#CAFE

The Michigan Congressional delegation’s letter, stating that the Detroit-based automakers are not technologically capable of serving the market while complying with a proposed 2025 CAFE standard seemed strange to me in light of the recent progress made by Ford and GM on fuel economy. Why, I wondered, would these firms boast of their fuel econmy efforts on the one hand while allowing their congressional representatives to portray them as unable to build a CAFE-compliant fleet on the other. Why, I wondered, don’t Ford and GM come out and angrily insist that they can build the most fuel efficient cars in the world? My guess: because they know that they can probably wheedle a loophole out of the feds if they keep pleading inability. Yes, everyone knows they can comply with CAFE… but even the UAW knows that when the government asks you to do something, you ask for something back. Which in turn made me wonder: what might the OEMs want? And, turning to the 2012-2016 CAFE Final Rule [go on, give it a read in PDF format here], I found a glaring loophole that all the manufacturers seemed to want, but which the feds turned down. I have no evidence that this is back on the table for 2017-2025, but I thought I’d put it out there to give a sense of what the OEMs may be pushing for by pleading inability to comply with the proposed 2025 standard.

An anonymous tipster has sent us a copy of a letter from the Michigan congressional delegation to President Obama [ PDF here, or hit the jump for an embedded copy], which calls his proposal for a 56.2 MPG CAFE standard by 2025 “overly aggressive and not reasonably feasible.” The letter is remarkable in the sense that the major signatories are Democrats, and yet it attacks the President’s proposal with more vigor than many inside the industry. The letter also confirms that that the Detroit-based automakers already rely on CAFE’s “credit” loopholes in order to meet the 2012-2016 standard, a stunning admission of how far behind Detroit still lags in fleet fuel economy. And rather than taking responsibility for their situation, the MI representatives blame CAFE for Detroit’s low fleet efficiency, arguing that “manufacturers that produce primarily smaller vehicles will have an unfair advantage.” Moreover, the MI reps don’t just admit that Detroit is behind its competition, but even goes as far as to argue that “the overall targets currently proposed may exceed what is technologically achievable for the the US automakers that produce and sell the majority of the larger pickup trucks and sport utility vehicles that US families and businesses -and tens of thousands of autoworkers- depend on.”

In short, the letter strikes me as a shockingly old-school display of excuses and apologia that stands in sharp contrast to the “green car revival” narrative that Detroit and D.C. pushed so hard during the bailout. And frankly, I’d be embarrassed if I ran one of the largest automakers in the world and I was reduced to pleading my inability, on technological grounds no less, to achieve a 56.2 MPG fleet average (which in “window sticker” terms, translates to about 41 MPG EPA) within 15 years… even though CAFE is riddled with loopholes that make it easier to continue building thirsty trucks. If Detroit were actually leading the charge for a gas tax (or offering any kind of market-driven alternative), it might have some credibility on this issue, but as things stand this strikes me as nothing more than whining. So much for America’s “can-do” spirit…

The debate over 2025 CAFE standards will continue to rage all summer long, but if there’s one thing I learned from the industry lobbyists that I spoke to in Washington D.C. a few weeks ago, it’s that the media debate severely lags the conversation that’s going on behind closed doors. It’s a frustrating situation for commentators who hope to influence the process, but then D.C. debates are rarely about the ideas anyway. But environmental groups who hope to come between an industry that’s already relatively well-positioned for short-to-medium-term standards and a government that’s more interested in helping the industry than ever are still hoping to bring some public pressure to bear on an issue that, according to my sources anyway, was already largely settled weeks ago. Bloomberg [via AN [sub]] reports that

The auto industry is pressing the Obama administration for a promise to reevaluate rules that may more than double U.S. fuel economy standards by 2025 before they become final…

Still under negotiation are details of the midpoint review, including the timing, whether there will be a judicial review and whether the Environmental Protection Agency, the Transportation Department and California’s Air Resources Board will coordinate efforts, Gleberman said.

