The Potential Effects of the 2017-2025 EPA/NHTSA GHG/Fuel Economy Mandates on the U.S. Economy 2016
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SEPTEMBER
2016
The Potential Effects of the 2017-2025
EPA/NHTSA GHG/Fuel Economy Mandates
on the U.S. Economy
Sean P. McAlinden, Ph.D.
Yen Chen
Michael Schultz
David J. AndreaACKNOWLEDGEMENTS This study is the result of a group effort. The authors would like to thank our colleagues at the Center for Automotive Research for their assistance with this study. Significant efforts of internal reviews, editing and document production were provided by Diana Douglass and Lisa Hart. The authors would also like to thank our corporate and academic friends who provided external reviews and commentary. Their input significantly contributed to the integrity of our research. This study was internally funded by the Center for Automotive Research through its Internal Research and Development funds so as to maintain the objectivity of the analysis. Sean P. McAlinden, Ph.D. Yen Chen Michael Schultz David J. Andrea 3005 Boardwalk, Suite 200 Ann Arbor, MI 48108 www.cargroup.org The Center for Automotive Research a nonprofit automotive research center, has performed detailed studies of the contribution of the automotive industry and its value chain in the U.S. economy for more than 35 years. CAR’s mission is to conduct independent research and analysis to educate, inform and advise stakeholders, policy makers, and the general public on critical issu18,000es facing the automotive industry, and the industry’s impact on the U.S. economy and society.
TABLE OF CONTENTS
List of Figures and Tables .................................................................................................................. iii
Executive Summary............................................................................................................................1
Introduction ......................................................................................................................................5
I. History of U.S. Fuel Economy Legislation .....................................................................................7
Regulation of Greenhouse Gas Emissions................................................................................................. 8
Recent Changes to Fuel Economy Regulations ......................................................................................... 9
Footprint Standard.................................................................................................................................. 10
Midterm Evaluation of 2022-2025 CAFE and GHG Standards ................................................................ 11
II. Estimated Net Cost of Benefits of Higher Fuel Economy Technologies to the Consumer .............. 12
Fuel Economy Improvement and Benefits.............................................................................................. 12
Gasoline Prices ........................................................................................................................................ 13
Mandate Cost to the Consumer.............................................................................................................. 14
Consumer Valuation of Fuel Economy .................................................................................................... 16
Vehicle Miles Traveled ............................................................................................................................ 18
Fuel Savings and Net Cost Calculation .................................................................................................... 20
The Empirical Relationship Between Income, Employment, Fuel Prices and the Demand for Fuel
Efficient Vehicles ..................................................................................................................................... 21
III. Net Cost Of Fuel Economy Technologies and The Own-Price Elasticity of New Vehicles ........... 27
IV. 2025 U.S. Motor Vehicle Industry—A Baseline Long-Term Trend ............................................ 30
Introduction ............................................................................................................................................ 30
U.S. Employment versus U.S. Population ............................................................................................... 30
Income and Household Net Worth ......................................................................................................... 33
Household Formation and Vehicle Density ............................................................................................ 34
Motor Vehicle Demand in 2025 .............................................................................................................. 35
U.S. Motor Vehicle Production Estimate in 2025 ................................................................................... 37
U.S. Automotive Manufacturing Employment Estimate in 2025............................................................ 38
V. Effects of the Fuel Economy Mandates on the Baseline Trend Forecasts ..................................... 41
Vehicle Demand and Automotive Manufacturing Employment ............................................................ 41
Effect on new motor vehicle dealership employment ........................................................................... 43
VI. Estimates of the Effects of the Mandates on the United States Economy ................................ 45
i | Page Center for Automotive Research © 2016The Contribution of Automotive Employment to the U.S. Economy ..................................................... 45 Automotive Manufacturing .................................................................................................................... 45 New Vehicle Dealerships......................................................................................................................... 47 Total Contribution to the U.S. Economy in 2014 .................................................................................... 48 Total Effect of the Fuel Economy Mandates on U.S. Employment in 2025 ............................................ 48 Conclusions ..................................................................................................................................... 51 Final Observations ........................................................................................................................... 53 Recommendations ........................................................................................................................... 57 Appendix I: A Model of New Light Vehicle Sales Own Price Elasticity ................................................. 59 Appendix II: A Brief Review of Own-Price Elasticity Studies ............................................................... 63 Appendix III: Motor Vehicle Demand Modeling: Long-Term Trend through 2025 ............................... 65 References....................................................................................................................................... 67 Sources ............................................................................................................................................ 70 ii | Page Center for Automotive Research © 2016
