“Already Gone” – CAFE Becomes SAFE

By Elizabeth Hilbourn and John Auers

Back in early April, we blogged of the Eagles song, “The Sad Cafe,” in recognition of an announcement by EPA Administrator Scott Pruitt scrapping the 2022-2025 fuel economy standards for light duty vehicles. Since that announcement has moved in the form of a proposed rulemaking, we are following up with another Eagles hit, “Already Gone,” as another Obama Administration proposal heads for the dustbin. As with any change in regulation, there are winners and losers.  Certainly, the auto and oil industries have been pushing for the rollback and have made a good case that consumers will also be winners in the form of safer and less expensive vehicle options.  The big losers are the alternative fueled vehicles, and in particular, the electric vehicles who were anticipated to have a big jump in market share with the original 2021-2026 CAFE standards.  It is a twist on words that the CAFE standards are now the SAFE standards.  The Safer Affordable Fuel-Efficient Vehicles Rue (SAFE) incorporates more of the positive attributes where the automobile designs were headed: fuel efficiency, safety, protecting the environment without prohibitively high-priced vehicles or harming employment in the U.S. manufacturing sector.

“The Sad Cafe” gave a history of CAFE; however, it may be important to note that the CAFE was enacted after the 1973-74 oil shock as a political solution to soaring oil prices.  The standards were premised on the belief that consumers would not pay more for cars that used less fuel.  Now, much of the CAFE purpose is climate change and controlling CO₂ emission reduction.

Also summarized in “The Sad Cafe” is the fact that cars in the U.S. are more fuel-efficient and emit less CO₂ emissions than ever.  Cars sold in the U.S. hit a new record in 2016 (the last year studied) at 28.5 mpg and 300 grams CO₂ per mile, respectively, a significant change since a decade earlier at 23.2 mpg and 390 grams CO₂ per mile, respectively.  Also, all gains in fuel-efficiency and emissions were increasing at approximately the same rates over the last decade.  Also, as shown by the chart below, approximately 25% of the model year 2017 vehicles meet or exceed CAFE model year 2020 standards which are proposed to be held through 2026 in SAFE.

According to Secretary Elaine Chao, “more realistic standards will promote a healthy economy by bringing newer, safer, cleaner and more fuel-efficient vehicles to U.S. roads.” EPA Acting Administrator, Andrew Wheeler, states, “Our proposal aims to strike the right regulatory balance based on the most recent information.”  In fact, the CAFE was so extreme that a team from the University of Central Florida and MIT performed a study in 2017 which showed that adoption of electric vehicles would be a way to meet the CAFE policy.  One scenario in their study published in the journal Energy Policy (figure below) shows the replacement of ICEs with EVs to meet the policy timeframe of 2021-2026.

U.S. DOT and EPA contend that the preferred alternative would have large consumer and manufacturer impacts, while there would be no noticeable impact to net emissions of smog-forming or other “criteria” or other toxic air pollutants.  They claim a $2,340 reduction in overall average vehicle ownership costs and 12,000 fewer crash fatalities over the lifetimes of all vehicles built through model year 2020.  They project a 37.0 mpg projected overall industry average required fuel economy in model years 2021-2026 compared to 46.7 mpg projected requirements in model year 2025 under CAFE standards.  They project a 2-3% increase in daily fuel consumption or about 0.5 MMBPD.  Also significant would be the reduction from 56% to 3% in the percentage of hybrid vehicles needed to comply in model year 2030.

NHTSA and EPA are seeking public comment on nine regulatory options, including a preferred alternative that locks in model year 2020 standards through 2026.  The current standards have been a factor in the rising cost of new automobiles.  A January 2018 study by NHSTA shows that new model year vehicles are safer than older models.  The Administration is focused on correcting the current standards that restrict the people from being able to afford newer vehicles with more advanced safety features, better fuel economy and associated environmental benefits.  A report issued in April 2018 by the EPA found that the CAFE standards were not appropriate and should be revised.  The nine alternatives range in whether to begin in model year 2021 or 2022, the yearly percentage increases, whether to include air-conditioner efficiency and off-cycle provisions and CO₂ equivalent air-conditioner leakage emissions.  The proposed alternative includes existing standards through model year 2020, no increases from 2021-2026, no change in air conditioner efficiency and off-cycle provisions and no CO₂ equivalent air-conditioner leakage emissions.  The baseline / no-action alternative can be described as what would occur in the absence of any regulatory action.  The air-conditioner options represent improving fuel economy under conditions not represented by long-standing fuel economy test procedures. The CO₂ equivalent air-conditioner leakage emission alternatives involve regulating tailpipe CO₂ independently of air-conditioner refrigerant leakage and N₂O and CH₄ emissions.

In connection with the proposed rulemaking to establish passenger car and light truck SAFE standards for model years 2021 and beyond, NHTSA prepared a Draft Environmental Impact Statements (EIS) to analyze the environmental impacts of the proposed standards.  One purpose of NGTSA’s rulemaking is to establish model year 2022-2026 CAFE standards at the “maximum reasonable average fuel economy level that the Secretary of Transportation decides the manufacturers can achieve in that model year.”  NHTSA must consider the four statutory factors of technological feasibility, economic practicability, the effect of other motor vehicle standards of the government on fuel economy, and the need of the U.S. to conserve energy. For each of the alternatives, NHTSA quantified the environmental consequences in the areas of energy, direct and indirect impacts, air quality and health impacts.

Though no one can dispute that fuel economy, emission reduction, and safety are all good, we must balance technology, safety, economics, fuel conservation and pollution reduction.  The next steps are a 60-day comment period to either the NHTSA or EPA docket until the first week in October before final rulemaking can be published.

TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for all petroleum products.  Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook and our various other studies. This subject is discussed in the release of our 2018 Mid-Year Crude and Refined Products Outlook (C&RPO) issued last week.  For more information on this report or on any of our other analyses or consulting capabilities, please send us an email or give us a call.