8
ACHIEVABLE FUEL ECONOMY LEVELS

The charge to the committee was to estimate "practically achievable" fuel economy levels for new cars and light trucks by size class. Determining practically achievable fuel economy levels, however, necessarily involves balancing an array of societal benefits and costs, while keeping in mind where the costs and benefits fall. Such judgments must include a complex manifold of considerations, such as the financial costs to consumers and manufacturers, the impact on employment and competitiveness, the trade-offs of fuel economy with occupant safety and environmental goals, and the benefits to our national and economic security of reduced dependence on petroleum. In the committee's view, while this balancing should be supported by technical analysis, its execution is properly the domain of the political process. This committee cannot define the appropriate balance.

The committee has thus approached its charge by first seeking to estimate future "technically achievable" fuel economy levels by size class. As explained below, these estimates provide guidance, subject to certain assumptions, on the fuel economy that could be achieved using current technology. The committee also sets out its judgment of the range of retail price increases for new vehicles attributable strictly to such fuel economy improvements. (These estimates do not include price increases to meet occupant safety and emissions-control requirements.) The technically achievable fuel economy levels should not be taken as the committee's recommendations on future fuel economy standards. Rather, they should be viewed by policymakers as one of the many inputs necessary for determining what would be practically achievable in the coming decade.

The committee believes that the practically achievable levels—the levels of fuel economy for each size class that achieve an appropriate balance of a broad array of costs and benefits—are likely to be found in the regions between the levels that would be achieved without any governmental intervention and the "technically achievable" levels. It remains for policymakers to determine the form of any future regulations and the levels of fuel economy—the "practically achievable" levels—that in their judgment



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Automotive Fuel Economy: How Far Should We Go? 8 ACHIEVABLE FUEL ECONOMY LEVELS The charge to the committee was to estimate "practically achievable" fuel economy levels for new cars and light trucks by size class. Determining practically achievable fuel economy levels, however, necessarily involves balancing an array of societal benefits and costs, while keeping in mind where the costs and benefits fall. Such judgments must include a complex manifold of considerations, such as the financial costs to consumers and manufacturers, the impact on employment and competitiveness, the trade-offs of fuel economy with occupant safety and environmental goals, and the benefits to our national and economic security of reduced dependence on petroleum. In the committee's view, while this balancing should be supported by technical analysis, its execution is properly the domain of the political process. This committee cannot define the appropriate balance. The committee has thus approached its charge by first seeking to estimate future "technically achievable" fuel economy levels by size class. As explained below, these estimates provide guidance, subject to certain assumptions, on the fuel economy that could be achieved using current technology. The committee also sets out its judgment of the range of retail price increases for new vehicles attributable strictly to such fuel economy improvements. (These estimates do not include price increases to meet occupant safety and emissions-control requirements.) The technically achievable fuel economy levels should not be taken as the committee's recommendations on future fuel economy standards. Rather, they should be viewed by policymakers as one of the many inputs necessary for determining what would be practically achievable in the coming decade. The committee believes that the practically achievable levels—the levels of fuel economy for each size class that achieve an appropriate balance of a broad array of costs and benefits—are likely to be found in the regions between the levels that would be achieved without any governmental intervention and the "technically achievable" levels. It remains for policymakers to determine the form of any future regulations and the levels of fuel economy—the "practically achievable" levels—that in their judgment

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Automotive Fuel Economy: How Far Should We Go? provide the appropriate balance of costs and benefits to consumers, manufacturers, and the nation as a whole. This chapter opens with a discussion of technically achievable fuel economy. It then discusses some of the costs and benefits that might follow if the technically achievable levels were reached. Where feasible, these costs and benefits are quantified, but much of the discussion is qualitative. Also, where possible, the chapter illustrates the uncertainties in the fuel economy projections and in their impacts. TECHNICALLY ACHIEVABLE FUEL ECONOMY Method and Assumptions The committee's determination of "technically achievable" levels of future fuel economy was accomplished using a structured judgmental process. The estimates are based in part on the projections reported in Chapter 7. They represent the collective professional judgment of the committee in light of the available evidence, taking into account various opportunities and constraints, as follows. First, the committee assumed that all vehicles in the future fleet will have to comply with known safety standards and Tier I emissions standards under the Clean Air Act amendments of 1990. The expected impact of such standards on fuel economy was taken into account. (Tier II and California's standards were not explicitly considered; see Chapter 4.) Second, the committee assumed that other vehicle characteristics of importance to consumers, such as interior volume, acceleration performance, and amenities will be essentially equivalent to model year (MY) 1990 vehicles. (The effects of performance reduction were considered separately.) Third, to provide a measure of assurance that the levels could in fact be achieved, the committee assumed that technology that is currently used in mass-produced vehicles somewhere in the world will be available. In this regard, the committee members were not necessarily constrained in their individual judgments to consider only the list of "proven" technologies discussed in Chapter 2. Some members considered technologies now used largely to achieve performance enhancement that might otherwise be redesigned to achieve higher fuel economy; others considered technologies that offer a combination of relatively high-cost fuel economy improvement and other valued attributes. The range of technologies considered by the committee is such that they would pay for themselves at gasoline prices of $5 to $10 per gallon or less. Aside from the limits imposed by these assumptions, no consideration of affordability, sales, employment, competitiveness, or safety impacts entered into the determination of the "technically achievable" fuel economy levels. All such matters should be considered, however, as policymakers establish the practically achievable levels.

