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    Aug182012

    A FLAT CAFÉ RISES: The Resurgence of the Corporate Average Fuel Economy Regulations

    Abstract

    Although the Corporate Average Fuel Economy (CAFÉ) standards began as very modest, insufficient regulations to improve fuel economy without any additional regulation of CO2 emissions from privately owned vehicles, political and economic events through the course of its enactment converged to catapult the CAFÉ regulations toward new milestones in reducing carbon pollution.

    As a result of the 2009 Obama administration’s mandates for a new national fuel economy standard that redrafted the calculations for carbon pollution per vehicle on a “footprint” calculus, and a strong shift in public approval of lower costs in transportation expenses in a high unemployment economy, CAFÉ standards paved the way for innovative market solutions to meet aggressive new CO2 reduction goals for the next 13 years.

    1.      Introduction

    The Corporate Average Fuel Economy (CAFÉ) regulations were first enacted by Congress in 1975 in response to the instability of petroleum producing countries during the 1973 Arab Oil Embargo. Fuel efficiency standards for cars, and eventually trucks, were to be established by the Environmental Protection Agency (EPA) under the charge of the Clean Air Act of 1963, and administered by the National Highway Traffic Safety Administration (NHTSA), which is overseen by the Department of Transportation (DOT).

    When the first CAFÉ standards were implemented in 1978 at 18mpg, the initial purposes of this policy was to reduce oil consumption by increasing automobile fuel economy and establish immediate energy security measures to protect U.S. economic interests. However, after some gradual increases in fuel efficiency through its first decade in practice, the CAFÉ standards caved to automotive industry pressure upon Congress to relax the standards (Lubetsky, April 2011) and effectively flattened fuel efficiency benefits for the next twenty years (fig. a).

     1.      Nature of the Environmental Problem

    Historically, fuel economy was set by the sales-weighted harmonic mean, expressed in miles per US gallon (mpg), of a manufacturer's fleet of current model year passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 pounds (3,856 kg) or less, manufactured for sale in the US. If the average fuel economy of a manufacturer's annual fleet of vehicle production falls below the defined fuel economy standard, the manufacturer must pay a penalty, multiplied by the manufacturer's total production for the U.S. domestic market (Corporate Average Fuel Economy).

    This economic formula did not account for the environmental impact of vehicles on the road, or for the growing size of engines that were becoming popular in the early 1990s with the introduction of Sport Utility Vehicles (SUVs). These new vehicle types were significant contributors to CO2emissions during this decade (fig. 2a) and were brought into the market by automobile manufacturers because light-duty truck CAFÉ standards did not apply to their larger wheel base (Yacobucci, 2007). SUVs also benefitted from artificially depressed gasoline prices, making the overall transportation sector responsible for 24% of CO2 emissions during the years 1990 – 2003 (fig. 2c) (Transport, 2007). 

    “On April 6, 2006, the National Highway Traffic Safety Administration (NHTSA) released a final rulemaking for SUVs and light duty trucks beginning with model year (MY) 2008. The rule restructures the Corporate Average Fuel Economy (CAFE) program for light trucks to establish standards based upon vehicle size, as opposed to the [previous] program with one average standard for all light trucks. It marks a significant change to the CAFE program for trucks” (Yacobucci, 2007).

    In addition, a Gas Guzzler Tax was levied on individual passenger car models (but not trucks, vans, minivans, or SUVs) that get less than 22.5 miles per US gallon (10.5 l/100 km) (Gas Guzzler Tax). A total of $794,921,139.50 US dollars were assessed by CAFÉ fines on the automobile industry related to noncompliance of the fuel economy regulations (NHTSA, 1983-2009).

     

    Meanwhile, CAFÉ still lacked the calculus to include environmental policy to reduce carbon pollution from automobiles in its application of fuel economy standards.

