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1 Introduction Fuel economy is attracting public and official attention in a way not seen for almost two decades. Gasoline prices have risen sharply over the past 2 years and fluctuated unpredict- ably. Moreover, concerns have developed over the reliabil- ity of the gasoline supply, particularly during peak driving seasons. Evidence also continues to accumulate that global climate change must be taken seriously. U.S. cars and trucks are responsible for a nonnegligible fraction of the world's annual emissions of carbon dioxide, the most important greenhouse gas. Is it time to require cars and trucks to achieve a higher level of fuel economy? Or do such regulations do more harm than good? These questions led Congress to request a study from the National Academy of Sciences. This report is the result of a very short, very intense study by a committee assembled to answer these questions (see Appendix B for biographies of committee members). It is intended to help policy makers in Congress and the execu- tive branch and those outside the government determine whether and how fuel economy standards should be changed. Insofar as possible, it assesses the impact of fuel economy regulation on vehicles, energy use, greenhouse gas emis- sions, automotive safety, the automotive industry, and the public. This report is the successor to another National Research Council (NRC) report on the subject and owes a great debt to the committee that prepared that report. The earlier commit- tee began its work in May of 1991 as the Committee on Fuel Economy of Automobiles and Light Trucks, following a re- quest from the Federal Highway Administration and the National Highway Traffic Safety Administration. It was the charge of that committee (the fuel economy committee) to study both the feasibility and the desirability of a variety of efforts to improve the fuel economy of the light-duty vehicle fleet in the United States. More than a year later, the com- mittee issued its report, Automotive Fuel Economy: How Far Should We Go ? (NRC, 19921. 7 It is difficult to summarize neatly the conclusions of that report. Briefly, though, the fuel economy committee found in 1992 as follows: "Practically achievable" improvements in vehicle fuel economy were possible, and these improvements would lie between, on the one hand, what would hap- pen with no government intervention and, on the other, the results of implementing all technologically pos- sible efficiency-enhancing measures without regard to cost, safety, or other important factors. Despite considerable uncertainty on this issue, if downweighting was used to improve fuel economy, there would probably be an adverse effect on passen- ger safety, all else being equal. While emissions standards for new cars had obvious advantages, they could make it more difficult to im- prove automobile fuel economy. The automobile manufacturing industry, which was in a sharp downturn in 1992, could be harmed by fuel economy standards "of an inappropriate form" that increased new car prices and hurt sales, or that shifted purchases to imported vehicles. When gasoline prices were low, consumers had lim- ited interest in purchasing vehicles with high fuel economy, unless those same vehicles also delivered the performance characteristics horsepower, accel- eration, options that consumers appeared to desire. · Finally, a variety of alternatives to the then-current cor- porate average fuel economy standards should be con- sidered, including changing the form of the program, increasing the price of gasoline, and adopting a system of taxes and rebates to discourage the production of "gas guzzlers" and reward "gas sippers." Now, nearly a decade after the 1992 study began, another NRC committee has completed its work (see Appendix C for
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8 EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS a list of the committee's meetings and site visits). While cre- ated to look at some of the same issues as the earlier group, the Committee on the Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards was born of a different time and directed to address a somewhat different set of concerns. For instance, the impetus for the earlier com- mittee was a sharp, though temporary, increase in oil and gasoline prices in the wake of the Gulf War. Despite a recent increase in oil and gasoline prices related to two factors- the renewed pricing power of the Organization of Petroleum Exporting Countries (OPEC) and capacity constraints in the domestic refining industry no serious sunclv interruptions motivated this report. Similarly, and as was reflected in its findings, the earlier committee was charged with examining a