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Automotive Fuel Economy: How Far Should We Go? Results Based on its collective knowledge and judgment, and drawing on the results of the projections of future fuel economy displayed in Figures 7-4 through 7-11, the committee estimated the "technically achievable" fuel economy levels in MY 2006 for eight classes of passenger cars and light trucks. The results are shown in Table 8-1 as ranges over which the committee has varying degrees of confidence. The committee has a relatively high degree of confidence that the lower estimates of technically achievable fuel economy could be reached, given the underlying assumptions. The committee has less confidence that the higher fuel economy estimates in the various size classes could be achieved, and it believes that it would be risky to set fuel economy targets at or above these levels. The committee sought to narrow the ranges as much as possible, but enough uncertainty remains that it would be misleading to collapse the ranges to single point estimates. Table 8-1 also presents the committee's judgments about the likely increases in cost (in terms of their retail price equivalents, or RPE) associated with each estimate of technically available fuel economy for each vehicle class for MY 2006.1 Expected increases in the average prices of new cars and light trucks in MY 2006 associated with the technically achievable levels range from a low of $500 to a high of $2,750 in 1990 dollars. The wide range associated with each fuel economy level reflects the high degree of uncertainty the committee had to contend with in considering the costs of adopting fuel-saving technologies. Table 8-2 presents the committee's estimates of technically achievable fuel economy levels for MY 1996. These estimates reflect the committee's view that, because of the long manufacturing lead times required and the sunk investments in existing facilities, little can be accomplished by MY 1996 beyond that now expected from the manufacturers' product plans without generating excessive cost and disruption in the automotive industry.2 As discussed in Chapter 5, there is no realistic opportunity between now and 1996 to introduce new technology or increase the market penetration of existing technology in a fashion that will significantly increase fuel economy without extraordinary cost. More can be accomplished by MY 2001 and MY 2006 because new products developed for those years can more effectively reflect an increased emphasis on fuel economy. 1   These cost/price estimates take into account not only the costs associated with the specific shopping cart projections in Chapter 7, but also the committee members' independent understanding of the costs of reaching the technically achievable fuel economy levels. The various cost estimates are an average for all vehicles in each class—any specific vehicle model might be subject to lower or higher cost increases than these. Moreover, for purposes of this analysis, the committee attributes all the costs of a technology to fuel economy. Some fuel economy technologies, however, may offer other benefits to the consumer. If so, the analysis exaggerates the cost of higher fuel economy. 2   The MY 1996 projections reflect a gain of 0.7 miles per gallon (mpg) in fleet-average car and light-truck fuel economy over 1991 levels based on an estimate by SRI (1991:2) of 0.7 mpg for MY 1995 over MY 1990.

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Automotive Fuel Economy: How Far Should We Go? TABLE 8-1 "Technically Achievable" Fuel Economy for MY 2006 Vehicles     Ranges of "Technically Achievable" Fuel Economy in MY 2006a/ (mpg) Incremental Retail Price Equivalent for Improved Fuel Economy in MY 2006b/ (1990 Dollars) Vehicle Size Class Higher Confidence Lower Confidence At Higher Confidence Fuel Economy At Lower Confidence Fuel Economy Passenger Cars         Subcompact 39 44 500-1,250 1,000-2,500 Compact 34 38 500-1,250 1,000-2,500 Midsize 32 35 500-1,250 1,000-2,500 Large 30 33 500-1,250 1,000-2,500 Light Trucks Small pickup 29 32 500-1,000 1,000-2,000 Small van 28 30 500-1,250 1,000-2,500 Small utility 26 29 500-1,250 1,250-2,500 Large pickup 23 25 750-1,750 1,500-2,750 a/ The term "technically achievable" is circumscribed by the following assumptions made by the committee. The estimates result from consideration of technologies currently used in vehicles mass produced somewhere in the world and that pay for themselves at gasoline prices of $5 to $10 per gallon or less (1990 dollars). The estimates assume compliance with applicable known safety standards and Tier I emissions requirements of the Clean Air Act amendments of 1990. Compliance with Tier II and California's emissions standards has not been taken into account. The estimates also assume that MY 2006 vehicles will have the acceleration performance of, and meet customer requirements for functionality equivalent to, 1990 models. The estimates take into account past trends in vehicle fuel economy improvements and evidence from "best-in-class" fuel economy experience. The term "technically achievable" should not be taken to mean the technological limit of what is possible with the current state of the art; nor should the committee's estimates of what is technically achievable be taken as its recommendations as to what future fuel economy levels should be. Aside from the limits imposed by the foregoing assumptions, no cost-benefit considerations entered into the determination of the technically achievable fuel economy levels. Specifically, the estimates do not take into account other factors that should be considered by policymakers in determining any future fuel economy regulations, including impacts on the competitiveness of automotive and related industries, sales and employment effects, petroleum import dependence, effects on nonregulated emissions (e.g., the greenhouse gas, carbon dioxide), and the development and adoption of unanticipated technology. As a point of reference, the Environmental Protection Agency's (EPA's) composite average fuel economy for MY 1990 passenger cars and light trucks, by size class, was as follows: passenger cars—subcompact, 31.4 mpg; compact, 29.4; midsize, 26.1; large, 23.5; light trucks—small pickup, 25.7; small van, 22.8; small utility, 21.3; large pickup, 19.1 (Heavenrich et al., 1991). b/ The retail price equivalents are estimates only of the incremental first cost to consumers of improved fuel economy. They do not include incremental costs associated with mandated improvements to occupant safety, which, on average for new passenger cars and light trucks, are expected to be $300 and $500, respectively in 1990 dollars; nor do they include incremental costs of controls to comply with Tier I emissions requirements, which are expected to range from a few hundred dollars to $1,600 per vehicle.