Environmental groups oppose the midterm review, saying it’s a gambit by automakers seeking to kill the program at the halfway point, when a president more friendly to the industry may be in office, said Dan Becker, director of the Washington-based Safe Climate Campaign.

According to my sources, a mid-way review of 2017-2025 standards was agreed to in principle by all the major stakeholder stakeholders some time ago. And for obvious reasons: with disruptive new technologies under development and the trajectory of fuel prices remaining an unknown quantity, nobody knows precisely what technologies will be available and what the market will demand come 2017. Like California’s ZEV mandate, a push to kill the mid-term review makes CAFE even less responsive to the market than it already is. If anything, environmental groups should embrace a review of current standards because there’s a good chance fuel prices will be higher and the nation will be more determined than ever to sacrifice for higher emissions standards. Besides, if CAFE loses touch with the market and has no opportunity to sync back up, the industry could be in for another disastrous downturn. And no matter how pro-regulation you are, it’s tough to argue that CAFE should be totally unresponsive to market forces. Unless you know exactly what the market will look like in 2025 (in which case, let’s start a hedge fund), trying to set 2025 emissions standards in stone now makes no sense at all.

Last week I wondered aloud about where the UAW stands on fuel economy, inspired by the union’s apparent flip-flopping between supporting the companies that employ its workers and backing its environmental allies on the left with talk of its commitment to green jobs. And after expressing concern about proposed CAFE increases, it seems the UAW is flopping back towards the environmentalist side of the equation, joining the so-called “Blue-Green Coalition” of labor leaders and environmental groups in expressing its vague support for “strong” emissions standards in a letter to President Obama [ PDF]. But with CAFE negotiations coming down to within 5 MPG or so of a final “number” for the 2052 standard, the letter’s lack of commitment means it’s still not clear where the UAW comes down in the policy debate. So instead of highlighting the union’s commitment to the environment, the letter ends up serving as a window into the UAW’s cynical, yet self-deluding side.

If you asked an auto industry lobbyist, say, a month ago, what the big fights were over in CAFE negotiations, he probably wouldn’t have said “the number.” In the parlance of the Potomac valley, that means everyone at the table knows that at some point they’re all going to join hands and sing kumbaya over one highly symbolic number. Not surprisingly, the numbers that everyone in DC has been looking at fall right in the middle of these four scenarios… not coincidentally the tipping point where hybrids swing from a quarter to nearly half the market. But are these WSJ [sub] charts even accurate? John Krafcik, CEO of Hyundai Motor America and the industry’s CAFE contrarian implies that it’s not for everyone, telling Automotive News [sub] that

Honestly, our focus isn’t on hybrid. Our focus is on optimizing internal combustion and getting as many fuel-efficient vehicles out there, across the lineup. That’s the way you do it. If you look at the math, if you look at how CAFE math works, volume trumps everything.

But then Krafcik oversees a brand that doesn’t just sell lots of high-efficiency cars, it sells very few pickups… resulting in a sales-weighted fleet fuel economy 35.7 MPG in the first half of this year (as calculated by Hyundai). Did we mention that the 2016 passenger car standard is 37.8 MPG, at which time it figures its non-hybrid Elantra will get 50 MPG combined on the CAFE test? And nobody can look at Hyundai’s six-month sales performance (up 26%) and argue that Americans don’t want to buy fuel-efficient cars. In short, Hyundai is proving that automakers who can make money selling appealing, fuel-efficient cars need not binge on hybrids Even, according to the EPA’s final rule on standards through 2016, for manufacturers trying to sell as many pickups as possible.

When the White House opened negotiations over the next round of CAFE regulations for 2017-2025, I reckoned the automakers and regulators were “working in nearly unprecedented harmony.” Well, not so much any more. The WSJ [sub] reports that, although work on “the big number” is proceeding well, in the words of IHS Automotive’s Michael Robinet

This becomes a lot more politically divisive as they become much more specific in terms of the footprint of the vehicle.