    1.      Policy Tools

    Optimum air quality has been a mission for California’s Air Resources Board (ARB) since its first meeting on February of 1968 in Sacramento, the state’s capitol. This department of the California Environmental Protection Agency  (CalEPA) was formed a year before, when the state legislature passed the Mulford-Carrell Act and combined the  Bureau of Air Sanitation and the Motor Vehicle Pollution Control Board to establish the ARB (Air Resources Board, 2008). Through the work of the ARB, important milestones were achieved such as the creation of the Los Angeles County Motor Vehicle Pollution Control Laboratory (1955), the Federal Motor Vehicle Act of 1960 which required federal research to address air pollution from motor vehicles, and 1976 the ban on lead in gasoline. Other significant ARB achievements through the subsequent decades led to big reductions in air pollution by 1995, such as a 58% reduction in nitrous oxide and an 80% reduction in atmospheric hydro carbons over 1970 levels (Air Resources Board History, 2012).

    However, with The U.S. failing to ratify the Kyoto Protocol in December of 1997, environmental groups in California, like the San Francisco-based BlueWater Network, began to lobby the California State Assembly for improved reductions in greenhouse gases from transportation sources. Historically, California has led the nation’s highest quantity of buses, trucks, and personal vehicles among the three most populous states (fig. 2d) (Comparison of State and Local Government Revenue and Debt). The scale of California’s purchasing power in the automobile market clearly had direct consequences for all automakers, and because of California’s strict air quality standards, it is the only state able to set more rigorous emissions standards for vehicles than mandated at the federal level, as long as it gets a waiver from the federal government (Climate Change Emissions Standards for Vehicles, 2007).

    Around this time, CalEPA recognized the problem of air pollution in the auto-dominated Southern California area. In 1997, CalEPA’s (ARB) launched a study of smog in this part of California, to better understand how this environmental problem occurs and its impact  not only with the state’s communities, but beyond to other states as well as Mexico. The study built upon an estimated 80% in air quality improvements to Los Angeles area between the years 1981 and 1995 as a result of cleaner fuels, more efficient vehicles, and reductions in industrial emissions (Varenchik, 1997).

    However, with so many millions of vehicles on the roads with various model years that pollute more with higher vehicle miles traveled, the concentration of elevated greenhouse gas emissions continued to alarm environmentalists, ultimately rallying the to push for strict limits on CO2 emissions starting with California’s automobile sector (Gurwitt, 2003).

    Initially, CAFÉ regulations did not specify how automobile manufacturers were to meet the fuel economy standards, but plenty of opposition was presented against changes in automobile technology to meet them. Car companies responded by building lighter and smaller cars that would burn less fuel in order to comply with the CAFÉ standards. However, strong opposition from industry interest groups centered on arguments that trade-offs to the lighter, smaller vehicles would result in an increase of deaths and injuries for drivers and passengers. James Healy, reporting for USA TODAY, wrote that “in the 24 years since [this] landmark law to conserve fuel, big cars have shrunk to less-safe sizes and small cars have poured onto roads. As a result, 46,000 people have died in crashes they would have survived in bigger, heavier cars, according to USA TODAY's analysis of crash data since 1975, when the Energy Policy and Conservation Act was passed.” (Healey, 1999). This was a challenge to the approach automakers were taking toward building more efficient, economical vehicles in response to tighter emissions standards.

    In spite of aggressive lobbying efforts amounting to nearly $5million dollars spent by the automobile industry to block what would become the AB 1493 (2002) Clean Air Clean Cars Act, California Governor Gray Davis signed the “Pavley Bill” into law, which authorizes and instructs California Air Resource Board to formulate and implement a program for reduction of greenhouse emissions from passenger cars and light-duty trucks and became the first bill of its kind in the country (Legislation).