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Automotive Fuel Economy: How Far Should We Go? TABLE 8-2 "Technically Achievable" Fuel Economy Levels for MY 1996, MY 2001, and MY 2006   Fuel Economy (mpg)     MY 2001 MY 2006 Vehicle Size Class MY 1996 Higher Confidence Lower Confidence Higher Confidence Lower Confidence Passenger Cars         Subcompact 32 36 38 39 44 Compact 30 32 34 34 38 Midsize 27 29 31 32 35 Large 24 27 29 30 33 New-Car Fleet 29 31 33 34 37 Light Trucks           Small pickup 26 28 29 29 32 Small van 24 26 27 28 30 Small utility 22 24 25 26 29 Large pickup 20 22 23 23 25 New Light-Truck Fleet 22 24 25 26 28 NOTE: See notes to Table 8-1. All estimates are rounded to nearest whole mile per gallon. The new-car and light-truck average fuel economy by size class for MY 1996 assumes 0.7 mpg improvement in each size class from its corresponding EPA composite average level in MY 1991. This assumption is similar to that made by SRI (1991) for MY 1995 vehicles starting from a MY 1990 base. Fuel economy values by size class shown for MY 2001 were obtained by interpolation between values for MY 1996 and MY 2006. The new-car and light-truck fleet average fuel economies are shown above for illustrative purposes and are calculated assuming a size-class mix similar to that for MY 1990 vehicles, as follows: passenger cars—subcompact, 23 percent; compact, 35 percent; midsize, 26 percent; large, 16 percent; light trucks—small pickup, 15 percent; small van, 29 percent; small utility, 16 percent; large pickup, 40 percent. Data are based on Heavenrich et al. (1991).

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Automotive Fuel Economy: How Far Should We Go? After arriving at its consensus estimates for MY 2006 and making straightforward extrapolations from MY 1991 for MY 1996, the committee derived estimates for technically achievable fuel economy in MY 2001 by linear interpolation between MY 1996 and MY 2006 (see Table 8-2). This approach implicitly assumes a constant rate of progress between MY 1996 and MY 2006. In view of the judgmental nature of the MY 1996 and MY 2006 estimates, a more sophisticated approach to estimating the intermediate year levels was not warranted. Using the estimated size-class fuel economy levels, the hypothetical fleet-average fuel economy estimates shown in Table 8-2 were calculated as a weighted harmonic average assuming that the size mix for the eight vehicle classes considered in this study remains the same as the MY 1990 mix. The committee's fleet fuel economy estimates for MY 2001 range from 31 to 33 mpg for passenger cars and from 24 to 25 mpg for light trucks. The comparable MY 2006 fleet averages are 34 to 37 mpg for passenger cars and 26 to 28 mpg for light trucks. 3 Additional fuel economy increases could be obtained if the constraints and assumptions embodied in the definition of the ''technically achievable" levels were relaxed. For example, it is clearly possible to trade off vehicle performance (e.g., the ratio of horsepower to weight, or hp/wt) for fuel economy. As discussed in Chapter 7, from 1987 to 1991, average hp/wt ratios increased by about 13 percent for all passenger cars and by 10 percent for all light trucks (size-class changes differ greatly). Assuming that a fuel economy improvement of 0.38 percent can be achieved for each 1 percent reduction in the hp/wt ratio (Energy and Environmental Analysis, Inc., 1991), reducing performance to MY 1987 average levels would yield an average gain in fuel economy of about 5 percent for passenger cars and 3.5 percent for light trucks, but at some loss of consumer satisfaction. Similarly, other vehicle attributes valued by consumers could be compromised in return for additional gains in fuel economy, at a cost of consumer satisfaction that is difficult to quantify, but potentially significant. PRACTICALLY ACHIEVABLE FUEL ECONOMY Cost-Benefit Considerations As discussed above, determining the practically achievable levels of the future fuel economy of automobiles and light trucks requires consideration of the nature and magnitude of the costs and benefits of higher fuel economy, not only to consumers but also to industry, workers, and the nation as a whole. Upon consideration of these costs and benefits, policymakers may conclude that it is desirable to push fuel economy to the technically achievable levels defined above, or even beyond, or they may decide to set lower levels after considering all of the costs that might flow from higher levels. 3   The committee assumed an unchanged fleet mix in order to make a rough estimate of the fleet averages. However, more stringent fuel economy regulations would raise the price of vehicles and induce mix shifting. Further, there is no reason to expect consumer preferences to remain fixed over the period. Thus, the MY 2001 and 2006 new-vehicle fleets would probably have a different mix from the MY 1990 fleet.