LIST OF FIGURES AND TABLES Figure 1: Research Inputs and Outputs......................................................................................................... 6 Figure 2: CAFE Summary by Year (Actual Performance & Regulatory Standard) for Passenger Cars (PC) and Light Trucks (LT), Model Years 1978-2025 ............................................................................................. 8 Figure 3: Calculation of Fuel Economy Target for MY 2016 and MY 2025 Vehicles ................................... 12 Figure 4: Motor Gasoline Prices and Forecast, 2012-2025 ......................................................................... 13 Figure 5: Small Cars and Electrified Vehicles Market Share and Real Gasoline Price 1980 –2015 ............. 22 Figure 6: Personal Consumption on Motor Fuel As Percentage of Total Personal Expenditure, and Small Cars/EVs Market Share, 1980 - 2015 .......................................................................................................... 23 Figure 7: Small Car/Electrified Vehicle Sales and Real Gasoline Price, 1Q 2000 - 4Q 2015........................ 23 Figure 8: Concept of Demand for New Motor Vehicle ............................................................................... 24 Figure 9: Small Car/Hybrids Market Share and Gasoline Expenditure as Percent of Income 1980 – 2014 26 Figure 10: U.S. GDP Growth Rate and Vehicle Sales Growth Rate 1956 – First Half of 2015 ..................... 30 Figure 11: U.S. Population and U.S. Vehicle Sales, Jan’ 2000 – Dec’ 2015 ................................................. 31 Figure 12: U.S. Full-Time Employment and U.S. Population Estimate – January 2000 – June 2015 .......... 32 Figure 13: U.S. Principal Means of Transportation to Work 1989 and 2014 .............................................. 33 Figure 14: Household Net Worth and Vehicle Sales 1975-3Q 2015 ........................................................... 34 Figure 15: Total Vehicles in Use in the U.S. 1982 – 2014; 2015 – 2025 ...................................................... 35 Figure 16: Estimated Number of Households and Vehicles Per Household: 1951-2025............................ 35 Figure 17: Long-Term Trend of U.S. Motor Vehicle Demand, 2015 – 2025 ($ Current Billions) ................ 36 Figure 18: Long-Term Trend of New Motor Vehicle Transaction Price and U.S. Motor Vehicle Sales, 2015 – 2025 ......................................................................................................................................................... 37 Figure 19: U.S. Vehicle Production/Employment Index (2000 = 100) ........................................................ 39 Figure 20: U.S. New Vehicle Dealership Employment and Auto Sales 2001 – 2015................................... 43 Figure 21: Crude Oil and Gasoline Nominal Price, 1976 – 2015 ................................................................. 54 Figure 22: U.S. Electrified Light Vehicle Sales and Take Rate 1999 – 2016 YTD ......................................... 55 Table 1: Review of Fuel Economy Valuation Studies .................................................................................. 17 Table 2: MY 2009, 2016 NHTS VMT and Real World Miles per Gallon by Age of Vehicle .......................... 19 Table 3: MY 2016 VMT and Real World Miles per Gallon by Age of Vehicle .............................................. 19 Table 4: Net Cost by Fuel Economy Cost and Gasoline Price Scenarios ..................................................... 20 Table 5: CAR’s Estimation of the Demand for Small Cars/EVs .................................................................... 25 Table 6: Short and Long Run Effect on Demand of Net Cost of Fuel Economy Technologies .................... 29 Table 7: U.S. Motor Vehicle Sourcing Ratio - U.S. Light Vehicle Sales by Country of Origin, 2014............. 37 Table 8:Long Run Demand Effect with Gasoline Price of $2.44 per gallon (2015 constant dollars) .......... 42 Table 9: Effects on U.S. Dealership Employment in New Vehicle Department .......................................... 44 Table 10: Total Contribution of all Motor Vehicle Manufacturing and Dealership New Vehicle Operations to the U.S. Economy in 2014 ....................................................................................................................... 47 Table 11: Total Effects of the Fuel Economy Mandates on Motor Vehicle Manufacturing, New Vehicle Dealership, and Total Private Sector Employment in the U.S. Economy in 2025 ....................................... 49 iii | Page Center for Automotive Research © 2016
Table 12: Variable Definitions and Sources ................................................................................................ 59 Table 13: Log Difference Models ................................................................................................................ 60 Table 14: Previous Own-Price Elasticity Estimates ..................................................................................... 64 Table 15: Base Line Motor Vehicle Sales Revenue Model: 2017 - 2025 ..................................................... 66 iv | Page Center for Automotive Research © 2016
EXECUTIVE SUMMARY
This study conducted by the Center for Automotive Research (CAR) constitutes an economic cost benefit
analysis of the national standards for light duty vehicle fuel economy and greenhouse gas emissions (GHG)
set by the U.S. National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection
Agency (EPA) for the years 2017-2025. Past CAFE standards mandated an increase in fuel economy from
18.0 MPG in 1978 to 27.5 MPG by 1990 for passenger cars. Passenger car standards were 36.5 MPG in
2015 and are mandated to reach a projected 54.5 MPG by 2025. The analysis estimates the net value of
the fuel economy improvements to the consumer that are mandated by the federal government during
2016-2025. The study also estimates the likely net benefits or costs to the new vehicle buyer of the
technologies needed to meet the higher fuel economy mandates in 2025 and the effects of net fuel
economy benefits on consumer purchases of total vehicles. For evaluation purposes, a baseline forecast
for the U.S. motor vehicle market and industry in terms of sales, production, and employment through
the year 2025 is presented that assumes the standards are not in place for 2017-2025. The study analysis,
then, measures the effect of higher fuel economy mandates and the adoption of related expensive
technologies on U.S. motor vehicle market, production, and automotive manufacturing and automotive
dealership employment in the year 2025. Finally, this study discusses other effects of the mandates on
the U.S. economy and contains CAR’s policy recommendations pertaining to the mid-term review of the
national standards for 2022-2025.
The major estimation results in this study include the following:
As mandated, average real world fuel economy for new vehicles will increase by a projected
12.7 MPG between MY 2016 and MY 2025. Real world fuel economy is derived by adjusting the
mandate standards for real world driving conditions. Thus, the MY 2016 real world driving
standard is 27.3 MPG and 40.0 MPG in 2025.
This study employs the most recent range of gasoline price forecast levels from the U.S. Energy
Information Agency (EIA). In 2025 US dollars the forecast levels are $2.44/gallon, $3.00/gallon,
and $4.64/gallon.
A review of 14 published studies on new vehicle consumer valuation of fuel economy produces
an average desired payback of 3.4 years for the cost of fuel economy technologies.
Evaluated at the EIA range of fuel prices, fuel savings over three years are worth $1,287
($2.44/gal.), $1,583 ($3.00/gallon), and $2,448 ($4.64/gallon) when adjusted for a rebound
effect in miles traveled applied to a survey estimated average mileage traveled by new vehicles
in the first three years of ownership.
When evaluated at three fuel economy mandate cost levels of $2,000, $4,000, and $6,000, and a
forecast price trend through 2025 for new vehicles, the study estimates nine scenarios for an
increase or decrease in the net cost of buying a 2025 vehicle. The scenarios range from a net
price decrease of -1.3 percent at a fuel price of $4.64/gallon and a fuel economy mandate cost
of $2,000 to the highest of eight net cost increase scenarios of 14.1 percent at a fuel price of
$2.44/gallon and a fuel economy mandate cost of $6,000. The study assumes that the full value
of the change in net cost to the consumer is passed along to vehicle prices.
The study estimates a long-run, own-price elasticity for new vehicle sales revenue of .61.
