Uh-Oh, What About the Other CAFE Law?

February 7th, 2008 at 10:32am

As published by

Capital Building

Automakers in the U.S. market heaved a sigh of relief when Congress finally enacted the new fuel economy law. They fought hard against it, but in the end Congress gave them a lot of wriggle room.

First off, Congress gave them until 2020 to hit the 35 miles per gallon standard. The industry wanted until 2022, but their opponents wanted 2018. To outsiders that may not sound important, but a couple of years can make a massive difference in being able to bring new products to the market profitably.

Congress also changed the law to require fuel economy improvements based on what they call “attributes,” that is, vehicles will have to make improvements based on their size. This was included to protect vehicles that are used for towing and hauling, which naturally burn more fuel.

Automakers will continue to get credits for producing “flex-fuel” vehicles that can run on something other than gasoline or diesel, namely ethanol. They’ll also get investment credits to retool their plants, and research credits to invest in new powertrain technologies.

And that’s why, while they don’t like the new standard, they believe they can meet it. You didn’t hear any champagne corks popping, but more than a few mopped their brows and exhaled.

Yet, their sense of relief won’t last long. There’s a much bigger fight looming. One that is far more stringent than the new CAFE regulations, and one that hits home a lot sooner.

A couple of years ago California enacted a law to reduce C02 emissions. It calls for a 30% reduction in Co2 by 2016, but it also uses 2009 as the base point by which this reduction will be measured. Some industry insiders say it’s really a 43 mpg law that must be met four years sooner than the federal CAFE law. And it doesn’t include the wriggle room that the CAFE law provides.

Presently there’s a legal fight brewing over whether or not the state has the right to set such a standard. The State of California is suing the U.S. EPA and it will likely end up on the Supreme Court docket. My bet is that California, and the other fourteen states or so that are joining its law suit, will win.

But it will be a pyrrhic victory. Consumers and the media will rejoice that they’re going to see substantial improvements in fuel economy—until they see how automakers will have to meet that mandate.

The California law is going to force automakers to limit what they can sell—essentially everyone will be free to buy the compact car of their choice. Anything bigger or more powerful than that is going to carry a whopping big price tag. And once most consumers learn that their choice is that limited, they’re going to revolt.

But it will be too late. The automakers will have committed all the investment needed to build what the law requires, rather than what the most of the market wants.

I can’t discount some sort of technological breakthrough making this all easy to achieve, but at this snapshot in time I see nothing but disaster on the horizon.

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