Transcript Slide Template (Light Background)

Fuel Economy Standards and
Risk in the Auto Industry
Irene Berry
Virginia Tech
ASME WISE Intern
August 2, 2006
[www.msnbc.com]
Automobiles contribute significantly to the U.S.
economy and national oil consumption.
Automobiles account for 40% of U.S.
oil consumption.
Increasing vehicle fuel economy will
reduce consumption.
The auto industry accounts for 10% of
U.S. jobs.
[www.msnbc.com]
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Fuel economy policies should
consider impact on the auto industry.
This presentation focuses on the impact of fuel
economy on auto industry competitiveness.
Current fuel economy policy
and the auto industry
[www.cranfield.ac.uk]
Differences between automakers
and risks of market changes
[www.toyota.com]
Policy options and
recommendations
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[www.boxfordacademy.org]
The federal government sets Corporate Average
Fuel Economy (CAFE) standards.
A company’s CAFE is the average fuel economy of the
vehicles it sells expressed in miles per gallon (mpg).
30
Congress sets CAFE
standards for cars.
Fuel Economy (mpg)
25
20
15
10
5
Passenger Car
Light Truck
0
1975
[NHTSA 2005]]
4
1980
1985
1990
Year
1995
2000
2005
The National Highway
Traffic Safety
Administration
(NHTSA) sets them
for light trucks.
Introducing a new vehicle to the market is risky.
Producing automobiles is a very
capital intensive and complex process.
[www.matchtech.com]
The market for new vehicles
is elastic.
[www.marksimonson.com]
Competition between automakers is
intense.
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[www.smartcarfinder.com]
Automakers are different, in ways that affect fuel
economy:
Current CAFE
Technology leadership
Fleet mix
[www.consumerenergycenter.com]
[www.ford.com]
[www.gmbuypower.com]
Financial resources
Production flexibility
[www. washingtonpost.com]
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[www.world.honda.com]
Higher CAFE standards will create
disproportionate risks for automakers.
Less than 10 mpg
Consumers do not value fuel
economy.
To increase efficiency,
automakers must change
vehicle design.
[www.gmcanda.com]
If consumers will not pay for
changes, automakers must
absorb the costs.
[www.shell.com]
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Over 1000 mpg
High gas prices create risks for automakers that
produce large vehicles and have low CAFEs.
When gas is expensive, people buy
fewer and smaller vehicles.
Manufacturers of large and inefficient
vehicles are hit hardest.
[www.washingtonpost.com]
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Changes in the auto industry will impact domestic
employment.
If the “Big Three” lose market
share, they will cut U.S. jobs.
If automakers shift production
overseas, they will cut U.S. jobs.
If automakers invest to meet
demand, they will create jobs.
[www.uaw.org/solidarity]
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Policy should improve fuel efficiency and reduce
the current and future risks to the auto industry.
• improve fuel economy levels,
• minimize the risks of the
policy to the auto industry,
• minimize future risks of
higher gas prices, and
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World Price of Oil (2004 USD per Barrel)
Federal fuel economy policy
should
90
80
Historic
High
Low
Baseline
70
60
50
40
30
20
10
0
• maintain consumer choice.
1970
1980
1990
2000
2010
Year
Future oil prices will be
higher and more volatile.
10
2020
2030
2040
[EIA, AEO 2006]
CAFE standards have a role in fuel economy policy.
CAFE standards maintained
fuel economy levels.
CAFE standards set a floor
for fuel economy.
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4
NHTSA should also set
passenger car standards.
Fuel Economy (mpg)
NHTSA sets light truck
CAFE standards that are
cost-effective.
3
20
2.5
15
2
1.5
10
1
Actual Light Truck (mpg)
Actual Car (mpg)
5
Car CAFE standard
0.5
Light Truck CAFE Standard
Price of Gasoline
0
0
1975
1980
1985
1990
1995
2000
2005
Year
[EPA 2006]
11
Price of Gasoline (2005 USD)
3.5
25
CAFE standards should be part of a larger policy
package.
As percent light truck increased,
combined fuel economy declined.
30
25
40
20
30
15
20
10
Combined (mpg)
Passenger Car (mpg)
Light Truck (mpg)
Percent Light Truck
5
0
0
1975
1980
1985
1990
Year
12
10
1995
2000
[EPA 2006]
2005
Percentage of Total Fleet
CAFE standards result in
gradual improvements.
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Fuel Economy (mpg)
CAFE standards do not
prepare automakers for
future risks.
Other policies have been proposed to address
vehicle fuel economy.
Allowing automakers to trade CAFE credits
would reduce the costs of higher standards.
Manufacturer tax incentives would help
automakers retool plants.
[www.irs.gov]
Consumer incentives would encourage the
market to demand greater efficiency.
[www.communitytoyota.com]
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A market incentive based on efficiency will
reduce the risks of improving fuel economy.
A feebate rewards buyers of efficient vehicles and penalizes
buyers of inefficient vehicles.
Rebate Amount (USD)
-
2000
The amount of the feebate is
proportional to gallons per mile.
1000
0
8
18
28
38
48
58
-1000
It would encourage a shift to
smaller vehicles.
-2000
-3000
It would reward each gallon of
fuel saved equally.
-4000
-5000
Fuel Economy (mpg)
14
68
In summary, combining CAFE standards with
market incentives will reduce risks.
Imperfections in the market for
fuel economy create risks.
Policy should balance current
and future risks to automakers.
This requires a two-pronged
approach.
[www.hybridcars.com]
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Questions?