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Automotive Fuel Economy: How Far Should We Go? To assist policymakers in making these trade-offs, the committee has examined some of the costs and benefits, focusing particularly on those that can be illuminated by analyses based on the data and analyses used for other purposes in this study. Several complications are worthy of note at the outset, however. First, the costs and benefits of achieving higher fuel economy are borne by different individuals and groups. For example, consumers and manufacturers may pay a financial price for more efficient vehicles. Yet the nation—even the world—may enjoy the benefits of reduced energy use and emissions of carbon dioxide (CO2), as well as the benefits of enhanced national security. Moreover, some automotive manufacturers may be better situated than others to produce vehicles that meet tougher fuel economy standards so there may be differential impacts among them. Second, the magnitude and incidence of the costs and benefits of achieving higher fuel economy depend on the precise level and form of the standards adopted, as well as on how manufacturers and consumers respond to the new requirements in the context of their overall market relationships. The projections of future fuel economy in Chapter 7 and the committee's estimates of technically achievable fuel economy reported earlier in this chapter were carried out only within vehicle classes, without reference to whether new standards might be applied at the class level or on some other basis.4 As noted previously, this study did not examine the degree to which more stringent fuel economy standards might lead to downsizing, downweighting, or shifts in the market mix of vehicles of different classes, yet these factors are critical in defining the costs and benefits. Thus, policymakers are urged not to view the analyses of specific costs and benefits in this chapter as definitive, but rather as suggestive of further analysis that might be appropriate. Moreover, the quantitative values of the various costs and benefits depend on the levels of fuel economy, so they may differ from the values estimated here for the technically achievable levels of fuel economy. Third, higher fuel economy imposes costs and benefits not only directly, but indirectly, on the various affected parties. To illustrate, to the extent that more stringent standards lead to an overall reduction in automotive fuel use, and thus to a reduction in overall national petroleum consumption, they may lead to a reduction in oil imports. This could, in turn, lead to an improvement in the nation's balance of payments and a lessening of national concern for the security of Middle Eastern oil supplies. While the nation as a whole might view this as a desirable set of circumstances, some groups—such as oil importers and shippers—might view it less favorably. Fourth, some of the costs and benefits of higher fuel economy are quite uncertain. In some cases, this uncertainty yields the possibility of major miscalculations and errors. The sensitivity of the costs and benefits to the form of possible new standards exacerbates these possibilities. For example, some forms of corporate average fuel 4   Chapter 9 discusses a range of possible types of future fuel economy requirements and offers qualitative remarks on their possible implications for some of the costs and benefits examined here.

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Automotive Fuel Economy: How Far Should We Go? economy (CAFE) standards could compel some manufacturers to make radical changes in the design and characteristics of their product lines. Should they misjudge future consumer preferences and "miss the market," they could be seriously harmed financially. On the other hand, fuel economy requirements that are set too low could leave the nation and its automotive industry seriously disadvantaged if world opinion embraces the concept that carbon dioxide emissions must be cut sharply and swiftly to forestall excessive global warming. Finally, as fuel economy requirements are pushed ever higher, some of the benefits to the nation of higher standards, for example, reduced fuel use, become proportionally smaller. (The phenomenon of diminishing returns sets in, as suggested by Figure 8-1.) At the same time, some of the costs of higher fuel economy, as exemplified by the estimates obtained using the shopping cart method (Figures 7-4 through 7-11), become proportionally higher. Taking into account these kinds of effects, policymakers should be wary of setting fuel economy requirements too high. Costs and Benefits of Higher Fuel Economy to Consumers The estimates of technically achievable future vehicle fuel economy are based on the assumption that attributes valued by consumers, such as interior volume, comfort, acceleration performance, safety, and load-carrying capacity are not degraded. However, it was assumed that vehicle prices would have to increase to cover the costs of adopting technologies that could improve fuel economy while keeping these attributes fixed. The committee's estimates of these price increases are reported in Table 8-1. FIGURE 8-1 Dependence of fuel consumption on fuel economy for 100,000 vehicle miles traveled.

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Automotive Fuel Economy: How Far Should We Go? Higher fuel economy also benefits consumers by lowering the total amount they must pay for fuel during the lifetime of the vehicle. If the discounted present value of the vehicle lifetime savings in fuel costs exceeds the increase in the purchase price due to the incorporation of fuel economy technologies, the consumer will enjoy a net benefit. In theory, if all other attributes are the same, consumers should prefer a more expensive vehicle with higher fuel economy, so long as the discounted present value of the marginal fuel cost savings is greater than the increased initial purchase price. Table 8-3 illustrates this principle using a simplified set of calculations of the lifetime fuel cost savings for each of the eight vehicle classes considered in this study. The vehicle price increases and class-average fuel economies in MY 2006 are those estimated by the committee as technically achievable.5 The lifetime fuel cost savings are calculated under various assumptions of consumer discount rates and effective vehicle lifetimes. For these particular illustrations, it is assumed that the vehicle is driven 14,400 miles in its first year, declining by 5 percent per year thereafter; that the pump price of gasoline in the year 2006 is $1.45 per gallon in 1990 dollars, increasing 1.5 percent per year in real terms thereafter; and that consumers value future fuel cost savings over various time periods and discount them at various rates. No account is taken of differential resale value at the end of the vehicle lifetime,6 or of the time value of money that consumers spend to make the initial purchase.7 Table 8-3 displays the results under various assumptions about the key parameters of the analysis. In a number of instances, the lifetime fuel cost savings exceed the initial purchase price increase, which means that higher fuel economy would offer a net benefit to the consumer under those conditions. Even when the net impact is a cost to the consumer, the net cost (price increase due to higher fuel economy minus fuel cost savings) is much lower than the increase in the vehicle price. It can also be seen from this table that the lifetime fuel cost savings are estimated to be about the same, whether the consumer is assumed to use a 30 percent discount rate and a 12-year decision horizon or a 10 percent discount rate and a 4-year decision horizon. By comparison, the fuel cost savings using a 10 percent discount rate and a 12-year decision horizon are nearly twice as high as those estimated under the other two sets 5   The cost and benefits of practically achievable fuel economy levels would differ from those in Table 8-3. 6   It is not clear whether the initial purchaser of a vehicle should take into account the fact that a vehicle with a higher fuel economy might have a higher value at time of resale or trade-in. Thus, it is also not clear whether the practical lifetime of a vehicle should be taken as the average time a typical vehicle is owned by its first owner or the average total lifetime of the vehicle. 7   The latter assumption is equivalent to assuming that the downpayment plus the net present value of the time payments is equal to the purchase price.