Therefore, the effect on motor vehicle demand in terms of sales revenue in 2025 ranges from
1 | Page Center for Automotive Research © 2016+.82 percent at a fuel price of $4.64/gallon and a fuel economy mandate cost of $2,000 to the
largest decrease of eight scenarios of -8.6 percent at a fuel price of $2.44/gallon and a fuel
economy mandate cost of $6,000. The first scenario is associated with vehicle sales increase of
410,000 units and the second scenario with a loss of 3.71 million vehicle sales in the United
States compared to the base sales forecast model. Three of the scenarios estimates a sales loss
of 3 million or more vehicle sales.
The estimated changes in vehicle sales are converted to changes in U.S. vehicle production
through the use of a forecast of vehicle sourcing ratios. As a result, the 2025 fuel economy
mandates produce changes in U.S. vehicle production that range from an increase of 240,000
units at a fuel price of $4.64/gallon and a fuel economy mandate cost of $2,000 to a decrease of
2.07 million units at a fuel price of $2.44/gallon and a fuel economy mandate cost of $6,000.
Eight of the nine scenarios estimate a production decrease compared to the baseline estimate
with five scenarios resulting a loss of over 1 million units in vehicle production.
The estimated changes in U.S. vehicle production can be used to also estimate losses in
automotive manufacturing employment in the vehicle and parts manufacturing sectors through
the use of estimate of labor productivity in those industries in 2025. The changes in auto
industry employment range from an increase of 15,700 at a fuel price of $4.64/gallon and a fuel
economy mandate cost of $2,000 to a loss of 137,900 at a fuel price of $2.44/gallon and a fuel
economy mandate cost of $6,000. Eight of the nine scenarios project a loss in industry
employment.
The overall change in vehicle sales, larger than the change in U.S. vehicle production, as a result
of the 2025 fuel economy mandates, will also impact employment at new vehicle dealerships.
Based on a trend in dealership labor productivity through 2025, the study estimates that in one
scenario, dealership employment would rise by 18,000, in the case of $4.64/gallon gasoline
price and $2,000 in fuel economy mandate cost, and eight scenarios in which dealership
employment would fall – the largest being a decline of 99,000 in the case of $2.44 price of
gasoline and $6,000 in fuel economy mandate cost.
The projected gain and losses in automotive manufacturing and dealership employment as a
result of the 2025 fuel economy mandates will affect the U.S. economy through a multiplier
effect. Recent studies of the economic contribution of automotive manufacturing and new
vehicle dealership employment have estimated that 5.6 jobs additional are created for every job
in automotive manufacturing, and 1.3 jobs for every job in new vehicle dealerships. Using the
multipliers of 6.6 for change in automotive manufacturing employment and 2.3 for changes in
new vehicle dealership employment produces an increase in overall employment on the U.S.
economy in 2025 of an increase of 144,020 jobs in the case of $4.64/gallon gasoline price and
$2,000 in fuel economy mandate cost and eight scenarios with negative employment change
including the loss of 1.13 million jobs in the case of $2.44/gallon gasoline price and $6,000 in
fuel economy mandate costs.
An important conclusion of this study is the overwhelming and direct importance of fuel prices in
forecasting the economic effects of the 2025 fuel economy mandates. If the value of fuel savings to the
new vehicle buyer falls short of the cost of mandated fuel economy technologies then U.S. automotive
sales, production, and manufacturing will fall with serious consequences for the U.S. economy. This
2 | Page Center for Automotive Research © 2016study utilizes a special econometric analysis to estimate the influence of fuel prices on the demand for fuel efficient vehicles. The influence is powerful even in the short-run and particularly in periods of reasonable growth in personal disposable income and employment when greater wealth and access to consumer credit offers consumers the opportunity to move up-market in vehicle purchases. Should fuel prices remain moderate or historically low as the result of increased oil supply and/or reduced global demand it will be challenging to sell advanced technology fuel efficient vehicles at costs above the value of fuel savings captured by the new vehicle buyer. Two of the three long-term 2015 EIA gasoline price scenarios portray this moderate or low gasoline future ($3.00 and $2.44 per gallon, respectively in 2025). It is difficult to recommend the best public policies for accommodating the current fuel economy mandates for 2022-2025 in a moderate or low gasoline price future when some polices are considered politically infeasible. The recommendation section outlines several policies to encourage consumer demand for the commercialization of advanced fuel efficiency technologies and a larger share of fuel efficient vehicle sales by increasing the value of fuel efficient technologies to the consumer. These recommendations include utilizing a gasoline/fuel tax or a carbon tax mechanism; providing additional strong-hybrid and plug-in hybrid vehicle purchase incentives; recognizing and incentivizing the benefits of both on- and off- cycle technologies; and extending the mandate timeline to allow the market additional time to achieve projected learning curves and technology efficiencies. More recognition of on- and off-cycle technologies alone in no way ensures the industry a realizable path to meet the 2025 EPA/NHTSA mandates that are misaligned with the market demand for fuel economy. Applying these recommendations in some combination will better create and identify the benefits of saving fuel in the judgement of the American new vehicle consumer and, in the process, better align market demand for vehicle fuel efficiency. 3 | Page Center for Automotive Research © 2016
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INTRODUCTION This study conducted by the Center for Automotive Research (CAR) constitutes an economic cost benefit analysis of the national standards for light duty vehicle fuel economy and greenhouse gas emissions (GHG) standards set by the U.S. National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) through the years 2017-2025. Past CAFE standards mandated an increase in fuel economy from 18.0 MPG in 1978 to 27.5 MPG by 1990 for passenger cars. Passenger cars standards were 36.5 MPG in 2015 and are mandated to reach a projected 54.5 MPG by 2025.The first section provides background on vehicle fuel economy and greenhouse gas regulations and standards mandated by the U.S. government (EPA/NHTSA). The second section estimates the net value of the fuel economy improvements to the consumer that are mandated by the federal government. The second section of this study also estimates the likely net benefits or costs to the new vehicle buyer of the technologies needed to meet the higher fuel economy mandates to the American consumer of new light vehicles in 2025. The third section estimates the effects of net fuel economy benefits on consumer purchases of total vehicles and types of vehicles. The fourth section presents a baseline forecast