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Mar 27, 2017

With Weaker Fuel Economy Standards, Everyone Loses, Including U.S. Automakers

 

On Wednesday [March 15, 2017] in Detroit, beneath a vast American flag, President Trump answered 17 automakers’ call to reopen the Mid-Term Review of the 2022–25 “CAFE” automotive efficiency standards.

On his fourth day in office, he’d expedited approvals for two oil pipelines, skipping further assessments (if the courts permit). This time he did the opposite, scrapping the Obama Administration’s quick decision and substituting a year’s further study. On January 12, EPA had found—sooner than expected but based on a strong record—that the 2022–25 CAFE standards agreed by all parties in 2009–12 could indeed be profitably and practically met, and at even lower cost than expected. Now President Trump has rejected that finding and reinstated a year-long process in which automakers can argue that EPA’s robust and exhaustive record of decision, backed by a 2015 National Academies study, was wrong.

Automakers were pleased, but they must have been a mite surprised when the President said, “We are going to work on the CAFE standards so we can make cars in America again.” Actually, under CAFE standards evolving since 1978, the industry in 2016 sold an all-time record 17.55 million vehicles. But such continued success is not guaranteed. Twice before, weak foresight has nearly destroyed U.S. automaking: first when 1970s oil shocks favored higher-mpg Japanese products and Detroit avoided a rout only by responding to President Ford’s 1975 CAFE law, and in 2009 when two of the Big Three needed restructuring and an $80 billion bailout.

The President seemed taken with the automaker trade association’s claim that it’ll be too hard and costly to raise average on-the-road auto efficiency from 25.1 mpg today to about 36 mpg in 2025 (or 54.5 mpg on paper including loop­holes). The govern­ment’s previous analyses found this would cost about $33 billion, not industry’s claimed $200 billion, and save about $98 billion, by relying overwhelmingly on gasoline vehicles salted modestly with hybrids and slightly with electric vehicles.

Lobbyists assert that dipping fuel prices have shrunk efficiency’s expected savings at the pump (true but irrelevant, as I’ll explain below) and that high standards don’t fit surging sales of SUVs and pickups (wrong—big vehicles already enjoy looser stan­dards, so the theoretical 54.5 mpg target has automatically shrunk to 54.1). But the law signed by President G.W. Bush requires “maximum feasible” efficiency after 2020 if techno­logically and economically practical. The all-parties agreement to mesh three con­flic­ting sets of regulations and ease compliance with that law provided for midcourse review by 2018 to check if any tweaks were needed. Now the White House, fed inflated claims of job loss, seems eager to use that review to gut the rules, replacing a well-working compact and its stable planning basis with uncertainty, acrimony, and conflict.

Be careful what you wish for. The existing record of decision shows automakers have outperformed their Model Year 2012–15 efficiency targets and innovation pathways while raising sales for seven years running. Over 100 cars and light trucks on the market today meet 2020 or later standards. The reinstated Mid-Term Review can be expected to add new evidence making a strong technical and eco­nom­ic case for the original standard or—as EPA found justified last November—even higher.

Obsolete piecemeal analyses showing high cost are contradicted by current market offerings and the industry’s own research. Regulators and at least some automakers know this. The new review would make it awkwardly manifest. Attempts to ignore it would doubtless be litigated. An enormously complex and ponderous industry critically dependent on long-term planning can ill afford the prolonged uncertainty self-inflicted by its own lobbyists—continuing a decades-long history of reflexively undermin­ing its basic strategic interests.

Naturally automakers would rather invest less, innovate comfortably, and minimize sticker prices. These worthy goals are exactly why they’re so worried by the Presi­dent’s calls—in exchange for relief from “industry-killing regulations”—to upset their finely tuned North American supply chain, change or scrap NAFTA, and penal­ize transborder trade. Many of the 2.4+ million U.S. jobs making vehicles or parts depend on that trade to make autos affordable. Automakers rightly fear that mes­sing with Mexico’s auto assembly (over a tenth of U.S. 2015 vehicle sales) and $50 billion of annual component manufacturing for American assembly plants would raise American sticker prices, costing U.S. jobs. Having also long suffered from over­capa­city, they’re also worried by the President’s eagerness for them to expand domestic output in a seemingly full market. 

So the proffered deal is to stop overzealous regulators’ “assault on the American auto industry” in return for protectionism meant to expand domestic auto production and jobs. Its risks might be worthwhile if weaker CAFE standards actually made American automakers more competitive. But in reality, weaker standards would achieve just the opposite and would harm jobs and national security, for at least four reasons.