wide variety of approaches that could improve the fuel economy of the pas- senger vehicle fleet, including changes in required fuel economy standards, increases in gasoline taxes, subsidies for the production of fuel-efficient vehicles, and enhanced re- search and development programs. The present committee had a much narrower charge. It was directed by Congress, acting through the Department of Transportation (DOT), to concentrate on the impact and effectiveness of Corporate Average Fuel Economy (CAFE) standards originally man- dated in the Energy Policy and Conservation Act of 1975. These standards (which have been set at various times both by Congress and by the National Highway Traffic Safety Administration [NHTSA]) establish mandatory fuel efficien- cies in the form of required miles-per-gallon (mpg) goals- for fleets of passenger cars and light-duty trucks, which in- cluded the popular sport utility vehicles (SUVs) beginning with the model year (MY) 1978.i It is fair to say that the CAFE program has been contro- versial since its inception. There are sharp disagreements about the effects of the program on the fuel efficiency of the U.S. vehicle fleet, the current mix of vehicles in that fleet, the overall safety of passenger vehicles, the health of the domestic automobile industry, employment in the industry, iThe Corporate Average Fuel Economy program is designed to improve the efficiency of the light-duty vehicle fleet, both automobiles and trucks. It requires vehicle manufacturers to meet a standard in miles per gallon (mpg) for the fleet they produce each year. The standard for automobiles is 27.5 mpg, and for light trucks it is 20.7 mpg. Companies are fined if their fleet average is below the CAFE standard, but various provisions allow flexibil- ity, such as averaging with past and expected fleet averages. Imported and domestic automobile fleets must meet the same standards but are counted separately (trucks are not). The program is administered by the National Highway Traffic Safety Administration (NHTSA) of the Department of Transportation. Testing is done by manufacturers and spot checked by the Environmen- tal Protection Agency. Vehicles are tested on a dynamometer in a labora- tory (to eliminate weather and road variables). Both city and highway driv- ing are simulated and the results combined to compare with the standard. Further information can be found at
INTRODUCTION United States account for slightly less than 20 percent of annual U.S. emissions of CO2; since the United States ac- counts for about 25 percent of annual global emissions, these vehicles are responsible for about 5 percent of worldwide annual emissions. Thus, improving the fuel economy of the passenger-car and light-duty-truck fleet would have a non- trivial impact on global CO2 emissions.3 These concerns have been heightened by a series of re- ports from the Intergovernmental Panel on Climate Change (IPCC), a collection of the world's leading climate scien- tists. The most recent report suggests that (1) atmospheric concentrations of CO2 and other greenhouse gases are con- tinuing to increase, (2) the average surface temperature of Earth has increased significantly in the last 100 years, (3) a causal relationship probably exists between 1 and 2, and (4) continued increases in CO2 emissions could lead to glo- bal warming, which would have serious adverse conse- quences for both plant and animal life on Earth. While also emphasizing the great uncertainties pertaining to climate change, a recent report by the NRC confirmed that "the con- clusion of the IPCC that the global warming that has oc- curred in the last 50 years is likely the result of increases in greenhouse gases accurately reflects the current thinking of the scientific community" (NRC, 2001~. Concerns about climate change are not normally reflected in the market for new vehicles. In this market, the costs that consumers can be expected to take into account are those they will bear directly, including the purchase price of the car and its likely repair costs and resale value over time, expected fuel costs, insurance, taxes, registration, and other costs. Few consumers take into account the environmental costs that the use of their vehicles may occasion. In the par- lance of economics, this is a classic negative externality, and it is to be expected that too little fuel economy would be purchased in this case. For that reason, it is appropriate for the government to consider measures that would better align the signals that consumers face with the true costs to society of their use of vehicles. These measures could be of many types from simple taxes on gasoline designed to internal- ize the externality to regulatory requirements designed to improve the fuel