U.S. Fuel Economy Standards: 54.5 MPG by 2025




I almost missed this news as it was quietly slipped in between Super PAC programming, but a historical increase in fuel economy standards was finalized last week.

The National Highway Traffic Safety Administration (NHTSA) and Environmental Protection Agency (EPA) teamed up with the Obama administration, automakers, the United Auto Workers, environmental groups, and the State of California to set the new fuel economy standards.

These new standards were an extension of the Corporate Average Fuel Economy Standards (CAFE) and create rules to raise the average automaker fleet’s fuel economy to 35.5 mpg in 2016 (previous standard set in 2009) and 54.5 mpg in 2025.

This would present a 90% increase in average fuel efficiency versus the 2011 model year average of 28.6 miles per gallon.

Somewhat surprisingly, 13 of the largest automakers, including Ford, GM, Toyota, Honda and Chrysler, which together account for more than 90% of all vehicles sold in the United States, announced their support for the new standards.

The Impact of Obama’s New Fuel Economy Standards

Vehicle Costs: The Obama administration estimates an increase in vehicle costs of $1,800, however, they claim the new average standard would present a cost savings of $8,200 in fuel savings over a vehicle produced in 2010 ($1.7 trillion saved).

Environment: From an environmental standpoint, the new standards are projected to save 12 billion barrels of oil and eliminate 6 billion metric tons of CO2 pollution over the life of the program (more CO2 than the U.S. produced in 2010).

obama fuel economy standardsCanada, with a population around 10% of the U.S., has already announced they will be copying the new U.S. standards. Silly Canadians… always copying (except when it comes to health care, of course).




Economy: The new standards should help the economy as well. The less everyone has to spend on gas, the more we have to spend on everything else. And the less businesses have to spend on transportation costs. On top of that, automakers will need to hire more engineers to figure out how to meet the standards.

Without major population increases, this should theoretically cut down our foreign oil dependency significantly, improving our competitive position in the global economy.

U.S. has Lagged in Fuel Efficiency

new fuel economy standardsPrior to this regulation, fuel economy in the U.S. has been flat for decades. We’ve fallen behind other developed countries by significant margins.

Check out the NHTSA chart to the right, which shows the average U.S. fuel economy over the years.

Up until the last few years, when prior CAFE standard increases took effect, the average fuel economy had actually declined in the two decades following the early 1980’s.

Pathetic!

Of course, gas prices were so low and the global warming theory was only in its infant stages, so nobody really cared or pushed for changes.

The Need for a Market Nudge

Let fuel economy take care of itself in the marketplace, some would say.

The majority of consumers have been saying fuel economy is important (fuel economy was recently voted the #1 purchase consideration), but purchasing habits have not caught up.

You would think that many of the most fuel efficient cars would consistently make the list of top-selling vehicles, but that hasn’t happened. The list still includes many gas guzzlers, even after gas prices crossed $4 per gallon and everyone’s panties were all up in a bunch.

Why is this?

Consumers have typically had to pay up for fuel efficiency. Fuel economy has become a marketable vehicle feature. When the average fuel efficiency is as low as it is, the consumers who do care enough (usually those with a guilty environmental conscience) are willing to pay more for it. But most are not.

When presented with a 37 mpg hybrid vehicle for $30,000 versus a larger 30 mpg gas-only vehicle for $20,000, which do you choose?

The mpg spread hasn’t been large enough to justify the higher costs associated with hybrids and electrics.

Markets are self-driven, only to the extent that consumers have enough reasonably priced choices to drive it.

Until now, automakers haven’t needed to push change and have been disincentivized to do so. It adds to their costs – they must retool their factories, hire more engineers to design more fuel efficient vehicles, and test new technologies. There are costs involved in doing all of that. How do the automakers then maintain their almighty profit levels? By charging more for the cars. But if they charge more for marginal fuel efficiency gains, they lose out in the marketplace. So, it’s been easy for them to stick to an unwritten gentleman’s agreement to simply maintain status quo in the U.S. Therefore, the pace of change has been lethargic, especially when compared to other countries.

In response to the new standards (which they agreed to), many automaker’s statements had a tone of relief. Their competitors are being pushed to meet the same fuel efficiency gains, which levels the cost and profitability playing field for all of them. The technological possibility was always there, but now they finally have the key to unlock it.

It’s no coincidence you’ve already started seeing a jump in fuel efficiency in the last year with many non-hybrid vehicles from Ford, Chevy, Mazda, Toyota, and Hyundai/Kia hitting 40 mpg for the first time. One only has to look as far as the previous CAFE standards, which required 35.5 mpg by 2016, and the new impending standards.

I don’t think it will take until 2025 to get to 54.5 mpg. As soon as one or two automakers start making the claim that they beat the rest of the pack there, the rest will quickly follow suit.

Removing all political bias, it’s hard to see any losers here.

And with global warming and peak oil threatening, it can’t come soon enough.

As for me, I’ll still be riding my bike to work, even when they do hit 54.5 mpg.

New Fuel Economy Standards Discussion:

  • Are you excited about the new fuel efficiency standards? Do you think they are too high, too low, just right?
  • What effects do you think the new standards will have?
  • Will this impact your vehicle purchasing behaviors over the next decade?

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