In short, the original sin of CAFE, the two-tier system that drove SUV “light truck” sales and saw the creation of “trucks” like the PT Cruiser and HHR, has returned to haunt the latest round of negotiations. And, according to the WSJ, Japanese and Korean manufacturers are complaining that the new rules will motivate consumers to buy less-efficient offerings, and in turn give the Detroit manufacturers an unfair advantage. The kumbayas are over, and the gloves are off… but just how unfair are the newly-proposed rules?

A little education, as they say, can be a dangerous thing. Using some rudimentary game theory from my days of studying political science, I’d become fairly convinced that the CAFE target for 2025 would be set at 62 MPG for the simple reason that CARB wanted that number, isn’t elected and could pull out of negotiations if it didn’t get it. After all, the White House and automakers wanted a uniform national standard above all else… wouldn’t they give up a few MPG in order to preserve their main goal? Well, after talking with a few people familiar with the negotiations last week, I soon realized that things weren’t that simple (thanks a lot, bachelor’s degree). I was told that a compromise would be reached at between 50 and 60 MPG; CARB might not have other business with the Feds, but their Governor did and Jerry Brown wasn’t likely to back a play for 62 MPG. And sure enough, the Detroit News reports that the White House has opened negotiations with Detroit by backing a 56.2 MPG 2025 standard.

According to the DetN’s report The 56.2 mpg figure and EPA’s proposed greenhouse gas emissions limits equivalent likely is an opening bargaining point. The final proposal could change as automakers and the White House hold more meetings to try to again reach agreement. The administration plans to formally propose new standards in September and finalize them by July 2012. It estimated last fall that hiking fuel efficiency to 56 mpg by 2025 would boost the average vehicle cost by $2,100 to $2,600. But the administration said the rule would save car owners $5,500 to $7,000 over the vehicle’s lifetime in fuel costs, and owners would recoup the additional up-front cost within 2.5 to 3.5 years. But don’t get too caught up in calculating those numbers just yet, as it seems that at least a few of the auto industry’s allies were expecting something a little lower than that. As the DetN reports But the proposal caught some Michigan members of Congress off guard, and was higher than some automakers expected. On Tuesday morning, two White House aides — former auto czar Ron Bloom and Gary Guzy, deputy director of the White House Office of Environmental Quality — met on Capitol Hill with Sen. Carl Levin, D-Detroit; Rep. Fred Upton, R-St. Joseph, chairman of the House Energy and Commerce Committee; and Rep. John Dingell, D-Dearborn, to discuss fuel efficiency efforts. The three had heard rumors that the administration would back 55 mpg by 2025. Despite questions, the White House aides didn’t disclose the 56.2 mpg proposal for 2025. But Levin said automakers had been given a figure at the Wednesday meetings. “There was a scenario that was placed on the table which frankly shocked me and was very different from what we were told was not in the cards — even in terms of discussions — just hours before,” Levin said. In a statement Friday, Levin said he was surprised “to learn that the administration had decided to lay down a scenario for regulation of vehicle fuel economy and greenhouse gas emissions after telling us just the day before that no ‘decision’ had been made relative to those issues.” He questioned the administration’s forthrightness. Though none of the lobbyists I spoke would give out a specific number, they all said that a number was close and that it was essentially agreed upon. At least, as one Beltway insider put it, “the big number, the one that we’ll all stand up, hold hands and commit to” was very nearly a done deal. And the complex regulations that turn one politically totemic number into reams and reams of rules, guidelines, schedules and formulae? “Only about six people in the country actually understand that part,” admitted one long-time industry lobbyist, “and I’m not one of them.” Though negotiation over the CAFE “number” have probably been narrowed down to a 3-4 MPG window for some time now, the actual regulations, with all of the inevitable loopholes and “gaming” opportunities won’t be done until next summer. Besides, there’s a baked-in opportunity to rethink the entire deal, politically totemic “number” and all, in 2018.CAFE may seem like a huge fight, but this time around it seems that industry and regulators are working together in nearly unprecedented harmony.

General Motors CEO Dan Akerson set off something of a firestorm a few weeks ago, when he said, in response to a question about forthcoming CAFE increases:

You know what I’d rather have them do — this will make my Republican friends puke — as gas is going to go down here now, we ought to just slap a 50-cent or a dollar tax on a gallon of gas.