for the U.S. motor vehicle market and industry in terms of sales, production, and employment through the year 2025 based on long-term social and economic factors and assuming the standards for 2017-2025 are not in place. The fifth section of this study also analyzes how the impact of higher fuel economy mandates and the adoption of related expensive technologies will affect the U.S. motor vehicle market, production, and automotive manufacturing and automotive dealership employment in the year 2025. The final or sixth section of this study will discuss other effects on the U.S. economy and contain CAR’s policy recommendations pertaining to the mid-term review of the national standards for 2022-2025. The major estimation tasks performed in this study are reviewed in Figure 1 which shows six major steps or components in the estimation as well as details, discussed later in the study, of estimation sub- components of analysis. For example, in step one, once the effect of higher net costs due to mandated fuel economy standards are passed through to prices, CAR can estimate the impact on total light vehicle sales in 2025. The effect on the U.S. industry is estimated in step five which must use an estimated domestic sourcing ratio to determine the effect on U.S. vehicle production, and also employ a labor productivity trend estimate through 2025 to derive the effect on U.S. automotive manufacturing employment. Change in dealership employment is more straight forwardly estimated without a sourcing trend. In step six, this study’s estimates of the change in automotive manufacturing and dealership employment are expanded to estimate an effect on total U.S. employment. CAR uses employment multipliers from a recent major study of the contribution of the industry to the U.S. economy in 2014 to determine this total effect. 5 | Page Center for Automotive Research © 2016
II III IV V VI
I
ESTIMATED NET COST OF NET COST OF FUEL 2025 U.S. MOTOR VEHICLE IMPACT OF THE FE ESTIMATES OF THE
6 | Page
HISTORY OF U.S. FUEL ECONOMY MANDATES MANDATES ON THE
HIGHER FUEL ECONOMY INDUSTRY – A BASELINE EFFECTS ON THE UNITED
ECONOMY LEGISLATION AND OWN-PRICE BASELINE TREND
TO THE CONSUMER LONG TERM TREND STATES ECONOMY
ELASTICITY OF VEHICLES FORECASTS
Effects on Vehicle The Contribution of
Regulation of Fuel Economy
U.S. Employment versus Demand and Automotive Automotive
Greenhouse Gas Improvement and Own Pri ce Elasticity of Empl oyment to the U.S.
Emi ssions Benefits U.S. Population Ma nufacturing
Vehicles Empl oyment Economy
Recent Changes to Fuel Ga s oline Prices Income and Household Effects on New Motor Automotive
Economy Regulations Ma ndate Cost Effect of Net Cost of FE Net Worth Vehicle Dealership Ma nufacturing
Ma ndates on Price Empl oyment
Cons umer Valuation of Household formation
Footprint Standard New Vehicle Dealerships
Fuel Economy a nd Vehicle Density
Figure 1: Research Inputs and Outputs
Mi dterm Evaluation of Fuel Savings and Net Ba seline Auto Revenue Tota l Contribution to the
2022-2025 CAFE a nd Cos t Ca lculation a nd Unit Vehicle Sales U.S. Economy in 2014
GHG Standards
Empi rical Model of the Ba seline Domestic Tota l Effect of the FE
Effects of Income a nd Sourcing Ratio and U.S. Ma ndates on U.S.
Fuel Price on Demand Production Empl oyment i n 2025
for Fuel Economy
Ba seline Labor
Productivity and Auto
Ma nufacturing
Empl oyment
Center for Automotive Research © 2016I. HISTORY OF U.S. FUEL ECONOMY LEGISLATION Before proceeding to CAR’s estimation of the effect of the national standards on the U.S. economy, it should prove useful to describe the history of vehicle fuel economy regulation in the United States through the Corporate Average Fuel Economy (CAFE) standards set by National Highway Transportation Safety Administration (NHTSA), a division of the U.S. Department of Transportation (USDOT). This description also covers the regulation of greenhouse gas emissions by EPA and the California Air Resources Board (CARB). These three agencies, CARB, EPA, and NHTSA have collaborated to harmonize their standards through model year 2025. In response to the 1973 oil crisis, the U.S. Congress passed the Energy Policy and Conservation Act (EPCA) in 1975, which established the Corporate Average Fuel Economy (CAFE) program, in an attempt to decrease U.S. dependence on foreign oil. CAFE refers to the average fuel efficiency—measured in miles per gallon (MPG)—of all the vehicles a company produces of a given model year that are sold in the United States. The CAFE program was designed to decrease fuel consumption of the vehicles sold in the United States by requiring automakers to meet increasing fuel efficiency targets. CAFE regulations came into effect for passenger cars beginning in 1978 and for light-duty trucks—which include pickups, vans, and sports utility vehicles (SUVs)—beginning in 1979. From 1978 to 1985, the combined CAFE requirement for passenger cars increased more than 50 percent from 18.0 MPG to 27.5 MPG, and the actual fuel economy of vehicles sold also increased (see Figure 2). In response to petitions from automakers struggling to meet CAFE requirements, NHTSA relaxed the standard for model years 1986-1989. For model year 1990 the CAFE standard was restored to its 1985 level of 27.5 MPG and would remain unchanged until model year 2011. Figure 2 shows from the mid-1980s through 2010, CAFE requirements remained virtually unchanged, and improvements in vehicle efficiency were used to satisfy strong consumer preferences for performance (e.g., improved horsepower, torque, and acceleration) and other features (e.g., improved ride and handling, safety, air conditioning, sound systems, power seats and mirrors, sun roofs, and emissions equipment) rather than increasing fuel economy.1 In addition, a shift in market share from passenger cars to SUVs and pickup trucks during that period led to lower overall fuel efficiency than would have been expected had the vehicle segmentation mix remained constant.2 1 Knittel, Christopher R. (2011). “Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector.” American Economic Review, 101(7): 3368-3399. December 2011. . 2 Ibid. Knittel. (2011). 7 | Page Center for Automotive Research © 2016
Figure 2: CAFE Summary by Year (Actual Performance & Regulatory Standard) for Passenger Cars (PC)
and Light Trucks (LT), Model Years 1978-2025
PC Standard PC Performance LT Standard LT Performance
60.0
55.3
55.0
50.0
Miles per Gallon (MPG)
45.0
39.3
40.0
36.5
35.0
33.3
30.0
25.0 27.5 26.4
26.0
19.9
20.0 20.7
18.018.2 17.5
15.0
Model Year
Source: NHTSA 2009, NHTSA 2011, and NHTSA 2014
Regulation of Greenhouse Gas Emissions
The Clean Air Act of 1963 was the first federal law regulating air quality in the United States. It was
expanded by amendments passed in 1970, 1977, and 1990.3 Among other responsibilities, the Clean Air
Act requires EPA to set standards for stationary and mobile sources (i.e., vehicles) of air pollution. Under
the Clean Air Act, the EPA has set standards for “criteria pollutants:” carbon monoxide, lead, nitrogen
dioxide, ozone, particulate matter, and sulfur dioxide. At the request of the U.S. Congress, EPA has also
addressed other issues, including hazardous and toxic air pollutants, acid rain, depletion of the ozone
layer, regional haze, and other emerging problems, such as greenhouse gases (GHGs).