economy of the vehicles people buy. There is another reason for concern about automotive fuel economy. In the wake of the oil supply interruptions of the middle and late 1970s, petroleum imports fell as a share of 3At first blush, it might also appear to be the case that fuel economy is important because of the more common air pollutants for which vehicles are responsible for instance, the precursors to smog (hydrocarbons and oxides of nitrogen), particulate matter, and carbon monoxide. However, automakers are required to meet emissions standards for these pollutants that are denominated in terms of grams per mile traveled. Thus, it should make no difference for emissions of these pollutants whether a car has burned 1 gallon to go 20 miles or 10 gallons the emissions must be the same. The committee notes, however, that a number of the vehicles achiev- ing high fuel economy also have emission rates that are well below the statutory limits. 9 petroleum use. During the 1990s, however, this trend began to reverse. By 2000, imports hit an all-time high of 56 per- cent of petroleum use and continue to rise. If the petroleum exporters reinvested in the United States all the dollars paid to them, it would not ipso facto be a bad thing. In fact, sig- nificant reinvestment has occurred. But such reinvestment may not always be the case, and excessively high levels of imports can put downward pressure on the strength of the dollar (which would drive up the cost of goods that Ameri- cans import) and, possibly, increase U.S. vulnerability to macroeconomic instability that can cost the economy con- siderable real output. Some experts argue that these vulnerabilities are another form of externality that is, they are an effect that car buy- ers do not factor into their decisions but that can represent a true and significant cost to society (see Greene and Tish- chishyna, 2000~. These experts believe that this justifies government intervention of some sort. Others take a more skeptical view, arguing instead that the macroeconomic dif- ficulties of the 1970s (high unemployment coupled with very high inflation and interest rates) were due more to unenlight- ened monetary policy than to the inherent difficulties associ- ated with high oil prices (Bohi, 1989~. Either way, no one can deny that reducing our nation's oil import bill would have favorable effects on the terms of trade, and that this is a valid consideration in deliberations about fuel economy. This committee believes it is critically important to be clear about the reasons for considering improved fuel economy. Moreover, and to the greatest extent possible, it is useful to try to think about how much it is worth to society in dollar terms to reduce emissions of greenhouse gases (by 1 ton, say) and reduce dependence on imported oil (by 1 barrel, say). If it is possible to assign dollar values to these favorable effects (no mean feat, the committee acknowl- edges), it becomes possible to make at least crude compari- sons between the beneficial effects of measures to improve fuel economy on the one hand, and the costs (both out-of- pocket and more subtle) on the other. Having explained why fuel economy matters, why did Congress request a study and why did the NRC create a new committee to examine the issue of CAFE standards? After all, not 10 years have passed since the issuance of the 1992 NRC report, and the current committee believes strongly that the 1992 NRC report is still an excellent place to begin for anyone interested in the fuel economy issue. In fact, a number of things have changed since the 1992 NRC report that make a reexamination both timely and valu- able. Although each of these changes is examined in some- what more detail in subsequent chapters, it is worth touching on the most important ones here. First, there have been significant changes in the automo- bile industry in the last decade. The committee believes it is now virtually meaningless to speak of a U.S. auto company or a Japanese auto company. Today there is a handful of very large companies that both manufacture and sell vehicles
