Ceres, Cer-iously? - AutoObserver

Ceres, Cer-iously?

A casual observer would be forgiven for thinking that after the Obama administration, accompanied by union officials, environmentalists and auto company executives, announced the proposed new 2012-2025 Corporate Average Fuel Economy (CAFE) standards, the issue was closed. Apparently it isn't. I noted a piece in the Wall Street Journal the other day about a group of auto dealers heading to Washington, DC, to raise awareness about concerns related to the impending proposed CAFE regulations. The auto dealers claim that the regulations will be too costly for consumers and lead to job losses. The article quotes a White House spokesperson as saying the proposed regulations enjoy broad support, will save families thousands of dollars at the pump and dramatically reduce the nation's oil consumption. Further, these benefits could be achieved through average price increases of only $3,000 per vehicle.

The auto dealers are making the anti-CAFE arguments you might expect from the car companies. And yet, as the White House points out, most of the automakers "support" the proposed new standards. I added quotes for support, as I think "agreed to" is more accurate. Support probably is too strong a word. Thinking back, it was a bit strange seeing most of the automakers line up as the President announced the soon-to-be proposed standards. One day we heard there will be an ad campaign from by the American Automobile Manufacturers (AAM) to point out all the things wrong with the proposed standards — and the next we learn that, no, the rules are fine. The automakers' quick support is something to perhaps ponder in a future column, but for now, let's just say that my understanding is that the automakers "were made an offer they couldn't refuse."

Trumping all the benefits of higher standards touted by the White House, a report from Ceres has been making the Washington rounds. Ceres bills itself as leading "a national coalition of investors, environmental organizations and other public interest groups." Ceres has been advancing the enticing notion that increased fuel economy and stricter greenhouse-gas emissions standards will actually increase jobs. In fact, the group contends that the higher the fuel-economy standards, the greater the economic benefits.

This surprising conclusion struck me as wonderful news. Intrigued, I tracked down a copy of the report. It's certainly nicely presented, with lots of colorful charts and graphics. But after reading the document closely I have to question many of its conclusions, which seem panglossian at best. Both Ceres and the dealers are cannily tying fuel economy to the issue of the day: employment. This is good politics, but linking sales of goods to employment is always tricky; the economy is a complex system. Often, increasing sales in one area will only reduce sales in another. The result can be net job neutral because consumers have to make choices about where to spend their money. Adding to the complexity, sometimes consumers borrow to make a purchase, sometimes they pay cash, sometimes they take the money from savings. Then there is the role of the global economy: some goods are made here, some goods abroad.

The upshot is that linking sales to employment is not straightforward. Putting all this aside for the moment, let's look at how Ceres arrives at its conclusions. As best I can tell, the core of Ceres' argument is threefold. First, consumers will save money with higher CAFE standards because they will spend less at the pump. Higher-tech vehicles will cost more money, but Ceres claims that savings on fuel will at least partially offset these costs. Moreover, these increased prices will cover the costs of technology that requires the creation of new jobs that exceed any job losses in the oil/gas industries. This point is interesting. Higher standards will obviously reduce a consumer's gasoline expenditures. Whether this actually results in a net increase in employment across the economy is not so clear, as discussed above.

The group's second point ties to the President's emphasis on green jobs, insinuating that the government can kick-start the development of advanced technologies, which as they grow, will launch whole new industries. This one makes me even more nervous. The kind of a fuel-economy "moon shot" involved in meeting the proposed standards is one huge risk. The administration is placing a massive bet on electric vehicles, at the expense of other potentially promising technologies. And technology sometimes advances slowly — even when government dollars are thrown at it. A current cautionary tale comes from the now-bankrupt solar-panel producer Solyndra that was supported by a half-billion dollars in federal technology-advancing loans.

Buried in the Ceres report is a third point that looks to turn economics on its head. Ceres seems to be saying they expect vehicles sales to increase as prices rise. This makes no sense unless you assume that consumers see the new high-efficiency vehicle as offering the kind of markedly superior utility for which they are willing to pay extra. That strikes me as the fundamental question: Will consumers actually want to buy these new, higher-mileage, more-expensive vehicles that CAFE will require automakers to build?

Ceres seems to somewhat anticipate this question, citing their own poll in which 78 percent of consumers support high-mileage standards (Ceres called the respondents "voters," which might grab more attention in Washington).To Ceres's credit, the group does call it a poll; it clearly isn't research. Research into whether consumers will actually buy these new government-mandated, high-tech wonders would also mention the fact that these vehicles likely will be smaller, more costly and possibly less safe.

In the real world, consumers weigh trade-offs when deciding purchases. How much they are willing to pay, which attributes are more important than others. It would be reasonable to conclude that consumers would indeed prefer the vehicle they have today, with two times better fuel economy. Sign me up for this as well. But we don't have to do an expensive research project study to a see a how consumers feel about the tradeoffs associated with better fuel economy. We can just look at what they actually buy. This is not to say that consumers don't care about fuel economy. Many do. But it is just one of a myriad of attributes that comprise a consumer's purchase decision. And it is generally not at the top of the list.

My sense is that Ceres is getting things wrong. Compromising a vehicle's utility while raising its price will reduce sales. Hardly a formula for creating jobs.

Jeremy Anwyl: Vice Chairman of Edmunds.com. Follow @JeremyAnwyl on Twitter.

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