In 2003, the EPA denied a 1999 petition to regulate GHG emissions from vehicles under the Clean Air Act
because: 1) Congress had not granted EPA authority to regulate GHGs under the Clean Air Act, and 2)
setting vehicle GHG emission standards was not appropriate at the time.4 A coalition of states, cities, and
environmental organizations challenged the EPA decision, and in 2006, the matter was taken before the
U.S. Supreme Court in the Massachusetts v. EPA case.5 In April 2007, the Court in a 5-4 ruling determined
that GHGs are pollutants and may be regulated under the Clean Air Act. A month after the Supreme Court
decision, President George W. Bush ordered the EPA to regulate GHG emissions from vehicles in
3 EPA. (2015). “Clean Air Act Requirements and History.” U.S. Environmental Protection Agency. Accessed April 28, 2015.
.
4 EPA. (2003). “EPA Denies Petition to Regulate Greenhouse Gas Emissions from Motor Vehicles.” U.S. Environmental Protection Agency. August
28, 2003.
.
5 Supreme Court. (2007). “Supreme Court of the United States: Massachusetts et al. V. Environmental Protection Agency et al.” Legal
Information Institute, Cornell University Law School. April 2, 2007. .
8 | Page Center for Automotive Research © 2016cooperation with the USDOT and the U.S. Department of Energy (USDOE).6 In 2009, the EPA released its endangerment finding, in which it declared that GHGs, including those from motor vehicles, endanger the health and welfare of Americans and merit regulation.7 Regulation of GHG emissions from vehicles has also taken place at the state level in California. In 2002, the California State Assembly passed a law requiring CARB to regulate GHG emissions from vehicles. In September 2004, CARB approved regulatory standards which would limit GHG emissions from new passenger vehicles and light duty trucks beginning with model year 2009.8 In order to proceed with the new standards, CARB required a waiver from EPA, which it requested in December 2005.9 Over the following two years, California Governor Arnold Schwarzenegger wrote to and met with EPA Administrator Stephen Johnson in pursuit of the waiver. After the April 2007 Supreme Court ruling, the EPA announced two public hearings to consider the California waiver request.10 In May 2009, CARB agreed to harmonize its GHG emissions standards with those proposed by EPA and NHTSA in return for a waiver from EPA,11 and in June 2009, EPA granted the waiver.12 Recent Changes to Fuel Economy Regulations In December 2007, the Energy Independence and Security Act (EISA) was signed into law by President George W. Bush. Among other things,13 EISA required NHTSA to increase CAFE requirements beginning in 2011.14 EISA required a CAFE requirement of at least 35 MPG by 2020. By model year 2007, total fleet fuel economy was already increasing and continued to do so year after year.15 On May 19, 2009, President Barack Obama announced a new national fuel economy program requiring a more aggressive timeline than had been prescribed by EISA. With a fuel economy standard of 35.5 MPG for new light vehicles sales by 2016, the plan moved up the EISA timeline by four years.16 The new program also required EPA and NHTSA to harmonize the EPA GHG regulations and NHTSA CAFE regulations for model years 2012-2016.17 In September 2009, the two agencies proposed a harmonized program covering 6 Bush, George W. (2007). “Executive Order 13432.” Federal Register, National Archives and Records Administration, 72(94): 27717-27719. May 16, 2007. . 7 Federal Register. (2009). “Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act.” Federal Register, National Archives and Records Administration, 77(239): 66496-66546. December 15, 2009. . 8 CARB. (2007). “Fact Sheet: Climate Change Emissions Standards for Vehicles.” California Air Resources Board, California Environmental Protection Agency. May 30, 2007. . 9 Under the Clean Air Act, California is allowed to set standards that are stricter than federal standards, but required a waiver from the EPA to do so. Once California receives a waiver, other states can elect to adopt California’s standards. 10 Ibid. CARB. (2007). 11 Nichols, Mary D. (2009). Letter to The Honorable Lisa P. Jackson, Administrator of the United States Environmental Protection Agency and The Honorable Ray LaHood, Secretary of the United States Department of Transportation. California Air Resources Board, California Environmental Protection Agency. May 18, 2009. . 12 EPA. (2009). “EPA Grants California GHG Waiver.” U.S. Environmental Protection Agency. June 30, 2009. . 13 In addition to CAFE, EISA addressed other fuel economy programs (advanced vehicle technology programs and federal vehicle fleets), biofuels (the national renewable fuel standard, research and development, and refueling infrastructure), and standards for buildings and appliances. 14 Energy Independence and Security Act of 2007, Public Law 110-140 [H.R. 6] (42 USC 17001). 15 Ibid. NHTSA. (2014). 16 White House. (2009). “President Obama Announces National Fuel Efficiency Policy.” Office of the Press Secretary, the White House. May 19, 2009. . 17 NHTSA is tasked with regulating fuel economy and EPA is tasked with regulating GHG emissions—though these metrics are closely related, meeting one regulation does not guarantee meeting the other regulation. The two agencies were tasked with harmonizing the disparate standards to enable automakers to satisfy both sets of regulations. 9 | Page Center for Automotive Research © 2016