10 EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS around the world. For instance, the General Motors Corpo- ration (GM) has acquired all of Saab and Hummer, half of Isuzu, and a minority share of Suzuki and Fuji Heavy Indus- tries (the makers of Subaru). GM has acquired 20 percent of Fiat Auto S.p.A. (which includes Alfa Romeo), with a full takeover possible, and GM is also in negotiations to acquire Daewoo Motors. For its part, the Ford Motor Company (Ford) has acquired all of Volvo, Jaguar, Aston Martin, and Land Rover, along with a 35 percent stake in Mazda. DaimlerChrysler (itself the product of the largest merger in the history of the auto industry and one of the largest corpo- rate mergers of any type ever) now owns 30 percent of Mitsubishi and 10 percent of Hyundai (Kia). Volkswagen owns all of Rolls-Royce, Bugatti, and Skoda, while Renault has a controlling interest in Nissan as well as Nissan Diesel, and Renault/Nissan has taken over Samsung. Ford and GM have equity stakes in Russian and eastern European assem- blers as well. In other words, the auto industry is much, much more concentrated and more global in 2001 than it was in 1991, when the previous committee began its work. Perhaps equally important, Toyota, Honda, and Nissan- "foreign car makers" whose imports to the United States were a great source of concern a decade ago all have estab- lished significant manufacturing facilities in the United States. This has blurred the distinction between domestic and imported cars, a distinction that was important at the time the original CAFE standards were put in place, and is rel- evant to current deliberations about the future of the CAFE program. Further blurring any distinctions that used to make sense about imports vs. domestic cars is the North American Free Trade Agreement (NAFTA). Related to these changes in market structure has been a rather significant change in the financial well-being of the U.S. auto industry and the employment prospects of those who work in it. The United States has always been the larg- est and most consistently profitable vehicle market in the world, attracting most vehicle producers to sell vehicles to it. In recent years, the U.S. market has been strengthened by, among other things, the scale economies resulting from the mergers discussed above; the remarkable performance of the U.S. economy during the l990s; and the exploding popular- ity of minivans, pickup trucks, and sport utility vehicles (SUVs). Automakers headquartered in the United States re- gained their financial health and, with the exception of the Chrysler component of DaimlerChrysler, the balance sheets of the carmakers were in good shape.4 During the l990s, Ford, GM, and Chrysler bought back billions of dollars of their own shares with the excess cash they generated and invested heavily in other businesses, ranging from financial services to car repair and salvage. At the same time, employ- ment in the U.S. auto industry reached a new peak as foreign and domestic manufacturers expanded capacity at existing 4This will not be the case if the U.S. economy enters a protracted down- turn and/or if profits on light-duty trucks narrow significantly. plants, and foreign manufacturers invested in new auto as- sembly and parts plants. Another significant change over the last decade has to do with the trend in automobile fuel economy. At the time of the 1992 report, the average fuel economy of the entire U.S. light-vehicle fleet had just begun to decrease after nearly 15 years of improvements totaling more than 66 percent (see Chapter 2~. By 2000, however, overall light-vehicle fuel economy had not only failed to reverse the trend seen be- tween 1988 and 1991 but had fallen still farther it is now about 7 percent lower than at its peak in 1987-1988 (EPA, 2000~. This change, in turn, is almost a direct consequence of another dramatic change in the automobile market, one fa- miliar to each and every driver and passenger the shift in the mix of vehicles on the road away from traditional passenger cars and toward SUVs, pickup trucks, and vans (which, collectively, are referred to as light-duty trucks). As recently as 1975 (the year the CAFE program was legislated into existence), traditional passenger cars accounted for fully 80 percent of the light vehicle market. By 2000, the light- duty truck component of the light vehicle market had grown to 46 percent, and its share is expected to exceed that of passenger cars for the first time in 2001. Because new light- duty trucks sold are required to meet a fleet average fuel economy standard of 20.7 mpg compared with the 27.5 mpg standard that currently applies to the passenger car fleet, this shift has been pulling down the overall fuel economy of the light vehicle fleet. Moreover, a new type of vehicle has appeared on the market and is growing in popularity. This is the crossover vehicle (a light truck), which has the appearance of an SUV and many of its characteristics but which is built on a pas- senger car platform rather than a light truck platform (ex- amples are the Lexus RX-300 and the Toyota RAVEN. It is too soon to predict whether these vehicles will penetrate deeply into the light-duty vehicle market and what their effect would be if they do (for instance, will they replace station wagons and large cars, worsening overall fuel economy, or will they become smaller and more fuel- efficient substitutes for larger SUVs?