The Real CAFE Debate

Reform of US vehicle fuel economy standards has passed two out of three hurdles. The President proposed a 4% per year improvement in Corporate Average Fuel Economy targets in his State of the Union address, and last week the Senate passed a bill that would increase the CAFE standard to 35 miles per gallon by 2022. The last piece of the puzzle must come from the House of Representatives, which may defer consideration of CAFE until it takes up greenhouse gas limits later this year. In the interim, it's worth looking at two aspects of the CAFE system to get a better sense for what implementation of stricter standards might actually mean.

Last weekend, at a cocktail party at a friend's home, I chatted with some auto industry folks about the energy bill that had just passed. They were genuinely concerned about the ability of the US industry to deliver 35 mpg across the entire fleet, and I didn't get the impression this was just a question of whether they could do it and still make money--though that's not a trivial consideration, either. But this is not just a matter of technical feasibility. As I pointed out in a posting earlier this year, the European brands of two of the Big Three already meet the proposed target, with Ford's 2005 models averaging 36.3 mpg and GM's Opel and Vauxhall models coming in at 35.2 (after converting from grams of CO2 per km to mpg.) When you look at how they do it, two factors are obvious: size and fuel choice. Europeans drive smaller cars, with smaller engines, and more than half of new cars burn diesel fuel, which provides about a 30% boost in fuel economy versus a comparable gas engine.

Dropping a diesel into a big SUV would only take you from 17 mpg to 23. Hybridization of the gas model gets you to roughly the same point. Increasing overall fleet fuel economy by 10 mpg will certainly require Detroit to produce more models with more efficient power trains, but it will also require US consumers to shift their preferences towards smaller, lighter vehicles, probably sacrificing some performance in the process. Unless gas prices keep rising, I have my doubts about how rapidly that shift will take place. After all, if everyone wanted a Toyota Camry Hybrid, we could meet the new target next year.

And that brings me to the aspect of CAFE that I haven't heard discussed at all, enforcement. What happens if carmakers miss these new mpg targets? Under the current system, they pay fines, and the record of fine collection makes interesting reading. When you compare the fines assessed with the fuel economy of the vehicles sold by each firm, you see that falling short by one or two mpg hasn't been very expensive; averaged across a company's entire sales, it works out to under $100 per vehicle. Even for Ferrari, which is routinely 40% below target, the cost is around $700 per car. If the new targets are implemented under the existing system of penalties, then there's little need for additional "offramps" to shelter manufacturers. However, if the penalties are strengthened, US carmakers could find themselves caught between the vise jaws of consumer inertia and regulatory pressure, despite having designed cars that would meet the target. I can understand why the Big Three might be uncomfortable about a national debate on fuel economy that avoids talking about the carrots and sticks that might nudge consumers towards the car choices that constitute an essential ingredient of meeting these goals.