The Irony of Fuel Economy Legislation

Posted by: David Welch on June 23, 2007

To the American car buyer, I say prepare to downsize your vehicles or pay more for them. Late Thursday, the Senate approved a bill that would require auto makers to boost the fuel economy average of the fleet of vehicles they sell to 35 miles per gallon by 2020. Right now, they must meet an average of 21.6 mpg for trucks and 27.5 mpg for passenger cars. The bill still needs to be passed by the House of Representatives and signed by the President to become law. Moving to a one-fleet average generally means auto makers will either have to sell fewer suvs or sell enough small vehicles to offset the sales volume of their gas guzzlers. Lawmakers see this as politically expedient because voters will roil over a gasoline tax.

Here’s the bit of irony. Congress and the President (regardless of which side of the aisle and who is in the Oval Office) have long seen gasoline taxes as political suicide. Consumers want their big cars and suvs and would like to drive them, too. They won’t go for a gasoline tax that would entice them to buy smaller vehicles. This isn’t the generation that rationed gasoline during World War II. We want it all. But we’ll be paying a few thousand dollars more for our cars anyway.

To hit the proposed regs, auto makers will have to start using some expensive technology. One Honda executive told me that they would have to first employ cheap efficiency boosters like high-tech transmissions, variable-valve timing in engines, materials that reduce weight and friction and other tweaks. They all cost money. If those don’t cut it—and they probably won’t—we’re talking about more hybrids and clean diesels. That’s all good news. We need to use less fuel. But don’t think the consumer is going to escape more out-of-pocket expense.

Even Honda—the industry’s leaders in fuel economy performance—has work to do. The trucks it sold during the 2006 model year averaged out to get about 24.6 mpg and its cars averaged 33.2 mpg. The combined fleet average is 29.1 mpg, according to the National Highway Traffic and Safety Administration.

One Honda insider said that the company’s best minds don’t know how much more it will have to charge for its cars while it works on meeting the new regulations. If this bill becomes law, auto makers will have to hit the regulation by 2020. That gives them 13 years to find a way to boost efficiency. Right now, hitting 35 mpg would cost between $2,000 and $7,000 a vehicle depending on the model, according to one company’s estimate. Most models would need at least $5,000 in technology to get to 35 mpg, says an auto company executive who asked not to be named. That premium may fall as technology improves and becomes cheaper between now and 2020.

The real issue will be how quickly the fuel economy premium falls. The average car today gets 21 mpg in real world performance. The Senate’s 35 mpg—which is measured by the government’s testing methods—will probably equal 29 mpg in real world performance. Assuming that the average motorists goes about 12,000 miles a year and pays $3 a gallon for the gas, the new regulations would save them $470 a year. So if the average consumer keeps his car for five years, most will pay $5,000 to save less than $2,500. If the industry can keep pushing fuel efficient technology, the premium will drop closer to the amount of money saved at the pump and everyone wins. If not, we pay more for our cars and won’t get the money back in gasoline savings. Efficiency is something we have to do. Just don’t expect it to come free.

Reader Comments

Brendan Moore

June 24, 2007 9:08 PM

Good post - thoughtful analysis. It is sublimely ridiculous that the United States cannot take the easiest and fairest way to reducing the consumption of gasoline and promoting development and sales of highly fuel-efficient cars. As you point out, it is because no one wants to say "GAS TAX" out loud.

So instead we take this tortured route to paying more to drive around in cars and trucks. Its called CAFE. Its stupid, its illogical, and it tries to ignore the basic laws of economics, but it seems as if we're stuck with it.

Because, of course, no one want to pay more more taxes! I mean, that would be awful, right? So, we'll just make you pay more over here, and call it something else. Its a shell game, but one that American motorists (voters) seem to want to play.

