September 21, 2012 / 12:26 PM / 7 years ago

COLUMN-Mandated car economy standards work: Gerard Wynn

By Gerard Wynn

LONDON, Sept 21 (Reuters) - Mandating economy standards for new vehicles can be a more politically acceptable approach to driving road fuel savings, and overcoming apathy among car buyers, than approaches such as hefty fuel taxes.

Their success depends on governments juggling winners and losers, and a net social benefit with the extra upfront costs to individual consumers and manufacturers.

The International Energy Agency (IEA) reported this week that fuel savings from more efficient cars yield huge net financial benefits to owners over the lifetime of vehicles.

All net growth in global oil demand is expected to come from the transport sector in emerging economies, the West’s energy adviser says.

But given recent rises in oil prices, greater vehicle efficiency is also a priority for developed countries to access fuel savings that are also needed to achieve more ambitious targets to cut greenhouse gas emissions.

The IEA, in its report “Improving the Fuel Economy of Road Vehicles”, estimated that fuel consumption in new passenger vehicles globally could be halved by 2030 using commercially available technologies at negative net cost.

Existing technologies included lighter materials, less road resistant tyres and more aerodynamic vehicles, greater combustion efficiency and, at more expense, combustion engine-electric motor hybrids.

But in the real world it is not so simple.

The IEA found that actual annual efficiency gains from 2005-2008 lagged its target rate, meaning year-on-year the 2030 target was slipping out of reach and requiring ever steeper reductions to get back on track.

“To achieve such a scenario, strong policies will be needed from governments around the world,” it said.

Some consumer groups have warned that standards risk pricing less affluent motorists out of the market, while manufacturers are fearful of costs they cannot pass onto motorists and of a possible drop in new vehicle sales if prices rise.

Meanwhile, China is alone among emerging economies in adopting fuel economy standards, the IEA found, while the actual efficiency of car fleets in countries outside the developed countries grouped in the OECD has fallen.

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Global fuel economy standards (page 22-23 of IEA report):

Declining actual fuel economy in non-OECD (page 10):

NET SAVINGS

U.S. and European Union authorities recently enacted or proposed new fuel economy standards and both calculated these would bring net savings for motorists.

The U.S. Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) on Aug. 28 introduced their latest passenger vehicle fuel economy standards for new models from 2017-2025.

The U.S. standards, which are subject to a “comprehensive mid-term evaluation”, go further out in time than any other country, but are still less ambitious for 2025 than the standards the European Union has proposed for 2020.

The EPA average standard is equivalent to about 101 grams carbon dioxide per km, compared with the European Union’s proposed 95g of CO2 per km by 2020, for passenger vehicles.

For a new model bought in 2025, EPA estimated fuel savings from higher efficiency would pay back the extra upfront cost of a more economic vehicle in three and a half years, compared with a new model in 2016.

They calculated the higher upfront cost at an average of $1,800 per vehicle.

The European Commission confirmed its proposed mandatory fuel economy standards on July 11.

It calculated net savings for consumers of around 2,000 euros ($2,600) over the (13-year) lifetime of the vehicle for new 2020 models compared with those meeting the 2015 standard, and a payback on the efficiency upgrade of less than five years.

The IEA reported that the pay-back period for most incremental efficiency improvements was less than five years, with the exception of an advanced hybrid engine (5.1 years).

MANUFACTURER COSTS

One tricky part for policymakers is juggling winners and losers.

EPA estimated the total costs of its program to automakers and vehicle buyers at roughly $148 billion to $156 billion, while the benefits are roughly $510 billion to $639 billion over the life of the vehicles covered by the rule, the U.S. Congressional Research Service reported (“Automobile and Truck Fuel Economy (CAFE) and Greenhouse Gas Standards”).

The Congressional Research Service report, published last week and referring to the latest economy standards, calculated wide variation in incremental costs across manufacturers, which in part reflected how far their models are in compliance with the rules and also their volume of car sales.

It found the greatest total cost of implementing the 2025 versus 2016 standard fell on Ford (nearly $3 billion), followed by Toyota and General Motors.

Both U.S. and European fuel standards differentiate by car area or weight, accounting for the lower fuel efficiency of heavier cars, and so soften the impact on such manufacturers.

And the latest EU 2020 standards have sought to make corporate targets easier by “super crediting” extremely efficient cars by a factor of 1.3, allowing them to count more towards the overall fleet.

REAL WORLD

Fuel economy standards cannot tackle real world problems such as the difference between the nameplate efficiency of a particular model and in-use fuel consumption, which depends on congestion, road quality (surface resistance), speed and driver behaviour.

But they can help overcome consumer apathy, where other policy tools like taxes or labelling may not work.

Consumers often are not convinced by energy savings, for example because of uncertainty over how much they will drive and about future oil prices.

One result is a demand for very short payback; the IEA found that commercial operators expect a pay-back of under 18 months on efficiency upgrades.

In addition, style choices intrude. Some consumers for example prefer bigger, heavier less efficient cars, which are perceived as safer.

Mandated fuel standards help overcome such consumer behaviours by constantly upgrading the stock of new models available.

They are especially relevant to emerging economies, where preference for bigger cars is driving down average fuel efficiency, the IEA report found, as people become more affluent.

The value of refining fuel economy standards in the West is less relevant without applying them also in emerging economies where ownership levels are furthest from saturation.

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