Do the automakers really need help with the U.S. efficiency standards?

Published Fri, 2015.01.23 | By

Nic Lutsey

If you paid attention to the press coming out of the Detroit Auto Show last week, you’d have the strong impression that low gasoline prices are making it difficult for automakers to comply with fuel economy standards. In fact the CEO of Fiat-Chrysler, Sergio Marchionne, is already getting folks riled up about using the official midterm evaluation in 2018 to roll back the 54.5 miles per gallon standard for new 2025 automobiles.

Let’s step back and think through a few aspects of this. Here are a few observations.

Marchionne suggests that the 2025 efficiency standards, which the auto execs committed to just four years ago, are now too hard. Only a short time ago, thirteen automaker chief executives stood with the President, smiled and applauded, wrote commitment letters, and agreed to the efficiency standards. And they did this not once but twice – once for the 2012–2016 standards and then again for the 2017–2025 standards.

Now compare Mr. Marchionne’s press clippings from 2011 with the statements he made last week. Apparently his confidence regarding his engineers’ can-do ability on developing advanced efficiency technology is eroding. What a difference a few years makes in a company’s commitment on technology, reducing oil use, and reducing climate emissions, huh?

Sergio Marchionne, circa 2011 Sergio Marchionne, circa 2015

The powertrain guys ... are an incredible resource, an incredible talent. Let them do their jobs. You will see incredible results even out of what I consider to be absolutely plain-vanilla technology.”

Marchionne later called the industry’s agreement with the Obama administration on a 54.5-miles-per-gallon Corporate Average Fuel Economy standard by 2025 ‘an incredible stimulus for the American car industry. I think we can get this done.’

Just last week, automakers were in Washington DC signing off on a 54.5 mile per gallon fuel economy standard by 2025. Marchionne said Chrysler will make that target by using a variety of technologies, but mostly by improving traditional internal combustion engines....Marchionne says automakers have ‘cried wolf’ too many times. Now they have to concentrate on getting to the goal. He said companies that say ‘I cant get there’ 14 years before the target ‘ought not to be in business. I think we have the capability to get this done,’ he said. ‘I think it’s going to be an incredible stimulus for the auto industry.’

All of us are going to toward a relaxation of the timeline,” Fiat Chrysler Chief Executive Sergio Marchionne said in an interview on Tuesday. “The question is the rate of change you’re going to roll [standards] out.

‘There is not a single carmaker that cannot make the 54 [mpg] number,’ Marchionne said, ‘The question is, at what a price? The question is whether 2025 is a realistic date for which to achieve it,’ Marchionne said. ‘Fifty-four will not change. The date of implementation might.’

Automakers are, as a matter of fact, doing a great job deploying efficiency technology and appear to be committed staying the course on efficiency. Contrary to what Mr. Marchionne implies, based on EPA’s compliance report the automakers are a year ahead of schedule on the standards (as an industry, although some are doing better than others . . . ). Indeed, the companies are deploying cost-effective efficiency technologies like turbocharging, direct injection, stop-start, 7–9 speed transmissions, and continuously variable transmissions at a rapid rate. Ford’s CEO Mark Fields has stated that Ford, like the rest of us, welcomes a data-driven review of the standards, but they are not altering their technology roll-out, suggesting “You are seeing the industry mix shift a bit, but not to the extent you did in years past when gas prices went down, because consumers are much smarter now…They’ve seen gas prices go up and they have seen them go down.

The US efficiency standards are, in fact, built to help automakers weather market shifts influenced by fluctuating gasoline prices. The auto companies supported the standards in large part because of the flexibilities that were specifically built into the regulatory design. The standards allow for “passenger cars” and “light trucks” (crossovers, sport utility vehicles, minivans, and pickups) to have separate stringency – meaning if the market shifts to light trucks, the overall compliance obligation gets easier. In addition, the standards are “footprint-based” — meaning that they’re indexed to vehicle footprint as measured by the area between all four wheels, to allow for a shift in the market up or down in vehicle size. Much of the media coverage on fuel economy trends, and Mr. Marchionne’s sound bites, gloss over or simply ignore how these footprint-indexed standards work: they induce efficiency technology deployment while allowing size shifts. And the standards are working quite well in this regard.

Understandably, automakers were highly supportive of how the standards were designed to handle such fuel price fluctuations. For example, here is an excerpt from General Motors’ public comment on the 2012–2016 regulation:

GM especially supports: 1) the coordinated attribute based approach of the two harmonized programs; and 2) the recognition of the need for mechanisms to provide for compliance flexibility in the face of great uncertainty over future technology developments and costs, customer acceptance of these technologies, and the price of fuels that consumers may see in the marketplace. All of these factors make it critical that automakers have some ability to cope with changes or unexpected outcomes, and we believe the proposed rules provide essential flexibility.

In developing the standards, the federal agencies analyzed how fuel prices might shift the fleet, in either direction. The sensitivity analysis in the 2012-2016 CAFE standards shows specifically how if fuel prices from 2015-2025 shifted from ~$3.00-3.40/gallon to about $2.00/gallon, model year 2014 vehicles would lose about 15% of the overall regulatory benefit. Of course if fuel prices go to the regulatory scenario for a high fuel price of $4-5 per gallon, fuel savings are much higher (See page 600 in the NHTSA Regulatory Impact Assessment.). The “54.5-mpg” standards shift on a sliding scale, as automakers make bigger or smaller vehicles to match consumer shifts with fuel price. Where exactly the final CAFE-compliant fleet ends up in 2025 will depend in part on what happens to the market between now and then, in response to gas prices. A -15%/+15% benefit from the 2017–2025 standards would equate to 50–58 mpg standards. This regulatory flexibility is meant to cut both ways to cover market dynamics, while still promoting efficiency technology in all vehicle models in all classes.

It appears as though low fuel prices leave plenty of room for opportunistic arguments about relaxing efficiency standards. However, there is really not much room for crying wolf, considering all the progress by nearly every automaker – and especially considering the standards are working exactly like they are supposed to. Let’s hope Mr. Marchionne does not speak for the industry at large with his premature plea to roll back the standard.