New Fuel Rules: Automakers May Build Them, but Will Customers Buy Them?By Michelle Krebs May 19, 2009
By Michelle Krebs
President Obama declared the new combined fuel-economy and emissions standards historic. In a press conference in the White House rose garden, surrounded by environmentalists and captains of the global auto industry, Obama said the new rules mark the nation's first comprehensive effort to curb vehicle emissions while cutting dependence on imported oil -- a turning point toward a "clean-energy economy."
Still, the new standards fall short on one critical element: What will make consumers buy the new clean vehicles required by the law?
The government can dictate that automakers build highly fuel-efficient vehicles that emit few pollutants, but will customers buy them? Recent history illustrates that customers are not stirred by their conscience but by their wallets, buying smaller, fuel-economy cars only when gas prices rise to the point of hurting them financially.
"Defining what should be built does not create demand," asserted Edmunds.com CEO Jeremy Anwyl. "There are tons of great fuel-efficient cars out there today but most consumers aren't interested, and the new fuel-economy standards don't appeal to deal with the demand side at all."
Adds John O'Dell, editor of Edmunds' GreenCarAdvisor.com: "A lesson regulators and many in the green community still haven't learned is that autos are still a major investment made as much with emotion as with common sense. It won't matter that the vehicles that result from this national program effort average 50 or 60 miles per gallon if no one wants to buy them."
Nevertheless, President Obama will announce Tuesday historic changes for the Corporate Average Fuel Economy (CAFE) regulations and greenhouse-gas rules, intended to lead to an American fleet that is cleaner and more fuel-efficient to make the U.S. less dependent on foreign oil.
On the positive side, the new regulations eliminate the discrepancy between the federal standard and the even higher standards proposed by California and other states, making it easier for automakers to coordinate their product plans for the U.S. market. Another plus is the harmonization between fuel-economy and tailpipe emissions rules.
As for fuel economy, an automakers' fleet of cars and trucks must average 35.5 mpg combined by 2016 -- four years earlier than the previous standard passed in 2007 required. Passenger cars must average 39 mpg and light trucks 30 mpg.
"As a result of this agreement," Obama said, "we will save 1.8 billion barrels of oil over the lifetime of the vehicles sold in the next five years. And at a time of historic crisis in our auto industry, this rule provides the clear certainty that will allow these companies to plan for a future in which they are building the cars of the 21st century."
In that period, the savings in oil burned to fuel American cars, trucks and buses would amount to last year's combined U.S. imports from Saudi Arabia, Venezuela, Libya and Nigeria, the president said.
The Obama administration says the new requirements also would eliminate 900 million metric tons of greenhouse gases -- the equivalent to taking 177 million cars and trucks off the roads.
The administration insists the new measures will preserve consumer choice by not dictating the size of vehicles but by requiring vehicles of all sizes become more energy efficient.
But the measures will come at a cost to both automakers and consumers. The average price of a vehicle is expected to increase by $1,300 -- about $600 more than under the previous fuel-economy rules. In total, that adds $13 billion to $20 billion annually in new-car costs.
However, the Obama administration is quick to point out that the higher vehicle cost will be offset by lower fuel consumption for consumers. As for the automakers, Congress is trying to match the new requirements with billions more in aid for financially ailing companies.
Automakers whose sales-weighted average fuel economy is above the CAFE standard must pay a fine to the government. A number of automakers resign themselves to paying that fine each year since it is more cost-effective and less brand-damaging than attempting to sell unwanted vehicles just to meet the standards.
"For some automakers, it would be market suicide to meet CAFE standards," Anwyl acknowledged. "Minimizing our impact on the environment is a great goal, but this isn't the way to get there."
Instead, Anwyl suggests that politicians look overseas for ideas and inspiration. Some foreign automakers do well when gas gets expensive in the U.S. because their forte is fuel-efficient vehicles for their home markets, where fuel prices are kept high through taxes. Some countries levy a heavier tax on vehicles with higher horsepower and bigger engines.