Predictably, populists and economic alarmists of all stripes took great umbrage at Akerson’s candor, questioning his leadership of GM as well as his perspective on the shaky US economy. But Akerson is not alone in his support of some form of gas-tax increase. Bob Lutz and Tom Friedman (an odd couple right there, if ever there was one) agree with him. Edmunds CEO Jeremy Anwyl defended Akerson and even suggested a $2/gallon tax earlier this year. Bill Ford and AutoNation’s Mike Jackson are of the same mind as now-retired Republican Senator George Voinovich on the issue. And yet, inside the Beltway, the subject tends to draw a chuckle and a roll of the eyes. Everyone wants it, but nobody wants it.

As the industry (or at least parts of it) and the federal government face off over forthcoming 2017-2025 CAFE/emissions standards, a Center for Automotive Research study is getting more play than ever from an industry that seeks to portray the high cost of fuel economy improvements as being not worth the additional costs to consumers. CAR has yet to publish its full study, but it’s clearly intended to counter an offensive from groups like the Consumer Federation of America, which uses its own study to show that CAFE regulation will actually save consumers money. This battle, over the cost to industry and consumers of passing a 62 MPG standard for 2025, has been playing out for months now, and will continue to go back and forth over the rest of this summer. And sure enough, the Union of Concerned Scientists and the National Resources Defense Council have both hit back against the CAR study, calling it “industry-advocate propaganda” in the Detroit News and arguing that it underestimates future reductions in technology costs.

While the political battle lines over increasing CAFE standards are being drawn in Washington, with the industry taking on both environmentalists and itself, a line of analysis that’s been around since 2009 is exacerbating the industry’s internal divisions over the impact of CAFE increases. A two-year-old University of Michigan study has been exhumed and expanded upon in a new CitiGroup report which makes a bold claim: CAFE will actually improve both sales and profits for the industry. And with Detroit taking the lead in resisting CAFE increases, one might think that the industry’s “turncoats” like Toyota and Hyundai, who have made marketing-led decisions to support CAFE increases, would be the main beneficiaries of these reports. Not so. According to this battle-line-confounding analysis, the biggest beneficiary of CAFE increases will be… Detroit. Madness you say? You may well be right…

Pickuptrucks.com reports that you may not have to wait for Mahindra to work through its legal issues to get an efficient diesel-powered pickup, as the DOE has funded development of a four-cylinder Cummins diesel engine which is being demonstrated in a Nissan Titan. According to the report

Cummins refers to the engine by the codename “LA-4” with a 2.8-liter displacement (170 cubic inches). Initial power figures on the engine dyno have the mule test engine producing 350 pounds-feet of torque at around 1,800 rpm. A chart in the presentation shows targeted power levels to be approximately 220 horsepower and 380 pounds-feet.

The engine is likely a derivative of the four-cylinder ISF architecture that Cummins builds overseas, with 2.8-liter and 3.8-liter displacements. The overseas 3.8-liter is rated at 168 horsepower and 443 pounds-feet of torque…

To meet U.S. clean-diesel standards, the 2.8 would use diesel exhaust fluid to scrub nitrogen oxide emissions, like Ford and GM use today in their heavy-duty diesel pickups. It would also feature a so-called passive NOx storage system that would capture and hold NOx during cold starts, releasing the gas when temperatures rise to levels of max efficiency for DEF. The passive system would save fuel used today to jumpstart NOx scrubbing when the system is cold.

The upshot? 28 MPG combined, according to pickuptrucks.com. Given the discrepancy between EPA fuel economy numbers and the CAFE method, that means this engine could make a Titan (which gets 13/18 MPG EPA with its stock V8) more than compliant with the 2015 30 MPG truck standard. And because the DOE spent only $15m, this probably qualifies as one of the more promising government fuel-economy improvement programs in some time. After all, improving truck efficiency is one of the toughest aspects of CAFE compliance… and if a Titan can get nearly 30 MPG combined (about the same as current four-cylinder family sedans), the government’s $15m just bought it a crushing blow to the industry’s anti-CAFE carping.