~. It is a change that bears close watching. Another development since 1992 has to do with new tech- nologies for vehicular propulsion. For instance, both Toyota (the Prius) and Honda (the Insight) have already introduced into the vehicle market the first hybrid-electric passenger cars vehicles that combine a traditional internal combus- tion engine powered by gasoline with an electric motor that assists the engine during acceleration. These cars recapture some of the energy lost during braking and can shut off their engines instead of idling, with almost instant restart, both of which are important energy-saving features. The Insight, which seats two passengers and weighs about 2,000 lb, has an EPA rating of 61 mpg in city driving and 70 mpg in high- way driving. The Prius gets 52 mpg in the city and 45 mpg
INTRODUCTION on the highway. Ford has announced it will begin selling a hybrid SUV, the Escape, in 2004 and has pledged to boost the fuel economy of its SUVs by 25 percent by 2004. GM and DaimlerChrysler have pledged to outdo any improve- ments Ford makes on SUV fuel economy. At the same time, there is great excitement and a steady stream of progress reports about the fuel cell. Fuel cells hold promise for alleviating the problems associated with fossil fuel combustion in both stationary (e.g., electric power plant) and mobile (e.g., vehicle power plant) sources. This is be- cause they produce power without the combustion processes that generate conventional air pollutants such as particulate matter, CO2, and other undesirable by-products (see Chapter 4, Attachment 4A, for a discussion of full fuel-cycle im- pacts). Moreover, the fuel cell and other alternative tech- nologies have been given a boost by the government/indus- try cooperative venture Partnership for a New Generation of Vehicles (PNGV), aimed at the development of a midsize automobile that is safe, affordable, and capable of getting dramatically better fuel economy (up to 80 mpg) (NRC, 2000~. Technologies have changed in other respects as well since the earlier 1992 NRC report. During the 1990s, automakers improved the performance characteristics of their light-duty vehicles considerably. For instance, the horsepower-to- weight ratio for passenger cars and light trucks is up about 50 percent since 1981. Similarly, the time it takes for a ve- hicle to accelerate from 0 to 60 miles per hour has fallen 26 percent since 1981 and 2 percent in the last year alone. Another way of saying this is that automakers have indeed made considerable technological advances in the cars and light trucks they made and sold during the last decade. But these advances have almost all been aimed at making cars faster and more powerful, at selling more and heavier light trucks, and at equipping vehicles with other extras (heated seats, power windows, and cruise control, for example) rather than at making them more fuel efficient. This is per- fectly understandable, incidentally, given the apparent lack of interest in fuel economy on the part of the car-buying public at mid-2001 gasoline prices. Since the 1992 NRC report, moreover, EPA has issued new Tier 2 emissions standards under the 1990 amendments to the Clean Air Act. These standards affect not only emis- sions but also certain technologies such as the advanced diesel engine that could be used to improve overall fuel economy. A final factor suggests a fresh look at fuel economy and the way in which it has been and could be affected by the CAFE program. Specifically, over the last 20 years and perhaps particularly over the last decade there has been a steady increase in the attention that car buyers pay to safety concerns. This is one of the causes of the steady, long-term decline in the fatality rate per vehicle mile traveled. What- ever the reason, safety "sells" in a way that was almost in- conceivable two decades ago. This is germane to the 11 committee's work because the possible effects on safety of the original CAFE program, as well as the effects on safety that a renewed effort to improve fuel economy would have, have been perhaps the most controversial aspect of the pro- gram. Because we now have another decade's worth of re- search on the determinants of vehicle safety, a fresh look at automotive fuel economy is warranted. SCOPE AND CONDUCT OF THE STUDY In legislation for fiscal year 2001, Congress requested that the National Academy of Sciences, in consultation with DOT, conduct a study to evaluate the effectiveness and im- pacts of CAFE standards.5 In particular, it asked that the study examine the following, among other factors: The statutory criteria (economic practicability, tech- nological feasibility, need for the United States to con- serve energy, the classification