Obama and Higher Fuel Efficiency Standards

It’s a good thing for our nation’s economy…. Not as good as a carbon tax, because the CAFE standards use coersion rather than incentives and don’t raise badly-needed revenue, but it’s still a good thing–and even for the auto industry itself. The story:

NEW YORK (CNNMoney.com) — President Obama set his green plan into action Monday, potentially reversing several Bush-era decisions on global warming and fuel efficiency.

In his first major environmental acts as president, Obama directed his Environmental Protection Agency to review a California application to regulate greenhouse gases and told his Department of Transportation to begin implementing fuel efficiency standards passed last year but not implemented by the Bush administration.

He also pushed for passage of the $825 billion economic stimulus package in the House and Senate. Those bills include money for investments in renewable energy, conservation and a better electric grid.

“No single issue is as fundamental to our future as energy,” Obama said at a White House news conference. “It is time for this moment of peril to be turned into one of progress.”…

Under the Clean Air act, California has long sought to tighten its air quality standards.

To achieve those standards, California would likely require cars to emit fewer greenhouse gases. Currently the federal government does not regulate carbon dioxide emissions - the main culprit in greenhouse gases.

The Bush administration recently denied California’s request saying that new federal fuel standards made stricter rules there unnecessary.

Obama said his administration will review that decision. Any change in policy would likely take months to implement.

“Let me be clear: Our goal is not to further burden an already struggling industry; it is to help America’s automakers prepare for the future,” said the president…

Regardless of what California does, Obama also moved to implement higher fuel efficiency standards passed in 2007.

Those increases - the first in more than 30 years - called for raising the average fuel economy from 27.5 miles a gallon for cars and 22 miles a gallon for trucks to 35 miles a gallon for the whole fleet by 2020.

Obama said the increased standards would save 2 million barrels of oil a day.

That’s about 10% of the country’s total oil consumption, and roughly the same amount the country currently imports from the Persian Gulf.

“This rule will be a downpayment on a broader and sustained effort to reduce our dependence on foreign oil,” said the president.

The new standards, originally supported by Bush, were put on hold during his last days in office, in response to the woes facing the auto industry.

The industry has long opposed raising fuel economy standards. It has argued that the new rules are expensive and unnecessary since is already makes fuel efficient cars…

I don’t think we should worry too much about what these higher fuel efficiency standards will do to the auto industry. (Perhaps my auto industry friends and relatives will want to argue with me on this; I’m not sure. But by the way, I don’t think the new rules could be both “expensive” and “unnecessary” (nonbinding?)…)

I believe the federal push for greater fuel efficiency will help to steer the automakers’ production more in the direction of where they need to go to be viable businesses (on their own) in the longer term. (The automakers are given until 2020 to get up to 35 mpg.) In the short term, the federal loans are the best immediate effort to keep them alive. What we don’t want is to have our government rescue the industry while enabling “business as usual.” The combination of the short-term rescue with longer-term “steering” is just one example of how we’ll have to conduct economic policy over the next couple years–assistance, but with (smart) strings attached. This is what “fiscally-responsible deficit spending” looks like.

But a carbon tax policy (or higher gasoline taxes) would still do better. For a comparison, see this recent CBO issue brief, and an earlier one.

Comments

[Steven Hansen:]

i hate taxes.

Jan 27 03:52 AM

[Timothy Swift:]

Why is 35 mpg a good thing? Seems like the autos need to design, engineer and build cars the public will buy and not by some arbitrary standard established by the all knowing and feeling coming from Washington. What do those clowns know about making a car?

Something seems terribly wrong about pumping billions into the auto companies to keep them alive then jam design mandates down their throats. But we knew this was coming.

The carbon tax silliness... Can someone please explain to me why CO2, an inert gas and essential for the cycle of life, is such a bad thing?

According to James Lovelock the world produces 550 gigatonnes of the stuff of which we're responsible for 30, or 5.5%. Even if its reduced to 0%, an impossibility, what was accomplished? Will the earth cool off? Seems like silly willy math to me.

Jan 27 08:41 AM

[Douglas Kor...:]

What we're doing now is using federal Taxpayer money to pay for rebates on gas-guzzlers just to keep workers making the wrong cars.
Subsidies to GMAC pay for bad loans to poor credit risks secured by the declining value of junk-bound gas-guzzlers.