B Moore - www.autosavant.net

paul McGraw

June 27, 2007 6:39 AM

The new CAFE proposals are a bad idea. I agree with the previous writer that the easier way to go is to raise gas taxes. The new standards are going to hurt the auto industry because people who now drive large vehicles will hold on to them rather than switch to a smaller, less space efficient vehicle. I think that higher gas prices are already fostering a move away from big SUV's and pickups. The market should be allowed to continue to work. Government intervention in the markets has never been and it will never be a good idea.
P.Mcgraw-Loing Island, NY

paul McGraw

June 27, 2007 6:39 AM

The new CAFE proposals are a bad idea. I agree with the previous writer that the easier way to go is to raise gas taxes. The new standards are going to hurt the auto industry because people who now drive large vehicles will hold on to them rather than switch to a smaller, less space efficient vehicle. I think that higher gas prices are already fostering a move away from big SUV's and pickups. The market should be allowed to continue to work. Government intervention in the markets has never been and it will never be a good idea.
P.Mcgraw-Loing Island, NY

SunnyvaleCA

June 27, 2007 7:12 PM

"Gas taxes" don't have to mean "more taxes," only "different taxes." Re-phrase the gas tax proposal as a tax burden shift away from those who pay payroll taxes and towards those people who spew carbon into the atmosphere.

LG

June 29, 2007 1:17 PM

If politicians are really concerned with reducing our use of oil, why don't they start attacking the boat manufacturers? Yachts burn fuel for leisure and are less fuel efficient than any car or truck on the road.

s houston

June 30, 2007 12:09 PM

VCA (UK) now has an online list of 36 of vehicles (11 petrol/gasoline and the remaining 25 are diesel) that have CO2 emissions below 120 g/km.


The lowest mpg on the lists is 56.5 (Imperial) [ 47 mpg(US) ] combined average. The lowest diesel starts at 61.4 mpg(Imperial) [52 mpg(US) ]. There are several Fords, Vauxhalls [Opel/GM], VWs, Hondas, and Toyotas on the lists.

http://www.vcacarfueldata.org.uk/information/how-to-use-the-data-tables.asp#petrol


Also interesting reading/study http://www.vcacarfueldata.org.uk/


And here is a source for pricing informatin
http://www.drivewithus.net/vehicles/ford/fiesta

Turan Ahmed

July 3, 2007 10:04 AM

The trouble with simply raising taxes is that it doesn't perminantly fix a fuel price, pricing fluctuates due to supply/demand so ultimate prices are not stable enough to act as a real detterant.

The Big 3 desperately need to invest in efficiency technologies (powertrain, body materials, aerodynamics esp)and continue high R&D investment to make (by what are global standards) big US cars/cross-overs/trucks far more efficient. Plus of course the introduction of more A&B segment cars (eg Chrysler's Hornet & GM's concept trio).

Plus setting a high CAFE benchmark will create new development work for US engineers in OEMs and their suppliers - surely a good thing for the economy.

Jeff

July 7, 2007 3:55 PM

The author purely misses the point on this. He has a myopic view focused solely at the pump. The author would benefit his readers by looking at all costs associated with owning vehicles. The cost of wear on roads from heavy SUVs, the cost to our environment from pollution, the cost of oversized parking spots borne by the tax payer also auto accidents and congestion.

Plain and simple: When you can, ride a bike or walk.

Wes

July 10, 2007 10:40 PM

If we let the automakers dictate innovation, we wouldn't have seat belts, airbags, or anti-lock brakes on any vehicle today, as they (along with side turn signals, collapsable steering columns, and headrests) were only added to cars after government mandates. A profit making entity will never add features that add to expense but not to profit without being forced to by regulations. Govt' should mandate 40 MPG by 2015, and you can bet the automakers will find a way to do it. They can probably start by reducing the horsepower of cars, there is no reason for all these 260-300 HP cars, when only 30 HP is needed to move a large pickup at full speed. Power is fine and dandy by me, but not at the expense of fuel economy. If they can do both more power to em.

Dave

July 25, 2007 12:13 PM

2020? Are we really going to have that much oil left ? Lordy, the oil production is declining NOW. This is stupid and people are ignorant.

By the way, the government has to regulate capitalism. If not, we have one huge company that enslaves us. I guess you must be CEO of that company, eh?

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