model years 2012-2016.18 In May 2010, Obama directed EPA and NHTSA to start planning new fuel economy and GHG emissions standards for 2017-2025.19 In October 2010, EPA and NHTSA took the first step by announcing their initial assessment, or Notice of Intent (NOI), for stringent standards for model year 2017-2025 vehicles.20 In a joint document, the Interim Joint Technical Assessment Report (TAR), CARB, EPA, and NHTSA, proposed four potential GHG emissions reduction scenarios through 2025: 3.0, 4.0, 5.0, and 6.0 percent annual reductions from the mandated 2016 level.21 In July 2011, the Obama administration proposed a fuel economy target of 54.5 MPG—163 grams of carbon dioxide (CO2) per mile—by 2025.22 The target is within the range of the four TAR scenarios, with the stringency of the standards increasing at approximately 5.0 percent annually. In the announcement, the Administration claimed that by 2025 a total of $1.7 trillion would be saved in fuel costs, or an average of $8,000 per vehicle. The targets were established with input from federal and state agencies, 13 automakers,23 environmental groups, and other stakeholders. In August 2012, EPA finalized the standards for model years MY 2017-2025 and NHTSA for MY 2017 - 2021.24 Footprint Standard The new fuel economy regulations include a vehicle footprint standard. The standard assigns different fuel economy targets to vehicles based on individual footprint, which is equivalent to the vehicle width multiplied by the wheelbase.25 Vehicles with a smaller footprint are assigned a more stringent fuel economy standard than vehicles with larger footprints. Researchers have suggested that a footprint-based CAFE standard incentivizes automakers to increase the size of the vehicles they produce.26 18 Ibid. Federal Register. (2009). 19 White House. (2010). “Presidential Memorandum Regarding Fuel Efficiency Standards.” Office of the Press Secretary, the White House. May 21, 2010. . 20 NHTSA. (2010). “DOT and EPA Announce Next Steps Toward Tighter Tailpipe and Fuel Economy Standards for Passenger Cars and Trucks.” National Highway Traffic Safety Administration, U.S. Department of Transportation. October 1, 2010. . 21 EPA, NHTSA, and CARB. (2010). “Interim Joint Technical Assessment Report: Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards for Model Years 2017-2025.” U.S. Environmental Protection Agency, National Highway Traffic Safety Administration, and California Air Resources Board. September 2010. . 22 White House. (2011). “President Obama Announces Historic 54.5 mpg Fuel Efficiency Standard.” Office of the Press Secretary, the White House. July 29, 2011. . 23 The automakers included BMW, Chrysler (now FCA), Ford, General Motors, Honda, Hyundai, Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volvo. 24 White House. (2012). “Obama Administration Finalizes Historic 54.5 mpg Fuel Efficiency Standards.” Office of the Press Secretary, the White House. August 28, 2012. . 25 Federal Register. (2012). “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards.” Federal Register, National Archives and Records Administration, 77(199): 62624-63200. October 15, 2012. . 26 Whitefoot, Katie and Steven Skerlos. 2012. “Design Incentives to Increase Vehicle Size Created from the U.S. Footprint-based Fuel Economy Standards.” Energy Policy 41: 402-411. February 2012. . and Gillingham, Kenneth. (2013). “The Economics of Fuel Economy Standards versus Feebates.” Working Paper. National Energy Policy Institute. April 4, 2013. . 10 | Page Center for Automotive Research © 2016
The footprint standard was required in order to maintain the fleet composition and reduce potential safety consequences of downsizing the fleet (i.e., without a footprint standard, automakers could sell fewer large vehicles and more small vehicles to improve CAFE performance). Though it may aid in maintaining the current fleet composition, a footprint standard will likely increase the cost of meeting CAFE targets, as automakers will become more reliant on expensive technologies to improve efficiency rather than producing smaller, lighter vehicles.27 Midterm Evaluation of 2022-2025 CAFE and GHG Standards Both EPA and NHTSA committed to conducting a mid-term evaluation of the 2022-2025 standards. The two agencies submitted a draft Technical Assessment Report (TAR) in July, 2016 and will make final decisions based on the evaluation by April 1, 2018. According to the Federal Register notice,28 the mid- term evaluation will be “a totally fresh consideration of all relevant information and fresh balancing of statutory and other relevant factors in order to determine the maximum feasible CAFE standards for MYs 2022–2025.” The agencies will work with CARB and other stakeholders to “develop and compile up-to- date information for the mid-term evaluation, through a collaborative, robust and transparent process, including public notice and comment.” The Federal Register lists several factors that will be considered, including available technology, effect on employment, alternative fuel infrastructure, vehicle and fuel costs, payback periods, vehicle sales and fleet mix, market penetration, and other factors relevant to the review. Draft final rulings for the agencies may be submitted in January, 2017 and would set standards for NHTSA for MY 2022-2025 and a possible change in EPA standards (increase or decrease) or no change for 2022-2025. 27 Jacobsen, Mark R. (2012). “Fuel Economy and Safety: The Influences of Vehicle Class and Driver Behavior.” Working Paper 18012. National Bureau of Economic Research. April 2012. . 28 Ibid. Federal Register. (2012). 11 | Page Center for Automotive Research © 2016
II. ESTIMATED NET COST OF BENEFITS OF HIGHER FUEL ECONOMY TECHNOLOGIES TO
THE CONSUMER
Fuel Economy Improvement and Benefits
This study considers the mandated improvement in fuel economy from 2016 to 2025 – the only personal
benefit or gain to the 2025 fuel economy mandates that are realized or recognized by the vast majority of
buyers of new motor vehicles. The estimated greenhouse gas levels required to meet U.S. greenhouse gas
regulations are 250 g/mile (equivalent to 35.5 MPG) for MY 2016 vehicles and 163 g/mile (equivalent to
54.5 MPG) for MY 2025 vehicles; however, these levels may be reached through a combination of tail pipe
emissions reductions and credits granted for reduction of air conditioning system refrigerant leakage.29 If
the air conditioning (AC) refrigerant credits are utilized to the extent the regulators estimate, which is the
expectation of CAR researchers, the unadjusted, lab-tested fuel economy would be approximately 261
g/mile (equivalent to 34.1 MPG) for MY 2016 vehicles and 178 g/mile (equivalent to 50 MPG) for MY 2025
vehicles. Real-world fuel economy is estimated to be 80 percent of lab-tested fuel economy,30 after
adjusting the lab-tested fuel economy, the real-world fuel economy of the average vehicle would be 27.3
MPG for MY 2016 and 40.0 MPG for MY 2025 (see Figure 3).31,32 Thus, between MY 2016 and MY 2025,
the real-world fuel economy of the average vehicle will increase by a projected 12.7 MPG (this assumes
AC refrigerant credits are used).