First, nearly all big overseas auto markets have higher gasoline prices than, and efficiency standards comparable to or stiffer than, the United States. (Europe has CO2 tailpipe standards for 2021 tougher than America’s for 2025.) Many nations—including by next year all of China, the world’s top auto market—also price carbon. Reverting to subpar efficiency would make new American autos less competitive or potentially unlawful abroad. Offering highly efficient models overseas and less-efficient ones at home would raise automakers’ costs and risks in both markets. Global competitive­ness requires world-class products everywhere, not laggardly innovation in America.

Within the United States, automakers have resolved the domestic form of that dilemma by harmonizing upwards to tighter pollution standards in California and nine allied states. The new threat to harmonize downwards by trying to scrap California’s standards (now valid to 2025) would trigger fierce litigation and plunge the industry’s product planning into years of uncertainty, benefiting only foreign rivals. Other nations won’t weaken the higher efficiency standards they’ve fitted to their circum­stances and priorities, but they’ll happily take market share if we weaken ours.

Second, U.S. automakers have invested billions of dollars and untold reputa­tional capital in laudable energy and climate leader­ship, from Ford’s aluminum F150 to Chevrolet’s electric Bolt. Sustaining market credibility and customer appeal requires consistent de­livery on those promises. That’s also a smart hedge against big risks like oil-price yo-yos. Imminent U.S. “peak car” ownership makes advanced techno­logy an even more vital bulwark against market shrinkage. And it makes the draft Federal Budget’s cancellation of the Advanced Technology Vehicle Manufac­tur­ing Program, saying industry is better placed to fund it, even more damaging to Detroit.

Third, backpedaling on efficiency would undermine Detroit’s ability to respond to the threat and opportunity of transformational business models strongly favoring electric traction—shared vehicles like ZIPcar and GetAround, mobility-as-a-service like Uber and Lyft, and emerging autonomous vehicles. As I’ll elaborate in a separate post, the world market is moving rapidly toward electric vehicles (EVs), whose global and U.S. sales are burgeoning. Skating where the puck used to be would squander hard-won advan­tage and risk market irrelevance.

Fourth, as GM learned by scrapping its pioneering EV1 electric car (apparently to avoid under­cutting its lobbyists’ contention that California’s Zero-Emissions Vehicle standard was unmeetable), industries that stomp on their own innovation shoot themselves in both feet: they annoy the most valuable customers, and they compromise their ability to attract, retain, and motivate top talent. Overcom­ing Silicon Valley’s gravita­tional pull is hard enough without signaling low ambition. Incremental, compliance-driven efficiency gains will cede the talent race to Tesla, Alphabet, and Apple. Tesla gained over half of GM’s market cap while selling fewer than 1% as many cars, because impressive ambition and talent created unique value.

Of course America’s traditional automakers too have extraordinary capabilities and can lead in innovation when they choose. They were heroes during 1975–83, when U.S. GDP rose by 27%, oil use fell by 17%, net oil imports fell by 50%, and net oil imports from the Persian Gulf fell by 87%, breaking OPEC’s pricing power for a decade. The foundation of this victory was 7.6-mpg-better domestic cars that burned 20% fewer gallons to drive 1% fewer miles—thanks 96% to smarter design, 4% to smaller size. During 1975–84, new light vehicles got 62% higher mpg yet became safer, far cleaner, and no less peppy.

Detroit then kept on innovating, but once its success had crashed the world oil price in 1985–86, ever-better powertrains were used to make cars more muscular, not more frugal. The average new U.S. light vehicle in 2003 had 24% more weight, 93% more horsepower, and 29% faster 0–60-mph time than in 1981, but only 1% higher mpg. If instead 1981 performance had stayed constant, light vehicles would have become 33% more efficient, saving more oil in 2000 than America’s net imports from the Persian Gulf—now more than ever the world’s scariest tinderbox.

Auto-efficiency rollbacks would threaten our national security and prosperity. As Rocky Mountain Institute’s Pentagon-cosponsored Winning the Oil Endgame showed in 2004, America’s $2-billion-a-day oil purchases incurred hidden costs—paid not at the pump but through our taxes or incomes—totaling at least $4 billion a day or $1.5 trillion a year, in three roughly equal parts: oil price volatility, OPEC’s monopoly pricing (supported by U.S. oil dependence), and the readiness costs of U.S. forces earmarked for Persian Gulf interventions.

