Friday, November 16, 2007

Closing the SUV Loophole

We've had several reminders this year that, when it comes to energy and environmental policy, the executive and legislative branches of government aren't the only ones that matter. First it was the Supreme Court ruling that carbon dioxide could be regulated as a pollutant--defying a common-sense definition of the term--and now the 9th Circuit Court of Appeals is telling the administration that its 2006 update to fuel economy standards for SUVs and light trucks didn't adequately justify treating them differently from passenger cars--in which role most of them are actually used. Even though this ruling is bound to be appealed, it seems likely to influence Congressional thinking on the form that stricter CAFE standards ought to take. If it turns out to be illegal to treat cars and SUVs differently, then the debate over a new 35 mile per gallon standard could get even tougher.

Although the arguments with which the 9th Circuit justified its ruling seem a bit strained, the so-called SUV loophole should have been addressed years ago. It is a classic example of unintended consequences overwhelming the good intentions behind a regulation. While it may have initially benefited businesses that used such vehicles for truly commercial purposes, holding light trucks to a lower standard--even as sales of this class exploded--has increased total US gasoline consumption by approximately 440,000 barrels per day , or about 5% more than would have been the case, had the SUV fad never taken off. The cumulative fuel impact of the SUV loophole exceeds the entire contribution of our costly corn ethanol strategy over the same period.

Closing the SUV loophole might not be as dire as it sounds for auto makers, however, because the average fuel economy of new passenger cars in 2007 is running well ahead of its current target of 27.5 mpg, even though "light trucks", including SUVs, come in very close to their required minimum of 22.2. As of the latest posted report, the entire new car fleet was averaging 26.4 mpg. Achieving 27.5 for all vehicles would only require SUVs to improve by 1.8 mpg, or the sales mix to shift by 7 points of market share toward passenger cars averaging 31 mpg. And if they don't get there right away, the fines to which carmakers would be subject aren't severe.

Ratcheting the entire new vehicle fleet up to a uniform 35 mpg standard would be a very different proposition. Getting another 4 mpg out of passenger cars wouldn't be difficult, using a variety of affordable technologies. Boosting the average for SUVs by more than 50%, on the other hand, would require wide application of the best available technology, which still might not be sufficient. Compare the hybrid and non-hybrid versions of Ford's Escape small SUV, and you only get a 33% uplift. Closing the gap across the entire new vehicle fleet would thus require pushing passenger cars well beyond 35 mpg, boosting SUV efficiency as much as possible, and reducing SUVs' share of the sales mix significantly. In this light, the 40 and 50 mpg CAFE standards that some presidential candidates are espousing could legitimately be characterized as plans for the virtual elimination of SUVs, unless they are only counting the petroleum consumption per mile and banking on biofuels and plug-in hybrids. If so, that could create even more unintended consequences than the SUV loophole did.

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