Figure 3: Calculation of Fuel Economy Target for MY 2016 and MY 2025 Vehicles
60 MY 2025 MY 2016
*163 g/m
178 g/m Real-world performance is 80%
50 54.5
Equivalent Fuel Economy (MPG)
of lab-tested fuel economy
Full use of AC 50.0
refrigerant leaking
233 g/m
40 *250 g/m
credits 261 g/m 40.0
30 35.5 34.1 325 g/m
27.3
20
10
0
Regulatory Target Based on Laboratory-Tested Fuel Adjusted, Combined Real-
Projected Fleet Economy World Fuel Economy
Source: EPA and NHTSA Final Rule, 2012
*Based on CO2 emission requirement (grams per mile).
29 EPA. (2014). “Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel Economy Trends: 1975 Through 2014.” U.S.
Environmental Protection Agency. October 2014. .
30 EPA and NHTSA. (2012). “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions
and Corporate Average Fuel Economy Standards” Final Rule. Environmental Protection Agency and National Highway Traffic Safety
Administration, U.S. Department of Transportation. October 15, 2012. . P. 62988 - 62990
31 Ibid. Table III-4
32 EPA estimated fuel economy for MY 2016 would be 27.8 mpg. The 27.3 mpg estimate of MY 2016 fuel economy is based on restrictions
within the NHTSA CAFE program for MY 2016. The reduction in MY 2016 fuel economy in this report will lead to additional fuel savings.
12 | Page Center for Automotive Research © 2016Gasoline Prices
In the United States, energy prices are tracked and forecasted by the U.S. Energy Information Agency
(EIA). In the EIA reference (most likely) forecast, the price for a gallon of gasoline will be $3.00 in constant
2015 dollars in 2025. The EIA also provides forecast estimates for high petroleum prices ($4.64 per gallon
of gasoline) and low petroleum prices ($2.44 per gallon of gasoline) for that year. The EIA gasoline price
forecast through 2025 is displayed in Figure 4.
Figure 4: Motor Gasoline Prices and Forecast, 2012-2025
Reference Case High Price Low Price
$5.00 $4.64
Gasoline Price per Gallon
$4.00 $3.70 $3.39
(2010 dollars)
$3.00
$3.00
$2.00 $2.44
$1.00
$0.00
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Year
Source: EIA 2015 “Annual Energy Outlook 2015.” U.S. Energy Information Administration. April 14, 2015.
.
Note: Prices reflect sales weighted-average price for all grades, including federal, state, and local taxes.
Crude oil is priced by the barrel, and there are multiple benchmark spot prices that are used when
referring to the global price of oil. The most common benchmark blends are “Brent” from the North Sea
of Europe, West Texas Intermediate (WTI) in the southwestern United States, and Dubai/Oman in the
Middle East. Because these benchmark blends vary in refining properties as well as delivery locations,
they have different prices, which are constantly changing as traders buy and sell crude oil contracts.
In addition to the EIA, several other organizations produce long-term oil price forecasts, including the
International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC), and the
World Bank, as well as several economic consulting groups. The EIA reference 2025 forecast assumes per
barrel oil prices of $91 (Brent Crude), $85 (WTI), and $82 (average import price). The average (mean) of
selected publicly available oil price forecast estimates33 is $97 per barrel in 2025,34 which is equivalent to
the 2025 forecast value from a November 2014 OPEC report. The EIA reference case forecast estimate
values (Brent, WTI, and average import price) are all below the average 2025 forecast price. The EIA price
33 Including forecast estimates from Arrowhead Economics; EIA; Energy Security Analysis, Inc. (ESAI); Energy Ventures Analysis (EVA); IEA;
Interindustry Forecasting Project at the University of Maryland (INFORUM); OPEC; Securing America's Future Energy (SAFE); Strategic Energy &
Economic Research Inc. (SEER); and the World Bank.
34 EIA "Annual Energy Outlook" 2014, EIA "Annual Energy Outlook" 2015, IEA "World Energy Outlook" 2014, OPEC "World Oil Outlook" 2014,
SAFE "Oil Security 2025" 2014, World Bank "World Bank Commodities Price Forecast" 2015. Oil price forecasts are in constant 2013 dollar,
unless otherwise noted.