    Prior to 2008, when the target fuel economy was simply the fuel economy of the vehicle expressed in mpg, there was no consideration of a vehicle’s impact based on scale of chassis. All that changed in 2008, when NHTSA revised the fuel economy target calculus to one based on attributes of each vehicle instead of a top-down uniform target across an entire automaker’s fleet. The new calculations are based on the vehicle footprint target, which is determined as the product of the vehicle’s wheelbase and average track width in square feet ( Vehicle Standards Timeline (1975-2011)). This change enabled “carbon-footprint” standards to begin factoring into the criteria for SUVs and other fuel consumptive vehicles more accurately, and was used by California in its application of the Pavley Bill.

    Although California would spend the next couple of years appealing denials and delays to its waiver request to the U.S. EPA to enable it to implement its own fuel economy standards, but ultimately being denied its request for a waiver to the Clean Air Act by then EPA Administrator Stephen Johnson, the momentum to reduce greenhouse gases from automobiles was high in the public’s agenda and ultimately set the stage for what would become part of the new Obama Administration’s “Comprehensive Plan for Energy Security” in 2009. In fact, it was in January of 2009 when a newly elected President Obama directed the EPA to reconsider California’s waiver.

    2.      Political Process

    President Obama revived the debate over fuel economy and carbon dioxide (CO2) reduction in 2009 by announcing national standards for passenger vehicles. He directed the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Transportation (DOT), in collaboration with auto industry unions, environmental groups, and state governments, to coordinate a new process for integrating California’s emission standards into the broader national regulations. “This would surpass the CAFE law passed by Congress in 2007 and required an average fuel economy of 35 mpg in 2020” (Office of the Press Secretary, 2009).

    Through the coordination of these federal agencies, the new federal standard aimed to achieve the same fuel economy improvement as California’s standard of  35.5mpg by the year 2016. The new national fuel efficiency policy was “… projected to save 1.8 billion barrels of oil over the life of the program with a fuel economy gain averaging more than 5 percent per year and a reduction of approximately 900 million metric tons in greenhouse gas emissions (President Obama Announces National Fuel Efficiency Policy, 2009). The new standards also included a greenhouse gas emission limit per vehicle. As a result, although the announcement did not initially grant the EPA waiver to California, the state nonetheless agreed to amend its Clean Car Standards to conform to newly coordinated federal standard from 2012 to 2016, with the condition that it receive a waiver to set its own vehicle standards after 2016 and enforce its own standards for model years 2009 to 2011. Under this agreement, automakers welcomed the improved fuel economy standards and greenhouse gas reductions because of the regulatory certainty and organization that significantly reduced the costs of compliance (President Obama Announces National Fuel Efficiency Policy, 2009).

    Although California would eventually receive its EPA waiver, allowing it to regulate greenhouse gas (GHG) emissions from motor vehicles within the state, beginning with the 2009 model year (MY), in the fall of that same year the EPA and DOT’s National Highway Traffic Safety Administration (NHTSA) issued a joint proposal to establish a national vehicle standards program for light-duty vehicles. The EPA proposed the first-ever national greenhouse gas (GHG) emissions standards under the Clean Air Act, and NHTSA is proposing Corporate Average Fuel Economy (CAFE) standards under the Energy Policy and Conservation Act. The standards follow the targets stated by President Obama in May 2009 with the condition that California and those states that had adopted the California regulations would agree to conform to the new federal standards from 2012 to 2016.

    3.      Science and Tech issues

    The automotive industry was weakened by the significant increases in the price of gasoline during the 2003-2008 energy crisis. With so many inefficient SUVs as well as large-wheelbase trucks, this jump in prices compounded the broader economic crisis happening across the U.S. and consumers drastically reduced their purchases of new vehicles. The sustained reduction in demand caused the three primary automobile manufacturers in the US to seek some form of restructure, with General Motors (GM) and Chrysler securing bridge loans from the federal government. Ultimately, both car companies filed for bankruptcy in 2008. When these companies emerged from bankruptcy, they were able to restructure their operations and business models to embrace newer technologies that would ensure a strategic improvement over past failures.

