Mustangs and CAFE Standards

Over the weekend a review of Ford's new 6-cylinder Mustang in the Wall St. Journal included an interesting perspective on the contribution of stricter Corporate Average Fuel Economy (CAFE) standards to the production of a car that provides both better fuel economy and more horsepower than the preceding model, in the absence of market incentives like higher fuel prices or taxes. While I have some quibbles with the reviewer's interpretation of the sequence of events involved, he does clarify the choice we've made in pursuing vehicle efficiency gains through a mainly regulatory, rather than a more market-based route. That choice implicitly trades off obvious costs at the gas pump for hidden ones in the sticker prices of new cars, while providing nearly unlimited scope for tampering to promote specific, favored technologies, as exemplified in the joint EPA and Department of Transportation CAFE and tailpipe emissions rules that were finalized last week.

The review in question concerned the 2011 Mustang equipped with a Duratec V-6 engine developing 305 horsepower but still managing a respectable 31 highway miles per gallon, a 29% improvement over the current V-6 model and a nearly 35% improvement over the current base V-8 with which the performance of the new, more powerful six might reasonably be compared. With its 19 mpg in city driving, the effective overall 24 mpg of the new model hardly puts it into competition with efficiency leaders like the Prius or Ford's own 39 mpg Fusion hybrid, but then I'm not sure how much time the typical Mustang buyer would spend looking at such cars, even if they achieved 100 mpg. More importantly, the most cost-effective fuel savings--and thus reductions in both oil imports and greenhouse gas emissions--will for some time come from improving the fuel economy of ordinary, non-hybrid cars. Consider that the new Mustang will save the average driver 130 gallons of gasoline a year compared to the old one. Buying a hybrid Fusion instead of the regular 4-cylinder Fusion saves only 40 more gallons per year than that, though at an extra cost of at least $3,295 on the sticker price.

It's debatable whether Ford would have produced a car like the 2011 V-6 Mustang without the tougher CAFE standards set by the US Congress in late 2007 and just finalized this April 1st. While the Wall St. Journal's new car reviewer sees clear cause-and-effect and wishes to "raise a cheer for government fuel economy regulations," I can't help wondering about the impact of gasoline price volatility during the product design cycle of this car. The last time I took a serious look at the subject, car companies spent three to four years creating a new model or major redesign of an existing model, tooling up to implement it, and then starting production. In 2007 US retail gasoline prices averaged $2.84/gallon and were coming off the first-ever summer in which monthly-average prices broke the $3.00 mark and on their way to $4.00 just a year later. I see as much causality in the arrival three years later of a 31 mpg Mustang as in the much less fortuitous arrival in 2007 and 2008 of various big SUVs and pickups that would have been designed in 2004-5, when gas prices averaged $1.89 and $2.31, respectively. Although I'm sure that the impending changes in CAFE standards influenced Ford's design department to develop products like the Fusion hybrid and the new Mustang, there's also good reason to suspect that Ford responded to changing fuel prices in much the same way that consumers did, albeit with an inherent lag of several years.

As long as it remains politically suicidal to take steps to increase fuel prices and provide consumers and carmakers with some certainty that they will remain high, we can't rely on a volatile fuel market to provide consistent signals favoring higher fuel economy. There are also solid arguments for holding down fuel taxes, unless their revenues are dedicated to improved highway maintenance or returned to taxpayers via rebates or breaks on other taxes. In the absence of higher gas taxes, however, the main policy levers available for reducing national fuel consumption are high taxes on gas guzzling cars, such as those levied on engine displacement in the UK and elsewhere in Europe, or the CAFE pathway the US has followed since the 1970s--and that unintentionally helped spawn the entire SUV fad through its infamous "SUV loophole."

In its latest incarnation CAFE treats SUVs less generously but still provides manufacturers with credits for producing flexible fuel vehicles capable of burning E85 that consumers don't seem to want, by letting carmakers count them as though they used E85 half the time--1% is more like it--and then only counting the 15% gasoline content of the E85 consumed for that half. The new CAFE also treats plug-in electric vehicles as though they consume no energy at all and somehow displace two non-electric cars each. While the latter distortion might not turn out as badly as the SUV loophole, these rules--along with hefty EV subsidies for consumers--are certainly going to push carmakers in the direction of making a smaller number of full EVs at the expense of a much larger number of non-plug-in hybrids, or even modestly improved cars such as the new Mustang, which must have required a considerable investment in technology and production retooling. Stacking the deck in that manner looks like a very expensive way to reduce greenhouse gas emissions, compared to other options. I'd much rather have seen a simpler set of rules--spelled out in many fewer than 837 pages--that established the required mpg and emissions outcomes by year and left it to carmakers and consumers to work out how to achieve them.

It's easy to forget how much the fuel economy of comparable cars has improved during my lifetime. The Mustang review caught my eye because my first car was a used '65, a quintessential baby boomer car that defined its entire category. Yet even when driven conservatively, the best I could eke out of mine was about 14 mpg, and 12 wasn't an unusual result. You can run two of this year's model on the quantity of fuel my '65 consumed, and in considerably greater comfort and with about 1% of the non-greenhouse emissions. How much of that improvement should be attributed to CAFE standards, the general advance of technology over the intervening years, or because fuel prices have finally surpassed the inflation-equivalent of the $0.60/gal. or so that I was paying when I bought my first car?