Brazil's Ministry of Industry, Foreign Trade and Services (MDIC) is consulting with industry to develop a replacement for Inovar-Auto, the industrial competitiveness and energy efficiency program for light-duty vehicles that expires at the end of this year. The current program aims for a 12% reduction in the fuel consumption of the new car fleet by 2017 compared to a 2012 baseline. As shown in the figure below, some automakers were already close to achieving the target in 2013. While the compliance data are not yet publicly available, it is anticipated that most manufacturers will meet the 2017 target, since the penalty for failing is equivalent to a 30% sales tax on vehicles sold from 2013 to 2017.
MDIC has set a tight timeline for establishing the new program: August 30 of this year. One of the key uncertainties at this moment is the stringency of the new energy efficiency target. Earlier this year, we analyzed the potential costs and benefits of aligning Brazil's new target with the European Union's 95 grams CO2/km target, equivalent to 1.27 MJ/km. As shown in the first figure, this potential target is equivalent to a 29% reduction from Inovar-Auto's 2017 target and a 36% reduction compared to Brazil's new car fleet in 2013. Our analysis shows that by 2023, this target could bring the efficiency of Brazil's new car fleet into line with other leading auto markets, including Canada, China, the European Union, South Korea, and the United States (second figure).
Passenger car energy consumption normalized to two-cycle corporate average fuel economy (CAFE) test equivalent values. Data labels are rounded to two significant figures. Brazil 2023 indicates one possible level of stringency for the new program, which is currently under development by MDIC. Japan has already exceeded its 2020 target as of 2013. KSA = Kingdom of Saudi Arabia.
Aligning Brazil's new-car efficiency target with the European Union’s target would have substantial benefits for consumers. Compared to a car meeting Inovar-Auto's 2017 target, the average new car sold in 2023 could reduce fuel costs more than 4,000 USD over the lifetime of the vehicle, equivalent to 2.4 times the cost of additional vehicle technology. These technology costs, estimated using the 2012 version of the U.S. Environmental Protection Agency's OMEGA model, are likely to be substantially lower because of recent advancements in vehicle technologies (e.g., cylinder deactivation, high-compression Atkinson-cycle engines, lightweighting, and mild hybridization). In Brazil, the evaluated 2023 target would increase the market adoption of advanced internal combustion engines, more efficient transmissions, and numerous other fuel-saving technologies (e.g., low-rolling-resistance tires, improved accessories).
In addition to saving consumers money and increasing technology uptake, a more stringent efficiency target would have substantial macroeconomic and environmental benefits. By 2035, the evaluated target would reduce greenhouse gas emissions and fuel consumption from Brazil's passenger car fleet by approximately one quarter, preventing the annual release of 35 million tonnes of CO2 and saving the energy equivalent of 250,000 barrels of oil per day. At an oil price of 50 USD per barrel, these fuel savings would be equivalent to approximately 4.5 billion USD per year—more than half of Brazil's 8 billion USD import bill for refined petroleum products in 2015.
Now, as MDIC is expected to determine the new energy efficiency target by the end of this month, we note a few advantages of the 2023 target that we evaluated. First, it is consistent with the energy efficiency of vehicles that will be sold in other leading markets between 2020 and 2025; thus, vehicles produced in Brazil for domestic sales or export could apply the same fuel-saving technologies as vehicles sold in Canada, China, the European Union, South Korea, and the United States. Second, we know from extensive analysis for Brazil and other markets (including the European Union, Mexico, and the United States) that more-stringent energy efficiency targets are consistently cost-effective and achievable using a wide range of manufacturer strategies for technology deployment. Finally, the evaluated 2023 target for Brazil is ambitious enough to achieve substantial fuel savings for consumers and reduce greenhouse gas emissions and fuel consumption from Brazil's passenger car fleet. As for the question of how stringent the energy efficiency target will be under Brazil's new program, we won't have to wait long to find out.