Why do consumers like CAFE? Well, the short answer is that a gas tax (which is infinitely superior from a pure policy perspective) hits them directly in the pocketbook, while CAFE forces automakers to absorb the cost increases before passing them along to consumers in the form of higher MSRPs. But underlying this fact is a larger issue that’s driving support of increased emissions regulation: gas is getting more expensive. As I pointed out in my recent editorial on the subject, for all the automakers’ whining about CAFE increases, it seems that energy prices are moving the market in the same direction anyway (the average family will spend $3,100 on gasoline this year).

According to a Consumer Federation of America study [ PDF], the steadily-rising price of energy has consumer’s even more concerned about gas prices and dependence on the volatile Middle East than they were during the height of the last fuel price shock in the Summer of 2008. As a result, support for a 60 MPG fuel economy standard doesn’t go below 49% (among Independents) even assuming a ten-year payback period, and earns the support of 63% of Democrats. And before you dismiss this support as hysteria, consider the underlying economics for a moment…

The war of words over a possible 62 MPG 2025 CAFE standard is accelerating this week, as letters in support of the standard [sub] are vying with industry responses against the proposal for media attention. And though environmentalists are quick to point out the often-misunderstood difference between EPA and CAFE mileage ratings (a fact that even the industry-friendly Automotive News [sub] concedes, if only in a blog post], the industry’s response is miles away from any kind of compromise, saying

The alliance believes it is inappropriate to be promoting any specific fuel economy/greenhouse gas at this point

How’s that for some old-school, don’t-tread-on-me corporate attitude? No room for compromise, no sense of nuance… and yet, that doesn’t actually represent the industry’s position at all.

Though the EPA won’t actually announce its 2025 CAFE standard until September, the California Air Resources Board’ insistence on a 62 MPG standard for ’25 has the industry’s analysts and talking heads in something of a frenzy. Smelling the smoke on the breeze, Automotive News [via AutoWeek] trots out a range of interpretations of the proposed 62 MPG standard, from the frightening to the apocalyptic. Cost increases per vehicle for a 62 MPG by 2025 standard are estimated by government agencies at $3,500 “at most,” while Alliance of Automotive Manufacturers reckons they’ll run “as much as $6,400.” Sean McAlinden of the notoriously industry-friendly Center for Automotive Research figures the market will have to shift to 64% plug-in hybrids, at a price increase of $9,970 per vehicle, while the AAM adds that 62 by 20205 “could cut car sales by 25 percent, costing the industry 220,000 jobs.” And the EPA seems to be listening to the rising chorus of grumbles, as the agency’s Margo Oge soothed the locals on a recent visit to Detroit with the words

We will be very mindful — and I underline ‘mindful’ — of the consumer throughout this process. Unless people buy these new clean cars and trucks, and buy them in large numbers, everyone loses.

But if CARB wants 62 MPG by 2025, it will get it from the EPA. Which means the real question is simply how much will the standard actually add to per-vehicle costs? Is the industry inflating its numbers in hope of a teaspoon of federal sugar to help the medicine go down? Is the 62 MPG standard really an industry killer?

Yes, and yes, says a study of the Resources for the Future (RFF) institute. The Washington think tank’s study examined “the unexplored link between the prevalence of overweight and obesity and vehicle demand” for bigger and more gas guzzling cars.

RFF brands itself as a “nonpartisan organization that conducts independent research.” Their study found “that the prevalence of overweight and obesity has a sizable effect on the fuel economy of new vehicles demanded. A 10 percentage point increase in the rate of overweight and obesity among the population reduces the average miles per gallon (MPG) of new vehicles demanded by 2.5 percent, an effect that requires a 30 cent increase in gasoline prices to counteract.” Basically what they are saying: Fat people choose fat cars. More fat people, more fat cars.

Shame on you if your belly keeps you from reading the numbers on the bathroom scale, you are driving up the cost of our gas, fatso. If you would eat less, we would pay less. If the study is correct.