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CAFE: A Prize for Making Gas-Guzzlers?


Loopholes in new fuel-economy rules may give Toyota, GM, and BMW reason to spend less on fuel-efficient cars and make some vehicles bigger

By the end of this year, the Obama Administration will finalize new rules designed to force car companies to build vehicles that travel farther on a gallon of fuel. Too bad the rules will discourage automakers from manufacturing the kind of small cars that the Obamaites favor and, in some cases, encourage carmakers to do exactly the opposite. That's right: make some models bigger.

President Barack Obama is only partly to blame; he inherited a fuel-saving scheme from President George Bush and the last Congress. When lawmakers were considering revising long-standing regulations two years ago, the auto industry pushed back. As a result, the legislation, while forcing a significant boost in fuel economy, has loopholes big enough to drive a truck through. Obama has finalized rules for 2011 based on Bush's proposed regulations, which run until 2015. Now, Obama is working on what will likely be tougher rules that will run through 2020. "The Obama Administration has an opportunity to close a bunch of loopholes," says Daniel Becker, an environmental lobbyist in Washington. "Hopefully they will."

It won't be easy. The regulations are so complicated as to defy quick or simple remedies. The new (and not necessarily improved) version of the rules classifies vehicles by size and assigns them a specific mileage target. So now, starting in 2011, a big SUV such as the Chevrolet Tahoe will have to hit a relatively tame 21 mpg, while Toyota's Avalon sedan will have to hit 25 mpg.

Sounds reasonable, doesn't it? But say a big SUV misses its target by one mile per gallon. A carmaker could just make the vehicle a bit larger, allowing it to hit an easier fuel economy target. So General Motors (GM) may benefit with its new and efficient Chevrolet Cruze compact, due out in a year, because it's bigger than the car it replaces.

FOLLOWING CALIFORNIA?

Toyota Motor (TM) faces the same calculations. Under the Bush rules, by 2011 the company's thrifty little Scion xD must get 40 mpg, but it currently misses the mark by two miles per gallon. Meanwhile, Toyota's Avalon sedan, the biggest in the automaker's line, gets a rating of 29 mpg and beats its 2011 target by 1 mpg. "The system doesn't do anything to encourage smaller vehicles," says Tom Stricker, Toyota's director of technology and regulatory affairs. And even if gasoline prices rise again and prompt consumers to look for smaller cars, he says, the new rules give automakers less incentive to sell more of them.

The rules are particularly hard on European carmakers. Mercedes-Benz and BMW get about 70% of their U.S. sales from passenger cars. But because cars are in a different category than SUVs, the targets are harder to meet. BMW may have to introduce expensive new technology or smaller engines so its popular 3-series sports sedan meets the new targets. Theoretically, says Tom Baloga, the automaker's vice-president for engineering, European automakers could decide to build more SUVs, which have easier targets, to attempt to boost sales while remaining in compliance. "Cars are going to get bigger," Baloga says, "as companies try to take advantage of the situation."

Revising the new rules and closing the loopholes will be difficult at this point. But there is one thing the Obama Administration will likely do: force automakers to hit higher overall mileage targets than the Bush plan calls for. The President is under pressure from California, which wants to set its own greenhouse gas rules—regs that are tantamount to higher fuel economy standards. Obama campaigned saying he would allow it, but automakers want one standard nationally. People familiar with the negotiations between the feds and industry representatives say a compromise is in the works that, starting in 2012, would move national fuel economy standards closer to California's request. That could push the nation's overall target to about 40 mpg (instead of 35 mpg) by 2020.

There is a simpler, more effective solution. European countries have reduced oil use by taxing gasoline heavily. Consumers there tend to buy small cars because fuel costs as much as $8 per gallon. Some members of Congress have talked about raising gas taxes in the U.S. But lawmakers need to get reelected, and new taxes are unpopular. So Washington will probably stick with its imperfect fuel economy rules for a long time.

Return to the Auto Bailout Special Report Table of Contents

Welch is BusinessWeek's Detroit bureau chief.

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