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Automotive Fuel Economy: How Far Should We Go? TABLE 8-3 Effects of Technically Achievable Fuel Economy Improvements on Lifetime Fuel Cost Savings: Illustrative Example   Fuel Economy (mpg)    Average Vehicle Price Increase (1990 $)           Average Lifetime Fuel Cost Savings [a] (1990 $) (vehicle life and discount rates)  Vehicle Class 1990 2006 High Estimate Low Estimate 12 Years, 30% 4 Years, 10% 12 Years, 10%     Low Estimates of mpg in 2006 Passenger Cars Subcompact 31.4 39 1,250 500 428 413 801 Compact 29.4 34 1,250 500 318 306 594 Midsize 26.1 32 1,250 500 467 470 912 Large 23.5 30 1,250 500 636 613 1,190 Light Trucks Small Pickup 25.7 29 1,000 500 305 295 571 Large Pickup 19.1 23 1,750 750 613 591 1,146 Small Van 22.8 28 1,250 500 542 562 1,051 Small Utility 21.3 26 1,250 500 586 565 1,095     High Estimates of mpg in 2006 Passenger Cars Subcompact 31.4 44 2,500 1,000 629 607 1,177 Compact 29.4 38 2,500 1,000 531 512 994 Midsize 26.1 35 2,500 1,000 672 646 1,257 Large 23.5 33 2,500 1,000 845 815 1,581 Light Trucks Small Pickup 25.7 32 2,000 1,000 529 510 989 Large Pickup 19.1 25 2,750 1,500 852 822 1,595 Small Van 22.8 30 2,500 1,000 726 700 1,359 Small Utility 21.3 29 2,500 1,250 860 829 1,609 [a] Present value of fuel cost savings discounted to 2006 for a new MY 2006 vehicle driven 14,400 miles in the first year, declining by 5 percent per year thereafter. Fuel price is $1.45 (1990 $) per gallon in 2006, increasing at 1.5 percent per year in real terms. Fuel savings are assumed to occur at the midpoint of each year and are based on the difference between the fuel economy of an average MY 2006 vehicle of each class and that of the average MY 1990 vehicle of the same class.

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Automotive Fuel Economy: How Far Should We Go? of assumptions.8 Using either of the first two sets of assumptions, it is nearly always in the consumer's interest to pay at least the lower estimates of costs for these higher fuel economy levels. This probably overstates the value that consumers would actually give to energy-saving investments of this type, however. The purchase price increase and fuel cost savings in each vehicle class depend on the level of fuel economy reached. As shown in Chapter 6, for reasonable estimates of the relevant parameters, the net consumer cost of high fuel economy is roughly constant over a range of several miles per gallon. This suggests that buyers of new vehicles will be indifferent to fuel economy at the present time, a stance seemingly supported by vehicle market trends over the past half decade. Although consumers will receive some savings in fuel costs in return for the higher vehicle price associated with fuel economy improvements, it is uncertain whether the consumer will be satisfied with this trade-off. The net financial impact on the consumer depends on the prices of fuel and technology, both of which are very uncertain. Moreover, although the technologies considered by the committee do not require major changes in vehicle attributes, sometimes even subtle changes may make a large difference in consumer perceptions. Forced changes to meet stringent fuel economy standards increase the risk that a manufacturer may modify one or more product lines in ways that consumers will not find acceptable. Safety and emissions regulations will also add to the price of new cars in the near future. Safety standards are expected to add $300 to passenger-car prices and over $500 to light-truck prices in coming years. Eighty percent of the cost is for front-seat airbags. Cost estimates for Tier I emissions controls vary widely, from a few hundred dollars to $1,600 dollars per car. Clearly, these cost estimates reflect a considerable range of uncertainty. The costs of Tier II standards are even less well understood, but are certain to be substantial (see Table 8-4). While these costs are independent of those arising from fuel economy improvements, the combined impacts of all regulations should be considered by policymakers when evaluating the benefits and costs of fuel economy, safety, and emissions regulations. Although consumers may perceive that the benefits they receive from safety improvements are commensurate with their costs, they may recognize that most of the benefits of pollution controls accrue to persons other than themselves, which may lead them to view their costs of meeting emissions reductions largely as a price increase. Costs and Benefits of Higher Fuel Economy to Manufacturers Improvements in the fuel economy of light-duty vehicles will affect vehicle sales and employment in the motor vehicle manufacturing industry. As noted above, 8   There is some disagreement about the appropriate choices of these parameters. Research on consumer behavior tends to support the idea of a high discount rate and long decision horizon, whereas financial analysts tend to support the idea of a long decision horizon and lower discount rate, and some engineers favor a low discount rate and shorter time horizon. The first and third options always yield about the same results for net present value in these examples, and the second yields results nearly twice as great.

