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August 30, 2012
Disagreements over costs for 2025 vehicle standards
Untitled Document

               The Obama administration’s announcement of new CO2 and corporate average fuel economy (CAFE) standards for light-duty vehicles immediately sparked disagreement over the economic impact of the changes.  The standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles and continue the same regulatory approach the government employed in setting standards for model year (MY) 2012–2015 light-duty vehicles. 
GHG & CAFE standards
               EPA’s portion of the final rule establishes an average industry fleetwide limit of 163 grams/mile of CO2, which is equivalent to 54.5 miles per gallon (mpg) for MY 2025.  In the CAFE portion of the rule, the National Highway Traffic Safety Administration (NHTSA) will roll out the standards in two phases.  The first phase sets a fleetwide average of 40.3 to 41.0 mpg in MY 2021.  The second phase covering 2022 to 2025 is not yet final, although the NHTSA projects a standard in the range of 48.7 to 49.7 mpg by 2025.  Separate standards for passenger cars and trucks will be based on a vehicle’s size or footprint.
Gas savings
               According to the two agencies, the amendments will increase the average cost of a new vehicle by about $1,800 in 2025 when the standards are fully effective.  However, the agencies argue that a consumer who drives his or her 2025 vehicle for its entire lifetime will save between $3,400 and $5,000 because of the reduced need for fuel.
               That line of thinking is not persuasive to the National Automobile Dealers Association (NADA), which expects a much larger average price hike of $3,000 for MY 2025 vehicles.  “This increase shuts almost 7 million people out of the new car market entirely and prevents many millions more from being able to afford new vehicles that meet their needs,” said Bill Underriner, NADA’s chairman.  “If this rule suppresses new vehicle sales, achieving the nation’s greenhouse gas and energy security goals will be needlessly delayed.”
Technological feasibility
               But the new standards were issued with the support of many auto manufacturers, which have advocated a single set of national standards that are technologically and economically feasible.  It has been conceded by the industry for some time that vastly improved fuel efficiency for light-duty vehicles is possible through advances in gasoline engine transmissions, vehicle weight reduction, lower tire-rolling resistance, improvements in vehicle aerodynamics, and more efficient vehicle accessories.
Compliance flexibility
               Even with the technological comfort level, the final action contains a provision for a midterm evaluation of the MY 2022 to 2025 standard.  Furthermore, the rule contains a number of compliance flexibilities, including allowing a manufacturer to generate credits if its fleet overcomplies with the CO2/CAFE requirements; the ability to generate credits by reducing GHG leakage from vehicle air conditioners; credits for off-cycle technologies (e.g., active aerodynamics and solar panels on hybrids) that are not reflected in EPA’s test procedures; and an incentive multiplier for CO2 emissions compliance purposes for electric vehicles, plug-in hybrid electric vehicles, and fuel cell vehicles sold in MY 2017 to 2021.
The CAFE requirements are authorized by the Energy Policy and Conservation Act (EPCA), which requires that NHTSA establish a maximum feasible average fuel economy level that it decides manufacturers can achieve based on technological feasibility, economic practicability, the effect of other federal standards on fuel economy, and the need to conserve energy.  The Clean Air Act affords the EPA the power to set GHG standards for vehicles.

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