Fuel Economy Debate - Part II

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Comments: 2

October 18, 2007

 

It seems the CAFE debate is heating up in Washington as the House appears to be getting ready to move forward on this issue. The Detroit New (DN) reported yesterday the White House has formally acknowledged the President will veto any bill that does not include a two-fleet rule. Today the DN is reporting Michigan Senator Carl Levin is stating if the House adopts the Senate’s proposal of a combined car-truck fleet standard of 35 mph by 2020 that will mean small car production jobs will be lost as will a significant cost penalty to the manufacturers. (See CAFE au Lait - Vehicle Fuel Economy Considerations in the U.S.)

 

Let me first explain what the Corporate Average Fuel Economy (CAFE) requirements are. Currently there are three separate requirements: two car fleet averages and one for trucks.

 

The car fleet is broken up into the import average and the second is the domestic fleet average. The domestic fleet now includes those vehicle that are manufactured in both Canada and Mexico. Then there is the fleet average for vehicle imported into the US from everywhere else. By law, both of these fleets currently have to meet a sales weighted average of 27.5 mpg. The original purpose of the two-car average rule was so the Big 3 automakers in the 1970’s would not farm out unprofitable small car production to Mexico or other low cost producing nations. During this period the Big 3 automakers ruled the road and their workers union (UAW) still had a large lobbing machine. Today, the Detroit 3 compromise less than 50% of the US market.

 

The truck fleet on the other hand, promulgated later and recently updated has a separate lower average of just over 22 mpg starting next year moving up to 24 mpg soon after. This is also a sales weighted average. The assumption being trucks were and to a lesser extent still are a different class of vehicle designed for a different usage and market which result in less fuel economy.

 

The requirements offer the manufacturers some flexibility before penalties are imposed. If a manufacturer’s fleet does not meet the requirements in a given year they have the options to use carry forward mpg credits, earned in previous years where they exceed the fleet average. The thought being, market forces will affect the fleet sales mix and manufacturers should have some relief. In those cases where credits are not available, the manufacturer will have to pay a fine. Details of the CAFE program can be viewed on the government’s website.

 

Therefore companies such as Mercedes Benz, BMW and Porsche known for selling expensive, performance vehicles, generally have had to pay fines since the regulations have been enacted because they have not been able to meet the fleet average given the type of vehicles they sell.

To frame the discussion let me present some fleet averages. The traditional domestic fleet will hit the averages within a couple tenths of the requirements but Honda and Toyota will come very close to meeting 35 mpg on their passenger car fleet, today. But, if Honda’s and Toyota’s truck fleet is included in the average their numbers will drop as their truck average is in the mid-to-low 20’s.

 

Over the years there has been much debate as to the actual merits of the CAFE program. As a brief overview, it is based upon market demand not fuel consumption and can force some manufacturers to dump efficient small cars at a financial loss on the market to sell more profitable large ones, places the burden on the manufacturers and not on the consumer, etc. I can discuss the merits or lack there of forever but will save that for another time.

 

But, why is the two-fleet critical for the manufacturers if the status quo is to be maintained? When CAFE was first promulgated, trucks were primarily purchased for commercial applications and compromised a smaller percentage of the fleet sales. Thirty years later, by definition, trucks compose approximately 50% of the fleet and include minivans, some stations wagons, cars that look like trucks (crossovers), small pick-ups and traditional SUV’s driven by consumers as life style vehicles and not necessarily for commercial applications. As a whole, even car-based vehciels classified as trucks do weight more and achieve less economy even when designed for conventional consumer use. Therefore the manufacturers have become very economically dependent on this class of vehicle as the buying publics tastes have changed since the 1970s.

 

As for Mr. Levine’s comments about small car jobs being lost - that is just political pandering. A number of years ago the definition of domestic was modified to include both Mexico and the Canada resulting in production being shifted already to those countries. A recent UAW news letter leaked GM’s US product plans trying to obtain support for the recent contract negotiations, GM plans only identified one semi-major small car program (gamma – Lordstown, Ohio) will be manufactured in the US. But I do suspect, GM’s Mexican operations will be supplying a few high volume small car programs to their US market to balance their future CAFE averages since they are considered domestic.

 

I contend if the policy of this administration is to maintain an upgrade to the current CAFE requirements then the Senate proposal is not advantageous to the manufacturers or the public from a free market economy perspective. But I suspect, the policy aims of the Senate and President are very different as only real change to the fleet and reduced energy usage can from the Senate's plan. Why, because the Senate’s plan will force change on the public and manufacturers as meeting their proposed legislation is all but impossible with the current fleet size and it will make the US vehicle fleet look a lot like Europe’s. The manufacturers should plan for both proposals as I have previously discussed, buying tastes can change in a day.

 

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Comments
Wed Oct 24, 2007 9:14 am
Name: Jonathan Trenn | Email: jtrenn attt energybill2007 dottt | Url: http://www.energybill2007.usComment: What a sound analysis.

The most striking statistic for me is that CAFE standards haven't been raised since 1985, a gap of 22 years. So not only have we stopped becoming fuel efficient for over two decades, we've not taken into account people's buying habits, which have effectively altered the landscape that much more. Yet we continue to rely heavily on oil - a resource that can pollute. And a resource that we get from unstable places such as the Persian Gulf.

You're quite right in the manufacturers should plan for both proposals. While regulations can be troublesome, I tire of hearing hearing terms such as 'decimate'. Car companies know change is coming. They should change with it.

I'm actually working with a coalition to make sure Congress sends the president a strong - but reasonable - energy bill with meaningful changes for our environment and planet. This legislation would be a step toward stopping global warming. We've got an online petition at http://www.energybill2007.us.

At some point, we need to pick up where we left off 22 years ago. To me, that time is now.

Wed Oct 24, 2007 9:18 am
Name: Jonathan Comment: The link can be found here: Energy Bill 2007

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