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Understating the Value of New CAFE Standard Targets?

September 15th, 2009 · 3 Comments

The Environmental Protection Agency (EPA) and Department of Transportation (DOT) today released proposed rules for implementating the increase in CAFE standards, beyond the Congressional mandate, as announced this past May. In short, this deal between the Obama Administration and the auto industry accelerates the improvement in light vehicle fuel efficiency across the fleet average (the CAFE) to 35 mpg from 2020, the Congressional mandate, to 2015.  This action merits applause, even if far from as aggressive as it could (or should) be (check out US compared to other countries). This move should lead to cutting US liquid fuel (almost entirely oil) demand, reducing oil import requirements, improving US auto industry competitiveness in the world market, and helping to reduce US pollution loads (whether fossil fuel aerosols, carbon dioxide, or otherwise).  All in all, even if less than what is possible, a win-win-win move.

As per Republican Roy LaHood, Secretary of Transportation,

“The increases in fuel economy and the reductions in greenhouse gases we are proposing today would bring about a new era in automotive history. These proposed standards would help consumers save money at the gas pump, help the environment, and decrease our dependence on oil – all while ensuring that consumers still have a full range of vehicle choices.”

As per EPA Administrator (Democrat) Lisa Jackson,

American drivers will keep more money in their pockets, put less pollution into the air, and help reduce a dependence on oil that sends billions of dollars out of our economy every year. By bringing together a broad coalition of stakeholders – including an unprecedented partnership with American automakers – we have crafted a path forward that is win-win for our health, our environment, and our economy. Through that partnership, we’ve taken the historic step of proposing the nation’s first ever greenhouse gas emissions standards for vehicles, and moved substantially closer to an efficient, clean energy future.

From the press release, the four key measurable achievements expected from this move

Specifically, the program would:

  • Increase fuel economy by approximately five percent every year
  • Reduce greenhouse gas emissions by nearly 950 million metric tons
  • Save the average car buyer more than $3,000 in fuel costs
  • Conserve 1.8 billion barrels of oil

Again, laudable goals and laudable achievements.  A serious question to ask, however, is as follows:  Is this underselling the likely impact of the overall program in terms of financial implications for both the average car buyer and the overall economy?

As discussed this past May, when the deal was originally announced, in Valuing cutting oil dependency, valuing savings at “$3,000 in fuel costs” simply takes a straight line assessment of how many fewer gallons the “car buyer” will burn using a more efficient car without seeking to assess or understand the financial implications of cutting global oil demand.   Very simply, markets are (at least partially) driven by supply and demand functions. In economic terms, to determine prices, creating new (additional supply) is functionally the same as reducing demand.  Analysis suggests that, come a decade from now, this program would reduce US oil demand in the range of 1.4 million barrels per day (roughly 7 percent) compared to the business as usual case (without considering any other possible world developments, technologies, etc …). In 2008, world demand fell by about 2.5 million barrels / day in the face of $140 barrel / oil.  Prices fell into the $40s before coming back up to the $60-70 range.  Was that demand destruction “the” reason for reduced prices? Likely not the sole, but a key factor.

With that in mind, how much would an average 1.4 million barrel/day demand reduction impact oil prices? Could we see $50 barrel/day lower prices? $25?  $10?  This is a form of predictive analysis that is very difficult to do and basically impossible to do with certainty, but we can be certain that lowered demand will foster lower prices on average.

Let us take a very low figure, reducing oil prices by $5 per barrel.

  • This translates to about 12 cents per gallon less expensive gasoline.
  • Assuming 15 million barrels per day of US usage (a 25% reduction from today), this would be $75 million per day of savings for US drivers and the US economy. This would translate to over $27 billion in annual savings for the US economy. And, that $27 billion would almost certainly be mainly in reduced oil imports (thus strengthening the US dollar due to improved (or less bad) balance of payments accounts).
  • Globally, assuming 80 million barrels/day of production (perhaps optimistic), this would mean perhaps $400 million/day or in the range of $150 billion/year in reduced expenditures on oil — freeing resources, globally, for spending on other priorities and requirements (whether clean energy investments, education, or otherwise).

In fact, $5 calculation as to the lowered per gallon cost of liquid fuels in 2020 due to this deal seems to be an absurdly low figure.  But, using that “absurdly low” figure, it is quite evident that there is a huge societal benefit that has not been part of the overall discussion.

By the way, let’s take a look at “cost/benefit” analysis.  Reporting is that the estimated cost, per vehicle, for this additional fuel efficiency would be $600.  An upfront cost paid back five-fold (not counting net present value) due to those fuel savings. Okay, that sounds great. Now, let’s us take a higher level look. That $600 will represent, for the most part, additional economic activity in the United States in exchange for reducing oil imports. Wow, that makes the overall economic “win” even better by displacing imported fuel costs for domestic “green jobs”. Another ‘win’.  However, what about that reduced fuel cost impact?  Taking a figure of $600 per car and assuming 10 million light vehicle sales/year translates to $6 billion in costs (within the economy, for the most part, meaning jobs and recirculating money) for (using that absurdly low figure of $5 barrel/oil lower price) for $27 billion per year in reduced oil import costs.