They say EVs are too expensive to make; but we spend billions and trillions subsidizing the oil industry and subsidizing the building of gas-guzzling junkers.

Jan 27 09:07 AM

[Tony C:]

TRS, building what the public will buy has a nice ring to it, but fails in the real light. First, the public rarely knows what it wants, as they don't stay abreast of new developments. So what might be possible will be unknown to them as they continue to buy what they know: the same old thing.
Did the public know in 1965 that it was possible to remove 95% of the pollution from a car's exhaust? No, nor did they demand it. And had they heard talk to that effect, they would also have heard the auto industry telling them it was impossible. The Feds demanded it, the industry reluctantly delivered, and now the people love it.
The same argument can be made for safety upgrades.
I would have thought that the diehard "market is always right" attitude would have been killed by now, given the economy of the last year.

Jan 27 09:25 AM

[Paul Killinger:]

Diane,

The entire idea is fascinating.

Normally, lenders make loans based on sound business plans. So if small cars are the least profitable items these companies sell, how is it the feds are going to come out if their lending results in lower profits?

Maybe automakers can charge more for them. No, that won't work, people can't afford to buy them as it is. Perhaps the feds will loan us the money to buy them, either directly or in the form of tax credits.

You all haven't figured out yet where this is inevitably headed, have you?

Jan 27 02:02 PM

[Paul Killinger:]

Well, I'll give you a clue. We're already circling the drain.

Jan 27 02:08 PM

[Chris B:]

"the autos need to design, engineer and build cars the public will buy and not by some arbitrary standard established by the all knowing and feeling coming from Washington. What do those clowns know about making a car? "

It appears they know a lot more than the NASCAR-inspired geniuses in the marketing departments of Ford, Chrysler, and GM who brought us the Expedition, the Challenger, and the Hummer H2/3 respectively and wiped out billions of dollars and tens of thousands of jobs doing so.

It turns out if you make almost exclusively gas guzzlers, your sales evaporate in years of recession OR high gas prices. Better write that brilliant observation into the business textbooks. Also tear down the muscle car posters in the boardroom.

Honda and Toyota routinely sell small cars for more money than the big 3 get for their trucks, so small cars can be profitable. However, decades of bitter experience from Pintos, Chevettes, Escorts, Reliants, and Neons have soured small-car consumers to the big 3's products. They became dependent on big vehicles because that was the last product segment made only by them, and therefore they could compete.

That is the big 3's problem, not fuel efficiency regulations that also apply to their successful competitors.

Jan 27 03:24 PM

[kcr357:]

If these standard were in place 10 years ago, I believe the Dom 3 would not be in the position they are today. In fact, I know they would be better off financially. When GM and Ford were competing to build the biggest SUV you can drive without a CDL, Honda was making 35 mpg cars.

Jan 27 05:20 PM

[Tony C:]

kcr, don't forget that while GM and Ford were racing to build ever-bigger SUVs, Toyota and Nissan were right there with them. Not only did both of those Japanese companies build SUVs as big as anyone's, they also launched huge pickup truck production which is now, or will soon be, shut down.
The bad calls aren't limited to Detroit.

Jan 28 12:35 PM

[Chris B:]

Tony,
Totally correct. Toyota, Hyundai, and Honda are falling back on their compact car markets to cover losses in the SUV/truck markets they recently entered. They are more fortunate than the "big 3" only because they still have these small car businesses to fall back on.

The lesson learned is this: gas guzzlers are the most cyclical part of the auto industry. Gas guzzler sales periodically plummet when either a recession or high gas prices occur. If you rely on them, you will go bankrupt as soon as a recession or period of high gas prices inevitably occurs.

Perhaps this severe spanking will be the end of the large Asian truck, as Toyota and Honda return to the more financially stable work of making compact cars.


On Jan 28 12:35 PM Tony Carlos wrote:

> kcr, don't forget that while GM and Ford were racing to build ever-bigger
> SUVs, Toyota and Nissan were right there with them. Not only did
> both of those Japanese companies build SUVs as big as anyone's, they
> also launched huge pickup truck production which is now, or will
> soon be, shut down.
> The bad calls aren't limited to Detroit.

Jan 28 01:57 PM