The Road to a Stronger CAFE Standard

U.S. automakers were powerless to stop new fuel-efficiency legislation. Now they have to get toiling to meet the mandate

by David Kiley

Since last December, when President Bush signed an energy bill that requires auto companies to achieve a 35-mpg fuel economy standard by 2020, with substantial improvements by 2015, auto executives have been gnashing their teeth while environmentalists have been flashing the V sign for victory.

Three months later, it has become evident the road to greater fuel efficiency is full of potholes. For one thing, the new legislation adds a new level of complexity to the 35-year-old CAFE system (sounds like French for "coffee," but stands for Corporate Average Fuel Economy). Then there's the issue of technology—or lack thereof: Automakers say they don't have the means to make pickup trucks and large sport-utility vehicles much more fuel-efficient than they are now. "We cannot get to 35 miles per gallon with anything resembling the current product portfolio, or with anything resembling current technology," said GM (GM) Vice-Chairman Robert Lutz.

Car companies also warn that the new standard will force them to raise prices on vehicles, which could spark a backlash from consumers. That may be the industry's best hope of getting politicians to revisit the legislation. James Press, who joined Chrysler last year as vice-chairman after a long career at Toyota Motor (TM), says the new bill is "just part of the political process," suggesting the law was all about Congress and the White House trying to show voters they are taking action on climate change and U.S. dependence on foreign oil. Press, who remains a staunch advocate of hybrid technology and reducing the carbon footprint of vehicles, says it may not be the last word on fuel economy.

Will the U.S. Keep on Truckin'?

The Big Three are betting that sooner or later lawmakers will run into resistance from the sizable portion of the U.S. population that is allergic to small econo-cars, and from those who cherish American pickup truck culture. "I'm pretty sure the state of California isn't going to outlaw pickup trucks," quips Chrysler's Press.

He has a point. Even with thousands of suburban weekend warriors shifting away from pickups as gas prices climb, demand from people who need working trucks remains. GM, Ford Motor (F), and Chrysler have a disproportionate amount of that business, though Toyota has its Tundra pickup. So far this year, 61% of GM's unit sales in the first two months were light trucks, including pickups and SUVs, compared with 42% for Toyota.

On the other hand, Detroit may be misreading the zeitgeist. If gasoline climbs above $4 per gallon, and goes on to flirt with $5 or $6, automakers could see demand soar for their more fuel-efficient passenger cars, while SUVs languish on dealer lots. And both Democratic and Republican hopefuls seem more interested in courting voters who want independence from Middle East oil than those wanting to drive Hummers to the mall. If Detroit makes too much noise about the new fuel standard, the U.S. companies may be seen as out of touch and could sacrifice more market share to Asian rivals that can handily meet the 35-mpg target.

CAFE Complexity

Part of the anxiety over the new energy legislation centers on the complexity of the standard. The current system mandates a universal standard for all automakers of 27.5 mpg for passenger cars and 22.2 mpg for light trucks, including minivans, SUVs, and pickups. The standards do not apply to each model, but are calculated as an average over an automaker's entire lineup.

Under the new system, it's different: The 35-mpg standard mandated for 2020 will apply to the entire industry, with no distinction between cars and other vehicles. Companies such as Honda Motor (HMC) and Toyota, which are underrepresented in the pickup and full-size SUV category, will likely exceed the standard, while GM, Ford, and Chrysler, the leaders in trucks and SUVs, could fall short of it. Automakers that don't make the grade will have to buy credits from those that do. But it's SUV and pickup buyers who will be stuck with the tab, suggests Chrysler Vice-Chairman Tom LaSorda. "It's likely to be another big hidden tax on the consumer, as well as small businesses and building trades."