Thus, seeking to take a step back and do a systems-of-systems look suggests that steps to improve transportation fuel efficiency have far greater payoff than simple stove-piped announcements suggest.

Some reactions to the EPA/DOT announcement:

Auto Alliance

“Last May, automakers committed to President Obama to increase the average fuel economy in new vehicles by 40 percent to a combined 35.5 miles per gallon by 2016.  This historic joint-rulemaking proposal released today by the Environmental Protection Agency and the National Highway Traffic Safety Administration creates a coordinated national approach for increasing fuel economy and reducing greenhouse gases and prevents competing regulations at the state and federal level.
The proposal provides manufacturers with a roadmap for meeting significant increases for model years 2012-2016.   Final rules are essential to providing manufacturers with the certainty and lead time necessary to plan for the future and cost effectively add new technology. We look forward to working constructively with the Obama administration to provide comments and begin meeting our shared goals of increasing fuel economy, enhancing energy security, and reducing greenhouse gas emissions through this single national program.”

Sierra Club,

“After decades of inaction, President Barack Obama directed the Environmental Protection Agency and the National Highway Traffic Safety to work together to speed up the pace for cleaning up the nation’s new cars and trucks.  We applaud President Obama for this move to curb global warming and our dependence on oil while giving Americans better vehicle choices.

“This is the biggest single step the U.S. can take to curb global warming and save oil - we will work to ensure the final rule delivers on President Obama’s promised oil savings and greenhouse gas reductions and sets a firm foundation for standards beyond 2016.

“The Administration’s action will reduce U.S. global warming pollution by 950 million metric tons and save 1.8 billion barrels of oil over the lifetime of the vehicles sold in model years 2012-2016.  The proposal includes the nation’s first greenhouse gas standards, which will put the whole country on a trajectory to achieve the reductions California and 14 other states were poised to implement.  It also accelerates compliance with the 35 mile per gallon fuel economy standards Congress set in the 2007 energy bill.

“The auto industry is fully capable of meeting these vehicle standards and keeping Americans safe. The industry is already using technologies from better engines, transmissions, and high strength, light weight materials to low rolling resistance tires to improve fuel economy.  Just one technology –  Ford’s Ecoboost engine yields a 20% fuel economy improvement.

“These standards will help consumers save at the pump, keeping dollars at home instead of going overseas to pay for oil — both agencies note that the standards announced today provide benefits of as much as $250 billion.

“Americans want more fuel efficient vehicles, as they showed in the Cash for Clunkers program. These new standards will ensure that consumers will have better choices across the entire vehicle fleet, from SUVs to minivans to cars. “

Related, see Warming Law re the California Waiver.

once the standards the DOT and EPA put forward today get finalized, we fully expect that they’ll be challenged by the auto industry. (For those wondering, the Obama-CARB-automaker deal in May included an agreement from automakers to drop all their preemption suits against states. As we’ve noted, however, auto dealers were apparently not included in the May agreement, which would explain why it’s the National Automobile Dealers Association that has filed this latest challenge.) Assuming national standards are challenged, industry would then be resisting the implementation of strict auto standards aimed at combating global warming on two fronts – in California, and at the federal level.

Center for Biological Diversity

“The proposal to regulate greenhouse gas emissions from vehicles under the Clean Air Act is a historic step in the fight to curb global warming,” said Vera Pardee, a senior attorney at the Center for Biological Diversity. “The Clean Air Act is our strongest and most successful tool for reducing air pollution and will now be put to work, together with our fuel-economy law, to reduce greenhouse gas emissions, protect the air we breathe, and save consumers money.”

In November 2007, the Center for Biological Diversity, other nonprofit organizations, and more than a dozen states won a landmark court victory overturning the Bush administration’s fuel-economy standards for model years 2008-2011, in part because of the administration’s failure to consider the impact of greenhouse gas emissions from the regulated vehicles. New but still inadequate standards for model year 2011 were proposed by the Bush administration and finalized under President Barack Obama, then once again challenged by the Center for Biological Diversity in court in April, 2009.

“While today’s proposal can and should be strengthened, we hope that it marks a turning point away from the fundamentally flawed approach to fuel economy and greenhouse gas emissions used in the past, toward the rapid progress we can and must achieve to reduce greenhouse pollution and slow global warming,” said Pardee.

Tags: Energy · analysis · automobiles · energy efficiency · gasoline · oil

3 responses so far ↓

  • 1 The White House’s Energy-Dumb Policy and Tone-Deaf Politics? // Mar 30, 2011 at 4:10 am

    [...] Instead, it looks likely that President Obama will call for a commitment to continue from the new CAFE standards to continuing tightening of mileage performance requirements through the end of the [...]

  • 2 JOBS! JOBS! JOBS! …. F.A.S.T.! // Sep 6, 2011 at 8:42 pm

    [...] too often, fallen into a trap of understating benefits. (On the CAFE standards, for example, see: Understating the value of new CAFE standard targets.) If proponents are understating value of action, that is preemptive concession to opponents of [...]

  • 3 The Republican Agenda To Raise America’s Gas Prices // Mar 16, 2012 at 9:23 am

    [...] constantly increasing CAFE standards will increase prices in the mid and long [...]

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