President Obama Unveils 54.5 MPG Fuel Economy Regulation for 2017-25. Will it Alter Vehicle Choices and Increase Costs?

This CAFE mandate could require changes in vehicle size and weight, and the use of what are now expensive technologies in during the decade ahead.

In a thirteen minute speech in Washington this morning, President Obama revealed his proposal for doubling the fuel economy of vehicles sold in the U.S. by 2025. This proposal, which will apply to cars and light trucks sold during model years 2017 to 2025, establishes a global warming standard of an average of 163 grams of CO2 per mile per new vehicle by 2025 – the equivalent of 54.5 miles per gallon (mpg) if all the improvements are met through actual increases in  fuel-efficiency.

The President was joined by GM, Ford, Chrysler, Toyota, Nissan, Honda, Hyundai, BMW, Volvo, Mazda, Mitsubishi and Jaguar – which account for more than 90% of all vehicles sold in the United States – as well as the United Auto Workers (UAW), and the State of California. The automakers, after furiously opposing the increases behind the scenes, ultimately choose to agree because of the stability that known standards provide in an industry with ~4-year lead times. It is also a sign of how the automotive landscape has changed post government bailouts with the Detroit Three beholden to the Administration for billions of dollars in assistance since 2009.

“This agreement on fuel standards represents the most important step we’ve ever taken as a nation to reduce our dependence on foreign oil,” said President Obama. “Many of these companies were part of an agreement we reached two years ago to raise the fuel efficiency of their cars over the next five years. By 2025, the average fuel economy of their vehicles will nearly double to almost 55 miles per gallon.”

The 54.5 Corporate Average Fuel Economy proposal is as misleading as a campaign promise to new vehicle buyers because the well known window stickers on new vehicles do not contain the fuel efficiency number that is actually used by government regulators to compute compliance with CAFE.

Due to various credits and adjustments – including huge credits for electric vehicles – fuel economy for CAFE purposes is roughly 25% higher than window stickers. So the widely touted 54.5 is actually going to work out somewhere around 40 mpg – and only then after a mid-term review of standards and their costs agrees to proceed, which is in the proposal at the insistence of automakers, who are buying time. This 40 mpg is roughly where Western Europe is right now and – barring major breakthroughs in fuel efficiency – it means that the roads of the United States will eventually become populated by much smaller vehicles than today – ones that are in Europe now.

So this latest government mandate will require unprecedented changes in the size and weight, as well as expensive new technologies in new vehicles during the decade ahead. This might require stunning and largely self-defeating increases of as much as $10,000 in vehicle cost – but the politicians extolling the virtues of the new standard will not be around to be held accountable by voters if the promises of $8000 in fuel savings under the decree are offset by increasing costs. However, given the competitiveness of the auto industry and it enormous efficiencies of scale, this is a good policy bet as well as a good political one too – given our dependence on oil from global  corporations and foreign hostile countries.

In the Annual Energy Outlook 2011 from the U.S. government this spring, increases in fuel economy standards and consumer reactions were examined. “When manufacturers bring an advanced vehicle technology to market, consumers must be willing to buy it. There is a high level of uncertainty about consumer willingness to pay significantly higher prices for more fuel-efficient vehicles,” the report said.

A more thorough independent analysis of the cost versus benefit of stringent fuel economy standards has been undertaken by the Center for Automotive Research that is part of the University of Michigan. The report, The U.S. Automotive Market and Industry in 2025, asks the question “What will anticipated mandates for increasing vehicle fuel economy and improved safety do to the automotive industry in the United States?” (The full report is available at www.cargroup.org.)

Building an earlier research, CAR concludes the higher the new standards, the lower auto industry employment and the worse the air quality since people will hold onto vehicles even longer than the record number of years they do now because of price increases.  (See AutoInformed: $10,000 Increase per Auto under Fuel Economy Proposal?)

Nowhere are such doubts raised in the new fuel economy proposal during today’s speech and follow on releases and blogs from the EPA and DOT, the two federal agencies which administer CAFE and are headed by Obama political appointees. The new standard builds on the Obama administration’s agreement for Model Years 2012-2016 vehicles, which will raise fuel efficiency to 35.5 mpg.

It is true that the two fuel economy dictates, combined with the model year 2011 light truck standard, are the first significant increase in fuel efficiency standards in three decades. But is it also true that – as environmentalist note – together they will save American families $1.7 trillion dollars in fuel costs, and by 2025 result in an average fuel savings of over $8000 per vehicle? The programs will cut U.S. oil consumption it’s said, saving a total of 12 billion barrels of oil, and by 2025 reduce oil consumption by 2.2 million barrels a day – as much as half of the oil we import from OPEC every day, but only 20% of current oil imports.

The oil savings, consumer, and environmental benefits of this fuel economy regulation are detailed in a new report entitled Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil, which the Administration released today.