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Automotive Fuel Economy: How Far Should We Go? TABLE 8-4 Incremental Retail Prices for Improved Fuel Economy, Improved Occupant Safety, and Tier I Emissions Control in MY 2006 Vehicles (1990 dollars)   Fuel Economy to Technically Achievable Levelsa Occupant Safetyb Tier I Emissions Controlc Passenger Cars $500 - $2,500 $300 From a few  hundred dollars to $1,600 Light Trucks $500 - $2,750 $500 a The price ranges are over the four classes of passenger cars and four classes of light trucks as shown in Table 8-1. b According to information provided to the committee by the National Highway Traffic Safety Administration, safety regulations will impose the following costs for passenger cars: $257 for airbags, $33 for side-impact improvements, and $32 for additional head protection. Light-truck costs will be $35 for rear lap belts, $1 for steering changes, $3 for headrest, $1 for roof crush strength, $11 for high-mount stop lamps, $432 for airbags, $26 for side-impact strength, and $26 for head impact. c Sierra Research (1988) estimated the cost of Tier I catalyst system improvements at $139, and on-board vapor controls at $25 per vehicle (other costs were not analyzed). In presentations to the committee, Ford reported estimates of $275 per vehicle for on-board controls and $550 for catalyst and any other tailpipe emissions improvements. Ford additionally estimated the cost of on-board diagnostic systems at $300 and elimination of chlorofluorocarbons at $125, for a total of $1,250; General Motors estimated a total cost increase of $1,600. EPA's estimates for Tier I standards are $152 per car and $57 per light truck; for on-board diagnostics, $94 for cars and $101 for trucks; for new evaporative emissions requirements, $10 for cars, $13 for light trucks. On-board vapor recovery during refueling is still under consideration. (Federal Register, 1990, 1991a, b.) these effects would not fall uniformly on the industry. Depending on their form, new fuel economy regulations could affect some types of producers, such as full-line manufacturers heavily dependent on large vehicles, more than others. Sales Mandated higher fuel economy levels could have two major types of negative impacts on manufacturers. First, the higher cost of new vehicles is likely to depress sales if the resultant increase in the vehicle's initial price outweighs the benefit of fuel savings over the vehicle's life, as evaluated by consumers. Second, manufacturers may make design changes in attempting to raise fuel economy that turn out to be unsatisfactory to consumers. In the extreme, both of these effects would tend to reduce vehicle sales, reduce manufacturer profits, and reduce employment in the automotive industry and in sectors connected to the industry.

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Automotive Fuel Economy: How Far Should We Go? While it is nearly impossible to anticipate the design changes manufacturers might make and how consumers might respond to them, it is possible to make some estimates of the effect of increased vehicle costs on sales. Consider first the worst case—that consumers respond only to the increase in the retail price of the vehicle. Assume for sake of illustration that (1) a 1 percent price increase for a new car leads in the short run to a 1 percent drop in unit sales,9 (2) that, in the absence of higher fuel economy standards, the average price of the MY 2006 car would be the same as the average price of a MY 1990 car, or $16,000 (MVMA, 1991); and (3) that the lower estimates of improved fuel economy are achieved. With these assumptions the retail price increases in Table 8-3 to this average vehicle price would yield unit sales reductions for new cars of about 3 to 8 percent, using the lower estimates of technically achievable levels. This would represent a significant impact on the automotive industry even though sales revenue would remain unaffected under the one-to-one elasticity assumption. More realistically, however, consumers may take into account the benefits of reduced lifetime expenditures on fuel when making new-vehicle purchase decisions. In the absence of any estimate of the effect on vehicle sales of the present value of lifetime fuel savings (i.e., the "elasticity" of vehicle sales with respect to fuel costs), one way to make the estimate is to assume that vehicle sales respond to changes in the present value of fuel costs in the same way they do to vehicle price changes. As exemplified in Table 8-3, with the estimates of technically achievable fuel economy and costs reported for this study, the net present cost of higher fuel economy to the consumer is always substantially less than the initial vehicle price increase, and there may even be a positive benefit. Thus, the estimate of the impact on future vehicle sales given in the preceding paragraph is an upper bound that probably overstates the effect. Employment The impact of higher fuel economy on employment in automotive and related industries is difficult to assess. Under the worst case scenario for the impact on sales, discussed above, unit sales of passenger cars and light trucks might decline by 3 to 8 percent. Assuming that the number of jobs in the industry is proportional to unit sales (see Chapter 5), a reduction in sales of this magnitude would lead to a decline in employment of similar proportions. Several factors would tend to mitigate this decline. First, as noted above, the worst case scenario assumes that consumers respond only to the higher price of more efficient vehicles. To the extent that this effect is offset by fuel cost savings, sales reductions—and thus employment reductions—would be less than the worst case suggests. 9   An elasticity of -1 to -1.5 was reported by Michael J. Boskin in his presentation to the committee at the workshop that was held in Irvine, California, July 8-12, 1991. Ford Motor Company, in its presentation to the Impacts Subgroup of the committee, September 16, 1991, suggested an elasticity of -1.

