White House Delays CAFE Announcement As Jobs, Downsizing Achievments Come Under Fire

Though the Obama Administration has announced the broad outlines of its 2017-2025 CAFE standard, the final rule wasn’t supposed to be released until the end of this week… and now, according to Reuters, it is delaying that release until mid-November. According to Reuters

The administration would, with a short delay, remain on track to meet its deadline for issuing final rules next July, five years before they take effect. That timeline gives the industry room to plan its vehicle mix and make any production or technology changes…

But sources familiar with the matter said the work is complex and time consuming. Regulators, they said, are purposely moving slower than anticipated to ensure that industry, environmental and consumer issues likely to be raised during a lengthy public comment period are addressed ahead of time.

Regulators also want to make sure the proposal can clear the White House budget office, which reviews proposed regulations, in a timely fashion.

But even as regulators work to anticipate criticisms of the new standard, more criticisms are materializing. From the mitigating impact of loopholes added late in the process to the regulation’s effect on jobs, the CAFE criticisms are stacking up.

When the proposed rule for 2017-2025 was released, I argued strongly against the loopholes that were added late in the process, writing

Though it’s a tough standard compared to what the industry has been used to, it’s also got loopholes (like the combination of 0g/mile EV rating and “multiplier credits”) that were considered before and rejected as too lenient… And, if nothing else, the layers of loopholes on top of already-complex calculations prove how much more efficient it would be to simply tax gas and let the market sort the details out.

And it seems that I am not the only one who is puzzled by the presence of loopholes that seem to mitigate any significant effects CAFE might have on the market’s product mix. In an interview with WardsAuto, Hyundai Motor America CEO John Krafcik grouses

“It used to be we wanted to downsize to meet fuel-economy targets, but now you really don’t have to do that.”

The ability of an OEM to game the system by exiting segments within its portfolio likely means auto makers in 2016 and 2025 could “hit every (CAFE) target, but the overall industry average still would be lower than what’s expected because the segments have shifted up,” Krafcik says.

“Every well-intentioned action has an unintended negative consequence. This is a classic one. Because of the new CAFE guidelines, the most fuel-efficient segment for pickup trucks, the small ones, aren’t going to be available in the U.S. market. That’s crazy.”

As we pointed out when Toyota and Ford hooked up, increased fuel economy standards would normally spell a decline in full-sized pickup sales and an increase in sales of more-efficient, smaller pickups, but

not only did the government reduce the required rate of efficiency improvement for trucks to nearly half what it is for cars, they also went a step further by giving credits for specific (i.e. hybrid) technology. Absent these credits, it’s highly likely that truck-dependent manufacturers would have looked to diesel power as a way to cheaply provide high-torque, high-efficiency truck powerplants, but with the feds placing their finger on the scale in favor of hybrids, Ford has no choice but to invest in the technology.

Krafcik is right to wonder what the government is playing at. Does it want Americans to drive smaller, more efficient vehicles in order to reduce our dependence on foreign oil, or is the new CAFE standard simply a way to game the US market to favor segments and technologies in which the US manufacturers enjoy an advantage (full-sized pickups and “Two-Mode Hybrids)? After all, if CAFE were about jobs then perhaps that second approach might be more justifiable.

And, in fact, there is a strong push to justify the CAFE policy as job-creating legislation, and that effort is being spearheaded by CERES, “a national coalition of investors, environmental organizations and other public interest groups.” In a study advertising “more jobs per gallon,” CERES continues a theme that it’s backed for some time: fuel economy increases are good for America’s “domestic auto industry.” I’ve addressed this argument at some length in the past, arguing

this line of analysis is truly puzzling. After all, the thesis that Detroit stands to gain the most form CAFE increases runs directly counter to the lobbying message coming out of Detroit’s governmental affairs offices as well as the Alliance of Automotive Manufacturers. On the other hand, even accounting for the flawed assumptions of $4/gal gas, strong truck sales and the consumer’s willingness to front-load costs (something the American consumer is famously allergic to), the study still sends Detroit in the right direction. Though I wouldn’t rush to assume that CAFE increases (or even higher fuel prices) will spur marginal profitability or volume gains for the Detroit automakers, steadily rising gas prices will have more of an impact on the market than CAFE. Whether profits improve or not, Detroit has little choice but to correct for its decades of anti-fuel-economy planning as the market changes. And, as Detroit has learned all to well in recent years, profits are nice but survival is the bottom line. Survival, not a groundswell of business success, is what should be motivating the Detroit automakers to stop worrying and learn to love (or at least accept) CAFE increases.

