U.S. fuel economy trends reflect a business strategy, not a technology challenge

Posted Friday, 19 January 2018, 16:08

The Environmental Protection Agency recently released its 1975-2017 Fuel Economy Trends report and its 2016 Manufacturer Performance report. For the last year or two the auto manufacturers have been saying that the data in these annual reports support their view (and the Trump administration's) that the light-duty vehicle fuel economy and GHG standards are not achievable and should be rolled back. It's a fair bet that they will eventually do the same with this year's reports, which show similar trends of reduced incremental improvement.

But to do so requires citing the EPA data out of context to arrive at a distorted conclusion. So here are some things you should bear in mind the next time you see somebody crying crocodile tears about how sales trends show the manufacturers struggling to meet the fuel economy standards and falling behind despite their best efforts.

Average fuel economy for cars and light trucks increased slightly in 2016, from 24.6 mpg in 2015 to 24.7. (Note that the fuel economy values in the Trends Report are the values used for fuel economy labels, which have been adjusted downward by about 20% from the official test results. The fuel economy standards use the unadjusted test results and, thus, are much higher.) 2016 also saw a massive shift in sales from cars to light trucks. The fuel economy/GHG targets for light trucks are more than 25% lower than the targets for cars with the same footprint (wheelbase times track width), which means that the average target came down while the average fuel economy went up.

The FE Trends Report does not include the fuel economy target values. Thus, the appropriate comparison from 2015 to 2016 is the average credits calculated in the EPA Manufacturer Performance Report. These calculations are based on both the actual fuel economy of each vehicle and the calculated fuel economy target for that vehicle. On average, manufacturers exceeded the standards every year from 2010 through 2015. But the margin over the standard decreased from 2014 to 2015, and for 2016 the average fell below the average standard level for the first time, by 9 gCO2/mile. Note that most of the compliance shortfall in 2016 is due to expiration of flexible-fuel vehicle credits after 2015. Flex-fuel vehicle credits were worth 9 gCO2/mile in 2014 and 6 gCO2/mile in 2015. But the compliance margin still fell from 13 gCO2/mile in 2014 to 6 in 2015 to approximately 0 in 2016.

bar chart, US automakers performance, GHG by model year, 2012-2016

Industry performance versus standards. (Source: EPA Manufacturer Performance Report.)

On the surface, this appears to indicate that the standards are becoming more difficult to meet-but this ignores the effects of normal product-redesign cycles, the 5-year carry-forward and 3-year carry-back credit provisions, and the large amount of credits banked from previous years.

It is prohibitively expensive to redesign vehicles every year. Most vehicles are redesigned every four to five years, and some have longer redesign cycles. This means that annual average improvements in fuel economy are not going to be consistent, but instead will vary depending on when high-volume vehicles are redesigned. In a redesign year, there's a big jump; before that happens, there's a lull, as the same basic design has been in place for a while without much change. For example: the higher-volume mid-size cars (Toyota Camry, Honda Accord, Nissan Altima, Ford Fusion) have all been redesigned for 2018, but overall their fuel-economy numbers didn't change much from 2015 to 2016. The FE Trends report shows that the rate of increase in market penetration of most individual new vehicle technologies (e.g., diesel engines, hybrid vehicles, cylinder deactivation, gasoline direct injection, turbocharging) slowed or even decreased in 2015 and 2016 compared with 2012 to 2014. What this really confirms is that 2015 and 2016 were down years for model redesign, and what it suggests is that the use of credits in 2016 is temporary-not that technical innovation to make vehicles more fuel efficient suddenly became slower and more difficult and more expensive with the change in the administration in Washington.

The fuel economy regulation is specifically designed to accommodate redesign cycles by allowing credits to be carried forward for 5 years and to be carried back for 3 years. The GHG standards are even more generous, allowing credits from 2010 to be carried forward up to 2021. This allows manufacturers to undercomply in certain years, according to their own needs as determined by their own specific redesign cycles, and make up the difference with credits from previous or future years.

Which brings us to the single most important piece of context to understand and bear in mind when hearing complaints about the onerous standards: complying with the standards every single year would be a high-cost compliance strategy, and the regulations are designed specifically around that fact. Every year a manufacturer exceeds the standards, it generates credits that can be used in the future. These credits are worth real money. In total, manufacturers had accumulated credits of about 285 million Mg (Mg = million grams) of CO2 at the conclusion of the 2015 model year. A 2017 report from Resources for the Future estimated that GHG credits are worth $42 to $63 per Mg, so the total value of the credits accumulated through 2015 is roughly $12 billion to $18 billion dollars. Certainly automakers want to maintain a cushion to handle unexpected events-that's part of the rationale for the credit system. But they can save billions of dollars by slowing down the rate of technology introduction and market penetration in order to undercomply at certain points and use up most of these valuable credits.

And that is exactly what occurred in 2015 and 2016. Manufacturers slowed down technology penetration so they could realize the value of some of those credits. It's a good business strategy, and nobody should blame them for using it. It takes brass, though, to turn around and claim that that kind of planned slowdown means that technology innovation itself has slowed or that the standards are climbing out of reach.