    With the resurgence of the U.S. automotive industry, now car companies invested in low-cost new technologies, using the internal combustion engine and other components, such as direct fuel injection (a more efficient way to burn fuel), turbo charged engines that capture energy from the exhaust system, low resistance tires, and lighter weight vehicles that require less fuel to move – more choices for drivers in order to stimulate demand and anticipate the increase in CAFÉ regulations developed by the Obama administration (Rawn, 2012). 

    Analysis

    Through the past 34 years, the CAFE regulations have experienced periods of gradual change, stasis, and then transformative change. Had this report been attempted prior to 2009, as others were, I might side with the primary criticisms of the CAFÉ policy (Morrow, 2010). At that time, CAFÉ was criticized for not doing enough to make significant impact to reduce CO2 emissions. Older vehicles were still on the road operating at less-than efficient standards, consumers saved on fuel costs but drove further calculated in vehicle miles traveled (VMT), and finally, more efficient automobile technologies were not incentivized given CAFÉ’s low standards compared to foreign governments like Japan and Germany.

    The Obama administration changed all that. Put simply, the president’s mandate to integrate national standards for fuel economy with those already set by the state of California enabled the radical advance of the CAFE policy.  Environmentalist groups like the National Resource Defense Council (NRDC) praised the most recent revision of the 2009 CAFÉ standards. Roland Hwang, Director of Transportation Programs at the NRDC speaking emphatically in an interview, says:

     “This is a huge deal…when you combine this latest round of standards, 2017-2025, with the first round of standards that the Obama administration, California, and the automakers also negotiated back in 2009, this is the single biggest step in a generation to get our country off of oil and cut carbon pollution – this is a big deal” (Roland Hwang, 2012).

    I agree with Hwang’s enthusiastic support of these new standards, and go further in recognizing that it was the confluence of stressed economic conditions, industry transformations, public shift in values, and a legacy of policy advances that resulted in the most ambitious attack on CO2 pollution from automobiles while stimulating new technological achievements in the transport sector. The new CAFÉ regulations rely more explicitly on market-based instruments, drawing upon existing economic incentives (like rebates for purchasing new hybrid fuel vehicles), as well as processes that alter market conditions as a means to achieve its environmental objectives but still allow for some flexibility in how those objectives are met.

    Conclusion

    Although mired with lack of political support and strong industry resistance for almost 20 years, the total growth of the CAFÉ policy over the past 40 has finally begun to bear fruit. Now the automotive industry is looking to alternative fuels as a viable means to achieve the 55mpg fuel economy goal set by the Obama administration for the year 2025. CAFÉ regulations have championed solutions to the environmental challenges of clean air beset by the automotive industry as a whole, while also paving the way for a dynamic green economy marketplace. And while it may take some time to see the transformation of the national car fleet from gasoline to alternative fuels, car companies like GM are at the vanguard of these new technologies. In an interview on Climate One, Shad Balch, Environment and Energy Communications representative for General Motors, stated that “we want to build cars and trucks that run on anything but petroleum” (Shad Balch, 2012).

    Now automakers are steering consumers toward hybrid or electric vehicles. The Toyota Prius and the Chevy Volt are the front runners in a small, but growing share of the U.S. car market that will be dominant trend among young auto buyers (Glinton, 2011).  Meanwhile, utility companies are “building transmission lines, installing new equipment and fixing up power plants” (Fahey, 2012), coupled with “the shale gas revolution, and the low-priced gas that it has made a reality, is the key driver of falling carbon emissions, especially in the last 12 months” (Hanger, 2012). With abundant supply of domestic alternative energy, reducing our dependence on oil to fuel our automobiles, and smarter car technologies incentivized by complimentary federal purchasing programs, on aggregate we will likely realize the ambitious 55mpg fuel efficiency standards to significantly reduce carbon pollution for a long time to come.

     

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