But CERES won’t stay down on the issue, and now Edmunds.com CEO Jeremy Anwyl has taken up the burden of knocking holes in the “higher CAFE=more jobs” logic, writing

Ceres has been advancing the enticing notion that increased fuel economy and stricter greenhouse-gas emissions standards will actually increase jobs. In fact, the group contends that the higher the fuel-economy standards, the greater the economic benefits.

This surprising conclusion struck me as wonderful news. Intrigued, I tracked down a copy of the report. It’s certainly nicely presented, with lots of colorful charts and graphics. But after reading the document closely I have to question many of its conclusions, which seem panglossian at best. Both Ceres and the dealers are cannily tying fuel economy to the issue of the day: employment. This is good politics, but linking sales of goods to employment is always tricky; the economy is a complex system. Often, increasing sales in one area will only reduce sales in another. The result can be net job neutral because consumers have to make choices about where to spend their money. Adding to the complexity, sometimes consumers borrow to make a purchase, sometimes they pay cash, sometimes they take the money from savings. Then there is the role of the global economy: some goods are made here, some goods abroad…

Ceres seems to be saying they expect vehicles sales to increase as prices rise. This makes no sense unless you assume that consumers see the new high-efficiency vehicle as offering the kind of markedly superior utility for which they are willing to pay extra. That strikes me as the fundamental question: Will consumers actually want to buy these new, higher-mileage, more-expensive vehicles that CAFE will require automakers to build?

Ceres seems to somewhat anticipate this question, citing their own poll in which 78 percent of consumers support high-mileage standards (Ceres called the respondents “voters,” which might grab more attention in Washington).To Ceres’s credit, the group does call it a poll; it clearly isn’t research. Research into whether consumers will actually buy these new government-mandated, high-tech wonders would also mention the fact that these vehicles likely will be smaller, more costly and possibly less safe.

In the real world, consumers weigh trade-offs when deciding purchases. How much they are willing to pay, which attributes are more important than others. It would be reasonable to conclude that consumers would indeed prefer the vehicle they have today, with two times better fuel economy. Sign me up for this as well. But we don’t have to do an expensive research project study to a see a how consumers feel about the tradeoffs associated with better fuel economy. We can just look at what they actually buy. This is not to say that consumers don’t care about fuel economy. Many do. But it is just one of a myriad of attributes that comprise a consumer’s purchase decision. And it is generally not at the top of the list.

My sense is that Ceres is getting things wrong. Compromising a vehicle’s utility while raising its price will reduce sales. Hardly a formula for creating jobs.

Panglossian is a great way to describe this line of logic. And as if the internal logic of the CERES thesis weren’t tortured enough, it misses the big picture: an insatiable appetite for cars in China, India, Brazil and Russia is likely to produce enough upward pressure on the price of oil between now and 2025 that the impact of fuel prices is likely to outweigh the impact of CAFE regulation. In short, CAFE will save jobs… but only because it forces OEMs to worry about fuel economy more than they might otherwise. It’s not about creating a proud new American industry, it’s about preparing what’s left of our existing auto industry for the inevitable oil price shocks caused by the European market-worth of new cars that will be sold over the next five years in China alone.

As federal regulators work to create a final rule for the 2017-2025 CAFE standard, they should be thinking about all of these issues. After all, criticism of the standard both in terms of its effects on the cars offered in the US and the state of the auto industry are only likely to increase over time. But at a certain point, they need to stop trying to anticipate all the possible criticisms of this complex and unwieldily law, and just get a final rule in place. After all, this is why a mid-term review period was included in the legislation. We’ll need to get a lot closer to 2025 before we even know what role CAFE standards will play in an environment that could be very different from the one we currently occupy.