Fuel Economy Rules Threaten Jobs, Vehicle Prices: Study

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In 2012, the federal government and automakers agreed on a timeline to bring U.S. corporate average fuel economy (CAFE) ratings for new cars sold in the United States to an average of 54.5 miles per gallon (mpg), along with a sharp reduction in carbon emissions by 2025. As the Obama administration was winding down, federal regulators reiterated the goals over requests from the industry for more time.

The Trump administration has been more receptive to carmakers pleas and, in keeping with Trump’s pledge to eliminate unnecessary regulation, a relaxation of the CAFE standard is expected. A new study from researchers at Indiana University that was sponsored by the Alliance of Automobile Manufacturers (AAM) provides some support for holding off on the increased mileage standard.

Lack of technology is not the issue. Rather, changes in the economy and potential job losses related to enforcing the current regulations need to be considered. John Graham, a co-author of the Indiana University study told Automotive News:

Our findings don’t call into question the need for regulation but we found that the federal requirements need to be fine-tuned. Due to unexpectedly low gas prices and tepid demand for electric and hybrid vehicles, the standards will have greater economic impact than envisioned when they were developed.

For example, the study suggests that a car buyer will purchase a more economical vehicle if the present value of the fuel savings is greater than the purchase price of the technology:

While the 2025 CAFE standard was estimated to increase the average price of a new vehicle by about $1,800 (relative to the 2016 standard), the consumer was estimated to save $5,700 or $7,400 over the long lifetime of the vehicle (up to 30 years for cars, 37 years for light trucks), depending on whether a 3% or 7% annual discount rate is applied to future fuel savings (NHTSA 2012a). The investment appears to be so attractive that the 2025 standards might increase vehicle sales if consumers are aware of the large fuel savings and do not undervalue them (NRC 2015a, 312).

But making a rational choice based on the best long-term outcome is not always the dominant factor in making a purchase decision. The AAM has long argued that the industry builds cars that consumers want to buy. From the AAM website:

Once the government set targets, automakers are not evaluated based on whether the products they offer consumers meet the government targets; rather, automakers are evaluated based on the products consumers choose to buy. So, low consumer interest in high-mileage vehicles presents a serious challenge to the government’s ambitious fuel economy and greenhouse gas targets.

While average fuel economy of all new vehicles continues to rise, sales of the most energy-efficient autos remain low. For example, 76 models on sale in 2015 achieved 40 MPG or more, as stated on the new vehicle label. Sales of all these models combined accounted for about 1% of total new vehicle sales. Sales of the most energy-efficient models will need to grow substantially to meet projected government targets.

Ford CEO Mark Fields said in January that about a million U.S. jobs would be lost if standards are not aligned with market realities. Based on the Indiana University study, that’s one in every seven direct and indirect jobs in auto-related manufacturing. The auto industry supported about 1.1 million direct jobs in 2005. That number fell by almost half to just over 650,000 in September 2009 and has since recovered to about 930,000 as of last October.

In 2013, the states raked in $110 billion in auto-related tax revenues and the federal government collected at least $95.5 billion. Those totals represent 13% of all state tax revenues and about 3.4% of federal tax revenues.

Among the study’s basic findings is this:

[T]he overall annual impact of the regulatory programs on the national economy is negative in the near-term but positive in the long-term, a pattern that is consistent with theoretical expectations. The annual impact turns from negative to positive as early as 2022 and as late as 2035 …

A total of 15 recommendations are included in the study, as is this caveat:

Our macroeconomic analysis does not include a societal cost-benefit analysis or an environmental or public health analysis of the regulations. Consequently, the study supplied here, by itself, does not address some issues vital to policy makers and stakeholders such as climate change, the public health impacts of pollution, and the overall societal benefits and costs of alternative standards.