13 | Page Center for Automotive Research © 2016forecast is below those offered from the IEA and several of the consulting groups. The EIA forecast estimate is also in line with forecast values from OPEC and the World Bank. Given that the EIA oil price forecast estimates, which serve as the basis for gasoline price forecasts, are either below or in-line with other benchmark forecasts, the EIA forecast gasoline prices can defensibly be used in CAR’s analysis. Mandate Cost to the Consumer A 1991 study performed by Greene concluded that, for every one mile-per-gallon increase in vehicle fuel economy, the average, per-vehicle cost would be within the range of $100-200 dollars, in constant 1985 dollar terms, and corresponding to a range of $200-400 in 2010 dollars.35 A review of CAFE by Klier and Linn (2011) found that numerous other studies have confirmed these figures.36 Using the range found in the literature, the projected 12.7 MPG improvement in fuel economy would cost on average somewhere between $2,500 and $5,000 per vehicle. Taking this range into account, CAR considers three different compliance costs for the 2025 fuel economy mandate: $2,000, $4,000, and $6,000. These costs represent the average per-vehicle cost (in 2015 dollars) to comply with the 2025 fuel economy regulations. It is useful, however, to review the elements of mandate cost (MC), sometimes called “retail price equivalent (RPE),” that can be passed along to the consumer in purchasing the vehicle in 2025: Direct Manufacturing Cost of Producing the FE Technology (DMC), or the price an automaker would pay a supplier for a fully manufactured part ready for assembly in a vehicle, or the automaker’s total cost of internally manufacturing the same part. Indirect Cost (IC), often referred to as “overhead” or expenditures not directly required for manufacturing a component but necessary for the operations of the automaker. These costs include such elements as warranty expenses, purchasing and parts testing expenses, research and development, depreciation and appreciation, maintenance repair operations, general and administrative services, retirement costs, transportation costs, marketing costs, and normal profit.37 Dealership Gross Margin (DGM) would include dealership net profit margin, business taxes, operating costs including new vehicle sales labor, vehicle preparation costs, marketing costs, and floorplan expenses. In fact, many of these expenses do vary with vehicle price including some retail store expenses and servicing equipment needed for warranty work. 35 Greene, David L. (1991). “Short-Run Pricing Strategies to Increase Corporate Average Fuel Economy.” Economic Inquiry 29(1): 101–114. 36 Klier, Thomas and Joshua Linn. (2011). “Corporate Average Fuel Economy Standards and the Market for New Vehicles.” Annual Review of Resource Economics 3(1): 445-462. 37 Much has been made by analysts at the regulatory agencies and a handful of outside academics of the level of new technology in determining indirect cost as well as the effect of so-called “learning curves” on both indirect costs and direct manufacturing costs. These assumptions have been used in the agencies’ assessments despite the fact in the 2016 Draft Technical Assessment Report it states “there is no actual cost data from industry to support them.” It should be needless to point out that the fuel economy mandates have resulted in an unprecedented acceleration in the pace of product development and technology deployment, especially in powertrain and the use of new materials. New technologies are being deployed in the market for shorter and shorter lifespans before replacement. This obvious fact alone should overwhelm any outdated discussion of learnings curves or technology levels. Overhead rates have increased dramatically as production volumes fall for each model introduction. Even so, CAR uses the 1.50 indirect cost or RPE multiplier researched by Vyas, Anant, et. al., Comparison of Indirect Cost Multipliers for Vehicle Manufacturing, Technical Memorandum in support of Electric and Hybrid Vehicle Cost Estimation Studies, Center for Transportation Research, energy systems division, Argonne National Laboratory, Argonne IL., 2000, and Rogozhin, Alex, et. al., RTI International. Automobile Retail Price Equivalent and Indirect Cost Multipliers. February 2009. CAR disagrees with the RTI analysis on many grounds including the exclusion of automaker net profits and the underestimation of dealer gross margin in retail price. 14 | Page Center for Automotive Research © 2016
Sales Taxes (ST) paid by the consumer to state and local governments on the final price of the vehicle. Insurance Cost and Financing Cost (INC, FC) paid by the consumer on the addition to final “roll-away” price that is determined by the elements described above for five years (average ownership period). Since American consumers finance about 90 percent of their vehicle purchases and about 84.9 percent of buyer’s finance or lease their purchases – finance costs are adjusted for these percentages. Therefore, if IC, DGM, INC, and FC are converted to ratios of DMC, for example, ICR = (DMC+FC)/DMC MC = ((DMC * ICR)*DGMR)*STR)*(INCR+FCR-1) Where, ICR = Indirect cost rate, roughly 1.50 (Source: NHTSA, NAS 2012). CAR believes however, that the ICR is used to set the manufacturer’s invoice price to the dealer, not the manufacturer’s suggested retail price to the consumer (MSRP). The MSRP does reflect what automakers think the dealer should receive as a gross margin over MSRP. However, the final price of the vehicle is in control of the dealer, not the automaker. MSRP is almost never the price paid by the consumer.38 DGMR = Dealership gross margin rate or roughly 1.0375, or the margin the dealer receives above the manufacturers invoice price.39 STR = Sales tax rate or roughly 1.055. This is applied to the final “roll away” price paid by the consumer. (Source, NHSTA 2012)40 INCR; FCR = Insurance cost rate, 1.080; Financing rate =1.0415 (using NHTSA gross finance cost of 5.43% for 5 years adjusted for 10% down payment and 85.9% of buyers financing.41 Thus the gross cost to the consumer is $MC = $DMC * 1.84. It is this cost that is netted for future fuel savings to gauge the impact of the FE mandates on the new vehicle consumer in terms of higher upfront vehicle cost. 38 Department of Transportation. (2012) Corporate average fuel economy standards for MY 2017-MY 2025 passenger cars and light trucks. Final Regulatory impact analysis. Retrieved from www.nhtsa.gov/staticfiles/rulemaking/pdf/cafe/FRIA_2017-2025.pdf, pp.763-793. National Research Council, Cost, (2015) Cost, effectiveness, and deployment of fuel economy technologies for light duty vehicles. Committee on the Assessment of Technologies for Improving Fuel Economy of Light-duty Vehicles, Phase 2. Board on Energy and Environmental Systems. Division on Engineering and Physical Sciences. Washington D.C. National Academies Press. Pp. 245-261. However, it must be assumed that both the NHTSA and NRC analysts include dealership gross margin in the RPE rate of 50 percent. This would be disturbing to dealerships who control their own margins. 39 National Association of Automobile Dealers, NADA Data 2015. Retrieved from https://www.nada.org/nadadata/ Alexandria, VA, 2016. 40 Department of Transportation. (2012) Corporate average fuel economy standards for MY 2017-MY 2025 passenger cars and light trucks. Final Regulatory impact analysis. Retrieved from www.nhtsa.gov/staticfiles/rulemaking/pdf/cafe/FRIA_2017-2025.pdf, p.830. 41 Ibid, pp.830-832. CAR is willing to accept the very low discount rate of 3 percent in this case since the finance rate is fixed with no risk and insurance cost is semi-fixed compared to highly variable fuel prices. The method of discounting at the beginning of the year is acceptable for finance payments but not insurance payments which are typically paid at the beginning of the year. Szakaly, Steven, Chief Economist, NADA, A Future of Dreamers or Drivers, a presentation given at the 2016 CAR Management Briefing Seminars, Traverse City, Michigan, August 2, 2016. Slide, 10. 15 | Page Center for Automotive Research © 2016
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