No Mandates Lead to Less-Efficient Cars

 Alan Neuhauser
  5th-Apr-2018

WHEN ENVIRONMENTAL Protection Agency Administrator Scott Pruitt on Monday abruptly announced that he would be revoking ambitious new vehicle fuel-economy standards implemented under the Obama administration, he was doing more than merely cutting regulations. The move would gut the mechanism that's been most responsible for reducing the amount of gas and diesel that American cars and trucks consume – and, in turn, the level of heat-trapping carbon emissions that they produce.

Average fuel-economy requirements, introduced by the federal government by President Gerald Ford in 1975 and implemented under President Jimmy Carter three years later, are the main reason for major advances in efficiency and emissions, automotive industry experts say.

While the public's interest in more-efficient cars tends to rise and fall with fuel prices, federal mandates like the Corporate Average Fuel Economy standard or those set by the California Air Resources Board make for a longer-term benchmark – one that manufacturers can more easily plan for.

"It does start with government regulations, whether those are CAFE standards or CARB setting new standards to limit emissions," says Francois Mallette, managing director of the automotive practice at L.E.K. Consulting.

The CAFE standard, introduced by Congress in 1975, requires automakers to hit a certain fuel-economy threshold, as measured by an average calculated from all the cars each manufacturer sells that year. When the law was passed, lawmakers declared that manufacturers had until the 1985 model year to achieve an average of 27.5 miles per gallon for the new cars they sold – roughly double the average at the time.

The standards weren't updated for another two decades, when President George W. Bush signed a law in 2007 raising the benchmark to about 35 mpg. Five years later, the EPA and the Department of Transportation, after extensive meetings with auto industry executives, labor unions and environmental groups, announced that manufacturers would need to achieve about 50 mpg by 2025.

It was that latest target that Pruitt on Monday said he would roll back, declaring that it was overly ambitious.

"The Obama administration's determination was wrong," Pruitt said in a statement. "Obama's EPA cut the Midterm Evaluation process short with politically charged expediency, made assumptions about the standards that didn't comport with reality, and set the standards too high."

The decision drew a sharp backlash from Democratic lawmakers, environmental advocates and some health groups that have called for reducing emissions, and it's sure to draw legal challenges as well. Not only does it undercut efforts to address climate change, critics contend, but it disincentivizes auto manufactures from improving fuel efficiency.

New vehicles for model year 2016, for example, achieved an average fuel economy of 24.7 mpg, according to the EPA – slightly higher than the year before and a new record. Cars averaged about 28.5 mpg, and light trucks – which include vans, pickups and SUVs – about 21.2 mpg.

Pruitt, however, has sharply opposed federal environmental regulations. His announcement Monday also reflected a division between automakers, which endorsed the move, and auto-parts makers along the supply chain such as Bosch, Delphi, Continental and BorgWarner, which have been responsible for developing the turbo-chargers, start-stop technology and other innovations that have made engines more efficient, experts say.

Pruitt's decision effectively frees automakers such as GM and Chrysler from having to commit to costly investments in more fuel-efficient vehicles, and unleashes fresh uncertainty for the companies that automakers had hired to develop those new technologies.

"The car companies, you could argue that they're probably not losers. The supply base, it could be challenging for them," says Mike Rayne, managing director of the performance improvement practice and automotive industry practice at FTI Consulting.

But, he adds, the market for more fuel-efficient technology isn't entirely upended. The California Air Resources Board said it would remain committed to the original efficiency targets and hinted that it would challenge Pruitt's decision. A dozen other states also follow California's standards, together representing about a third of the U.S. market.

In Europe, where hefty taxes on gasoline and diesel have long boosted the market for smaller and more efficient vehicles, demand for efficient cars is expected to remain high, particularly as cities there seek to reduce local pollution through taxes, fees and other schemes that discourage gas-guzzlers. China, too, has embarked on an ambitious effort to clean its air, and has also seen demand for fuel-efficient cars grow.

"As long as CARB is there and upholding the standards along with the 11 other states, [automakers] are going to have no other choice but to go, 'I better hit those standards or it'll lock me out from a huge swath of the market,'" Mallette says.

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