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Automotive Fuel Economy: How Far Should We Go? Second, as also noted above, even a decline in unit sales due to a price increase might leave automotive industry sales revenues unchanged since higher prices might essentially offset lower unit sales. Some portion of the price increase, however, arises from the wages paid to the workers who manufacture and install the new fuel economy technologies that generate the price increase. So, while there might be a loss of jobs due to any shrinkage in unit sales, the loss would be offset to some extent by the growth of jobs in producing the fuel economy technologies. The employment impacts of fuel economy changes must also be put in context. As pointed out in Chapter 5, the global automotive industry is now in a state of chronic overcapacity that is likely to continue for some time. Overcapacity, combined with long-term increasing productivity, will lead to continuing reductions in employment in motor vehicle manufacturing and related industries, regardless of fuel economy standards. Indeed, the long-term shrinkage in employment may dwarf the employment impacts of new fuel economy requirements. Competitiveness More stringent fuel economy standards may have a greater impact on who manufactures cars for the U.S. market and where they are manufactured than on aggregate sales or employment. That is, higher fuel economy standards may affect the competitive position of U.S. manufacturers vis-à-vis the rest of the world more than they would affect the industry as a whole. The importance of the competitive effect depends heavily on the form of the regulation, perhaps more so than its level. For example, a fuel economy standard that averages corporate fuel economy performance across all classes—the current approach—has important differential effects among manufacturers. Because domestic producers make a larger proportion of midsize and large cars than do most foreign manufacturers, even if domestic producers met the committee's technically achievable fuel economy levels in each class, they could not reach the same corporate average levels of fuel economy as the foreign (primarily Japanese) producers could unless they changed their market mix and incurred higher adjustment costs.10 Imported light trucks already achieve significantly higher fuel economy than domestic trucks in the same size classes.11 If fuel economy standards for light trucks were set above levels characteristic of current domestic trucks, but at or below those of the imports, the domestic manufacturers would be at a serious disadvantage. In particular, import manufacturers could make their light trucks larger, heavier, or more powerful in each size class to gain market share while domestic manufacturers would be severely constrained. 10   These matters are discussed more thoroughly in Chapter 9. 11   For example, in 1990 the fuel economy of imported small pickups was 27.0 mpg, compared with 24.5 mpg for domestics, 34.1 vs. 21.2 mpg for compact utilities, 28.6 vs. 16.2 mpg for full-size utility vehicles, and 25.4 vs. 22.9 mpg for compact vans (Heavenrich et al., 1991).

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Automotive Fuel Economy: How Far Should We Go? Costs and Benefits of Higher Fuel Economy to the Nation Petroleum Consumption High levels of fuel economy would reduce the consumption of petroleum by the automotive fleet. For example, if today's new passenger-car fleet were to consume gasoline at the "technically achievable" average level of 34 to 37 mpg, the consumption of gasoline by this fleet would be reduced by about 18 to 26 percent, compared with the standard of 27.5 mpg.12 Clearly reductions of this magnitude could enhance energy security, reduce CO2 emissions, and provide some of the other benefits that are discussed in Chapter 1.13 For example, fuel economy improvements of this magnitude, if attained today for the entire car and light-truck population, would reduce emissions of CO2 from anthropogenic sources in the United States by an estimated 3 to 5 percent.14 Reduced fuel use could lead to lessened U.S. dependence on imported oil, with attendant positive impacts on the balance of trade and on national security costs and risks. Safety It is the committee's view that the safety impact of fuel economy improvements of the levels projected in this report could be small. However, a number of factors prevent making this a definitive conclusion. Although fuel economy improvements could be achieved with little downsizing, it cannot be guaranteed that this approach will be followed. If consumers accept smaller cars, manufacturers may find downsizing a more profitable route to higher fuel economy than the introduction of costly technology that makes downsizing unnecessary. Thus, the committee concludes that there is likely to be some safety cost of higher fuel economy, and fuel economy measures that involve reductions in vehicle size or weight must be carefully monitored and analyzed to determine any safety consequences. But, as discussed more fully in Chapter 3, individuals and policymakers continually trade off safety and other values. The safety consequences should be one factor in the weighing of costs and benefits associated with achieving improved fuel economy of cars and light trucks. 12   Of course, even if the fuel economy standards for new cars and light trucks were set at the "technically achievable" levels in 2006, such significant reductions would not be achieved until years thereafter. New vehicles constitute only a small portion of the existing fleet; the standards have impact only over time as the fleet turns over and more efficient new vehicles replace less efficient older vehicles. Further, increased fuel economy would probably increase vehicle miles traveled so the net gasoline savings would be somewhat less. 13   Our failure to quantify all these benefits should not be construed to mean that the committee does not appreciate their significance. Rather, it reflects the difficulty in estimating and reliably evaluating them. 14   Committee estimate based on data on sources of CO2 from OTA (1991) and on the assumption that reaching the "technically achievable" level would result in an eventual 18 to 26 percent reduction in gasoline use for the entire automobile and light-truck fleet.

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Automotive Fuel Economy: How Far Should We Go? Emissions and the Environment Fuel economy increases are likely to have little direct impact on vehicle emissions (except for CO2), but emissions standards more stringent than the Tier I standards of the Clean Air Act amendments of 1990 are likely to have adverse effects on fuel economy. In addition, depending on the balance of price increase and fuel cost savings discussed earlier, increases in new-vehicle prices could keep older vehicles on the road longer, thus delaying reductions in total automotive emissions. For the estimates of ''technically achievable" fuel economy presented in Table 8-1, it was assumed that safety and Tier I emissions regulations will be met, but Tier II and California's standards were not taken into account. If Tier II standards of California's standards are considered—especially the strict NOx standards—it is likely that the application of several fuel-efficient engine designs (such as the lean-burn, the two-stroke, or the diesel engine) in light-duty vehicles could be precluded unless a major breakthrough occurs in emissions control for lean-burn engines. The Risk of Choosing Incorrectly As noted above, the benefits of fuel economy standards stem from the reduction in the consumption in petroleum. Figure 8-2 shows gasoline savings on a percentage basis as fuel economy is increased above 27.5 mpg. The noteworthy element of the curve is its non-linearity: as fuel economy is increased, less gasoline is conserved for each increase in mpg. Thus, improvement in fleet fuel economy offers diminishing returns on the benefit side of the equation. The evaluation of costs to consumers is more complicated. As shown in Chapter 6, the curve of net costs to the consumer of improved fuel economy is relatively flat over a fairly broad range. (This flat portion is termed the "indifference region.") The gains or losses from improved fuel economy may amount to a few hundred dollars—a small amount in comparison to the $16,000 purchase price of the average new car (MVMA, 1991). Moreover, since evaluating the financial benefits of buying fuel economy technology requires anticipating uncertain future fuel prices and cost savings and discounting them to present value, it would not be surprising if consumers do not take fuel economy improvement into account. Because manufacturers may have to redesign their product lines to achieve improved fuel economy—a costly and risky proposition—they may decide to leave well enough alone and not risk making changes. Hence, in the absence of effective market pressures to encourage improved fuel economy, there are reasons to set fuel economy standards at the outer limits of the indifference region. Standards set at this boundary would not threaten extraordinary costs to consumers. The difficulty in such an approach arises from the fact that the outer limit of the consumer indifference region is not easily determined. The combination of the rapidly rising costs of higher fuel economy levels and the diminishing returns to fuel savings per mile driven means that the net cost of higher fuel economy to the consumer increases rapidly outside the indifference region. Thus, the adverse consequences to consumers, manufacturers, and workers of overestimating the upper limit of the indifference region may be severe.

