Bloomberg News

Obama Fuel-Economy Rule Gives Sweeteners to Honda, Tesla

August 29, 2012

Honda Gets Boost by Obama Fuel-Economy Rule It Called Biased

Honda is the only automaker selling compressed natural gas-powered cars to U.S. drivers and will be able to use the credits to meet the fuel-economy standards. Source: Honda Motor Co. via Bloomberg

Honda Motor Co. (7267), which last year complained that a proposed fuel-economy rule was unfair to non- U.S. automakers, got a boost when the final version added extra credits for sellers of natural gas-powered vehicles.

Honda, based in Tokyo, is the only automaker selling compressed natural gas-powered cars to U.S. drivers and will be able to use the credits to meet the fuel-economy standards. It’s one of the few changes made to a rule for 2017 to 2025 that was proposed in November 2011 and released in final form by President Barack Obama’s administration yesterday.

“Providing incentive credits for natural gas vehicles makes a great deal of sense under this regulation,” Edward Cohen, Honda vice president of government and industry relations, said in an e-mail yesterday. “A dedicated natural gas vehicle reduces CO2 emissions by 25 percent and petroleum consumption by 100 percent.”

The corporate average fuel economy, or CAFE, rule may cost the auto industry as much $136 billion to comply with, while saving consumers up to $451 billion in fuel costs, regulators from the U.S. Environmental Protection Agency and National Highway Traffic Safety Administration said in a briefing. They declined to be named because they weren’t authorized to be quoted about the rule.

Added Incentive

“With this added incentive from the government, Toyota, GM and other carmakers may follow and introduce cars that run on natural gas,” said Mitsushige Akino, who oversees about $500 million in assets at Tokyo-based Ichiyoshi Investment Management Co. “The market isn’t established yet, so it may not directly lead to a boost in sales, but being a leader may boost Honda’s share price.”

The rule compels automakers to double the average fuel economy of passenger vehicles sold in the U.S. by 2025, through gradual increases in the rates at which they must improve mileage and reduce greenhouse gas emissions.

Honda, Japan’s third-largest carmaker, signed on to the rule’s framework after complaining in an e-mail that the plan, containing extra credits for hybrid pickup trucks made by U.S.- based automakers, “communicates favoritism and an unfair playing field to all market participants.”

2011 Negotiations

Obama’s administration and most global automakers agreed on the framework in July 2011 after private negotiations that Representative Darrell Issa, a California Republican, has characterized as improper.

The e-mail from Robert Bienenfeld, Honda senior manager for environment and energy strategy, to top officials at the EPA and NHTSA was disclosed in a report released earlier this month by the staff of the House Oversight and Government Reform Committee, led by Issa.

Providing extra credit for sales of natural gas vehicles may allow fuel cell-powered cars to become more common in the U.S., said an EPA official who wasn’t authorized to speak about the rule and declined to be named. Fuel cells operate on hydrogen, the universe’s most abundant element, which is available in high volume for industrial use by reforming natural gas or splitting water molecules using electricity.

New Market

Small automakers such as Tesla Motors Inc. (TSLA:US) may benefit from another change written into the final rule that builds on a market California opened this year for sellers of zero-emission vehicles such as plug-ins or those powered by hydrogen.

It would allow Palo Alto, California-based Tesla, which only makes plug-in electric vehicles, to sell any credits for exceeding the fuel-economy standards to companies that don’t meet their quotas.

“The new standards encourage the introduction of alternative fuel vehicles through credit earning and trading,” Christina Ra, a Tesla spokeswoman, said in an e-mail. Tesla “can support” other automakers’ compliance with the rule by selling both greenhouse gas and CAFE credits, she said.

Tesla’s newest model, the Model S plug-in electric car, has an 89 mpg-equivalent fuel-economy rating, she said.

Technologies that improve fuel efficiency and reduce emissions from gasoline- and diesel-powered internal-combustion engines will gain sales from the rule, said Roland Hwang, director of the Natural Resources Defense Council’s transportation program.

Gasoline Engines

Adding stop-start technology, which cuts power to engines when a vehicle is stopped; and continuously variable transmissions, or using lighter-weight materials, are ways automakers can meet the standards with traditional engines, he said in an interview.

“This is going to spur a lot of interest in lightweight materials,” Hwang said. “Aluminum, high-strength steel, magnesium, all of those composites. More technology means more jobs.”

Honeywell International Inc. (HON:US), which sells turbochargers to European automakers, expects to gain sales from the rule.

“In the U.S., we expect to see turbo penetration in light vehicle industry sales move from just more than 10 percent now to more than 20 percent by 2016 as manufacturers continue the process of downsizing and turbocharging to increase miles per gallon in all segments,” Tony Schultz, Honeywell Turbo Technologies Americas vice president, said in an e-mail.

Honeywell, based in Morris Township, New Jersey, plans to begin supplying turbochargers for vehicles sold in the U.S. to companies including Ford Motor Co. (F:US), General Motors Co. (GM:US), and Chrysler Group LLC “in the next few years,” he said.

$8,000 Savings

The Obama administration says that the rule announced yesterday, coupled with another fuel-economy improvement mandate for vehicles from model years 2012 to 2016, will reduce U.S. oil consumption by 12 billion barrels and lead to fuel savings of more than $8,000 by 2025 over the life of a vehicle. Boosting average fuel economy is part of Obama’s plan to reduce oil imports and use. Promoting purchases of more fuel-efficient vehicles can help reduce the use of fossil fuels.

The National Automobile Dealers Association said it’s concerned that vehicle price increases of about $3,000 from the two rules will price consumers out of the new-car market.

“If the consumer isn’t buying new cars, we’ve got the jalopy effect going that they’re going to keep the car they have and won’t be able to get to new things,” Bill Underriner, the McLean, Virginia-based group’s chairman and a Montana auto dealer, said in an interview. “It’s not going to help anybody.”

The fuel standards announced yesterday will add as much as $1,800 to the average cost of vehicles by 2025 and be more than offset by savings in fuel spending, EPA Administrator Lisa Jackson said yesterday on a phone call with reporters.

To contact the reporter on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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