or $3 per gallon for gasoline have very little incentive to buy higher mileage vehicles, and automakers still have an incentive (consumer demand) to build low mileage, high powered, trucks and SUVs. So, how do you make American consumers want to buy the vehicles that are better for the environment? And how do you make car companies want to build the vehicles that are better for the environment? The answer is simple and complicated all at the same time:
Simple answer: raise the price of gas by 100-200%. If gas were $7-$8/gallon, people would flock to better mileage, smaller vehicles.
Complicated answer: get politicians to pass a gas tax that raises the price of gas by 100-200%.
Without the shift in consumer thinking, though, the CAFE rules will only be window dressing for their intended purpose – getting more fuel efficient vehicles on the road. Additionally, as automakers try to force consumers into vehicles that are not actually spurred by their demand, consumers will react with their feet, marching quickly to companies that offer vehicles they want. After all, there is a reason that in 2008 the Volkswagen Golf was the best selling vehicle in Europe, while in the same year the Ford F-150 was the best selling vehicle in the US, and it’s got nothing to do with CAFE rules. Getting Americans to buy more efficient vehicles that use less fuel through top-down product pushes brought on by CAFE rules is failing and likely always will.