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Automotive Fuel Economy: How Far Should We Go? FIGURE 8-2 Cumulative percentage increase in fuel savings as a function of fuel economy with 27.5 mpg as a base. Other risks are also associated with overly stringent fuel economy requirements. The more stringent the fuel economy requirement, the greater the likelihood that the manufacturers will be required to introduce significant modifications of existing cars in order to comply. If consumers do not like the design changes that are made to increase fuel economy, the cost in lost sales and profits to the manufacturers could be substantial, even if fuel savings outweigh the retail price increase to the consumer. And, stringent fuel economy requirements would impose special pressures on U.S. domestic manufacturers at a time when they are facing severe competitive and economic challenges from foreign competitors. In sum, there are diminishing benefits and increased costs if fuel economy standards are set too high. This argues that policymakers should be wary of pushing fuel economy too far. POLICY COORDINATION AND ANALYSIS The interactions of higher fuel economy, improved occupant safety, and lower emissions illustrate dramatically the need for coordinated action by policymakers. There are limits to what can be achieved, and there are trade-offs that must be made. In setting fuel economy, safety, emissions, and other standards that affect automotive

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Automotive Fuel Economy: How Far Should We Go? manufacturers, Congress and the administration should consider the cumulative impacts of the various regulations. Because the standards are set by different agencies under differing statutory commands, however, little coordination of policy is achieved and inconsistent pressures—such as those arising from environmental and fuel economy considerations—are allowed to persist. This is indeed unfortunate because the automotive industry accounts for significant employment and is the focus of much of the national debate on improvements to the economy, the environment, and competitiveness. As noted above, the determination of the point at which the costs and benefits of improved fuel economy are in balance is surrounded by considerable uncertainty. Even the evaluation of the "technically achievable" fuel economy levels can only be roughly ascertained. And, the assessment of the appropriate balance is all the more uncertain because it requires trade-offs of incommensurate considerations: energy security, jobs, safety, environmental protection, and many other factors. There is a clear need for more information than the committee has had available to it. If more analysis had been carried out by a greater variety of researchers, the uncertainty about the potential for fuel economy improvement and its costs would now be considerably lower. It is clear from the committee's analysis that the risks of setting overly stringent fuel economy standards could have annual costs to consumers and industry in the tens of billions of dollars, not to mention the possible costs in jobs and lives. On the other hand, insufficient fuel economy improvement could contribute to continuing energy insecurity and growing greenhouse gas emissions. The very useful contributions by analysts supported by the U.S. Department of Energy notwithstanding, federal support for data collection and analysis on this subject during the past decade has been very inadequate. In the committee's opinion, if the federal government intends to continue regulating automotive fuel economy, it must make a more substantial investment in understanding the technical issues, costs, benefits, and risks of such regulation.

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Automotive Fuel Economy: How Far Should We Go? REFERENCES Energy and Environmental Analysis, Inc. 1991. Fuel economy technology benefits. Presented to the Technology Subgroup, Committee on Fuel Economy of Automobiles and Light Trucks, Detroit, Mich., July 31. Federal Register. 1990. Vol. 55, No. 13 (Friday, January 19). Federal Register. 1991a. Vol. 56, No. 108 (Wednesday, June 5):25737. Federal Register. 1991b. Vol. 56, No. 185 (Tuesday, September 24):48292-48293. Heavenrich, R.M., J.D. Murrell, and K.H. Hellman. 1991. Light-Duty Automotive Technology and Fuel Economy Trends Through 1991. Control Technology and Applications Branch, EPA/AA/CTAB/91-02. Ann Arbor,Mich.: U.S. Environmental Protection Agency. Motor Vehicle Manufacturers Association (MVMA). 1991. Facts & Figures '91. Detroit, Mich. Office of Technology Assessment (OTA), U.S. Congress. 1991. Changing by Degrees: Steps to Reduce Greenhouse Gases. Washington, D.C.: U.S. Government Printing Office. Salter, M.S., A.M. Webber, and D. Dyer. 1985. U.S. competitiveness in global industries: Lessons from the auto industry. In U.S. Competitiveness in the World Economy, B.R. Scott and G.C. Lodge, eds. Cambridge, Mass.: Harvard Business School Press. Sierra Research, Inc. 1988. The Feasibility and Costs of More Stringent Mobile Source Emission Controls. Prepared for the Office of Technology Assessment, U.S. Congress. Sacramento, Calif. SRI International. 1991. Potential for Improved Fuel Economy in Passenger Cars and Light Trucks. Prepared for Motor Vehicle Manufacturers Association. Menlo Park, Calif.