definitions used to dis- tinguish passenger cars from light trucks, and the effect of other regulations); 2. The impact of CAFE standards on motor vehicle safety; 3. Disparate impacts on the U.S. automotive sector; 4. The effect on U.S. employment in the automotive sector; 5. The effect on the automotive consumer; and 6. The effect of requiring separate CAFE calculations for domestic and nondomestic fleets. In consultation with DOT, a statement of work for the committee was developed (see Appendix D). The com- mittee's work was to emphasize recent experience with CAFE standards, the impact of possible changes, and the stringency and/or structure of the CAFE program in future years. The committee conducted numerous meetings and made several site visits during the short time frame of this study. It held open sessions during several of its meetings to receive presentations from a wide variety of individual experts and representatives of the private sector, nongovernmental orga- nizations, environmental groups, and government and to col- lect information and data on the various issues related to CAFE standards. Also, many reports, statements, and analy- ses were submitted to the committee for its review. The com- mittee also used consultants under its direction to facilitate its work under the tight time constraints of the study. For example, Energy and Environmental Analysis, Inc. (EEA) conducted analyses of potential improvements in fuel economy and related costs for a number of different vehicle classes. Sierra Research provided insight to the committee 5Conference Report on H.R. 4475, Department of Transportation and Related Agencies Appropriations Act, 2001. Report 106-940, as published in the Congressional Record, October 5, 2000, pp. H8892-H9004.
12 EFFECTIVENESS AND IMPACT OF CORPORATE AVERAGE FUEL ECONOMY (CAFE) STANDARDS on fuel economy improvements and costs, based on work it had done for the automotive companies. In the end, how- ever, the committee conducted its own analyses, informed by the work of the consultants, the technical literature, pre- sentations at its meetings, material submitted to it, and the expertise and judgment of the committee members, to arrive at its own range of estimates for fuel economy improvements and associated costs. In conducting its study, the committee first assessed the impact of the current CAFE system on reductions in fuel consumption, on greenhouse gases, on safety, and on im- pacts on the industry (see Chapter 2~. To assess what the impacts of changed fuel economy standards might be, it ex- amined opportunities for fuel efficiency improvements for vehicles with the use of existing or emerging technologies, estimated the costs of such improvements, and examined the lead times that would be required to introduce the vehicle changes (see Chapter 3~. Based on these examinations, the implications for changed CAFE standards are presented in Chapter 4. The committee also examined the stringency and structure of the CAFE system and assessed possible modifi- cations of the system, as well as alternative approaches to achieving greater fuel economy for vehicles, which resulted in suggestions for improved policy instruments (see Chapter 5~. Chapter 6 contains the committee's findings and recom- mendations. Appendix E is a list of acronyms and abbrevia- tions. Following the release of the prepublication copy of the report in July 2001, the committee reexamined its technical and economic analysis, as discussed in Appendix F. Minor changes have been made to some of the material in Chapters 3 and 4 as a result of this reexamination, but the findings and conclusions are substantively unchanged. REFERENCES Bohi, D. 1989. Energy Price Shocks and Macroeconomic Performance. Washington, D.C.: Resources for the Future. Environmental Protection Agency (EPA). 2000. Light-Duty Automotive Technology and Fuel Economy Trends 1975 Through 2000. EPA420- R00-008 (December). Office of Air and Radiation. Washington, D.C.: Environmental Protection Agency. Greene, D., and N.I. Tishchishyna.2000. Costs of Oil Dependence: A 2000 Update (May). ORNL/TM-2000/152. Oak Ridge, Tenn.: Oak Ridge National Laboratory. Intergovernmental Panel on Climate Change (IPCC).2001. Climate Change 2001: The Scientific Basis. Cambridge, U.K.: Cambridge University Press. National Research Council (NRC). 1992. Automotive Fuel Economy: How Far Should We Go? Washington, D.C.: National Academy Press. NRC. 2000. Review of the Research Program of the Partnership for a New Generation of Vehicles, Sixth Report. Washington, D.C.: National Academy Press. NRC.2001. Climate Change Science: An Analysis of Some Key Questions. Washington, D.C.: National Academy Press.
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