That last half-trillion-dollar-a-year chunk was about ten times what America was then paying for oil from the Gulf; it rivaled total U.S. defense spending at the height of the Cold War. The cost in blood was even more important: our sons and daugh­ters have twice gone to the Gulf in 0.56-mile-per-gallon tanks and 17-feet-per-gallon-equivalent aircraft carriers because we didn’t put them in 29-mpg autos. The Gulf War’s $7 billion net fiscal cost to the U.S. (after other countries’ $54 billion con­tributions) was equiva­lent to just one year of a $1/bbl price increase. Yet spending less than $7 billion to buy oil efficiency instead could have eliminated all Gulf oil imports and saved many lives—assuming, as seems plausible, that the United States wouldn’t have sent a half-million troops to liberate Kuwait in 1991 if Kuwait just grew broccoli.

Mideast oil is also fear­fully vulnerable to physical or cyberattack (directly or via its brittle infra­struc­ture) on key facilities and chokepoints. This makes the whole world economy hostage to hostile neighbors or small groups of skilled fanatics. A prudent America would not continue to hold itself and its allies at risk of supply interruptions and price shocks by prolonging its dwindling dependence on imported oil. That is exactly what a CAFE rollback would do, undercutting the Pentagon’s mission.

To reduce and ultimately eliminate oil’s hidden costs, the biggest lever, now as then, is auto efficiency. The auto industry measures its value in the narrowest possible way—dollars saved at the pump. Those depend on oil price, a 158-year random variable, and are also woefully incomplete. A more weighty and durable measure of value is national security. The Pentagon is wisely preparing to need no oil, because it’s finite, its supply and use harm public health, it’s at the root of Mideast instability and the climatic threat multiplier, and it funds not just American oilfield workers but also the foreign enemies with which the Administration is most concerned.

Thus we should get off oil just to enhance national security even if oil’s hidden costs didn’t (as of a few years ago) roughly triple the pump price—plus any damage to health, environment, global stability and development, or our nation’s independence and repute.

To be sure, U.S. oil savings and domestic production—driven by entrepreneurship and by federally subsidized innovation—have made impressive strides. Net oil im­ports in 2016 were just a fifth of 2004’s, and total oil use fell slightly despite 21% GDP growth. But even as the White House mulls slowing the demand side of that progress, the Middle East has become even more dangerous and its stabilization more costly and intrac­table. It’s the only place where bringing down one monarchy could give ideologues a three­fer—retaking Islam’s holiest places from their Sunni guardians, grabbing the world’s cheapest oil, and destabilizing Western economies.

Another issue rightly high on the White House’s agenda is jobs. But according to a 2017 analysis by the Department of Energy, America’s solar and windpower industries employed 23% more people at mid-2016 than oil and gas extraction, or nine times as many as coal mining, while energy efficiency employed nearly five times more Americans than solar and wind. Clean energy and alternative-fueled and electric vehicles provided not just several million jobs but also some of the nation’s fastest job growth, a significant part of it in red states.

Automotive prospects have changed far faster than ingrained political habits. By combining the latest commercial techniques for superefficiency and electrifica­tion (which efficiency makes far easier and cheaper by displacing up to two-thirds of the batteries), autos can now make even bigger efficiency gains cost less than previously, profiting both makers and buyers. In all, the industry’s remarkable engineering skills could make autos 4–8 times more efficient, far simpler, more desirable—and also appealing not because they’re efficient but because they’re better. This is not a fantasy. I drive such a 124-mpg-equivalent carbon-fiber electric car today, and it’s the best I’ve ever had, even though, alas, it’s not American.

While the more visionary automotive leaders follow such new paths to durable competitive advantage, science-based and profitable CAFE standards remain a key tool to calibrate ambition and limit backsliding.

So if I were leading a U.S. automaker, and my competitors—aiming to return to the illusory comfort of weak rules, slow competitors, and undiscriminating customers—told me they’ll throw their lawyers at today’s CAFE standards, I would reply: Good luck with that, but my strategy differs. I’ll throw my engineers at those standards, and my engineers will beat your lawyers.

This article originally appeared on Forbes.com.

Amory B. Lovins is a member of the Society of Automotive Engineers and the National Petroleum Council, a recipient of the Nissan and Volvo Prizes, and an advisor to automotive and military leaders for nearly three decades. These views are his own.

Image courtesy of iStock.
 

 
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