1. Fuel Economy Standards and Risk in the Auto Industry Irene Berry Virginia Tech ASME WISE Intern August 2, 2006 [www.msnbc.com]

2. 2 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. Fuel economy policies should consider impact on the auto industry. [www.msnbc.com]

3. 3 This presentation focuses on the impact of fuel economy on auto industry competitiveness. Current fuel economy policy and the auto industry Differences between automakers and risks of market changes Policy options and recommendations [www.cranfield.ac.uk][www.toyota.com] [www.boxfordacademy.org]

4. 4 The federal government sets Corporate Average Fuel Economy (CAFE) standards. Congress sets CAFE standards for cars. The National Highway Traffic Safety Administration (NHTSA) sets them for light trucks. A company’s CAFE is the average fuel economy of the vehicles it sells expressed in miles per gallon (mpg). [NHTSA 2005]]

5. 5 Introducing a new vehicle to the market is risky. Producing automobiles is a very capital intensive and complex process. Competition between automakers is intense. [www.matchtech.com] [www.smartcarfinder.com] [www.marksimonson.com] The market for new vehicles is elastic.

6. 6 Automakers are different, in ways that affect fuel economy: [www.gmbuypower.com] Fleet mix Technology leadership [www.ford.com] Financial resources [www. washingtonpost.com] Production flexibility [www.world.honda.com] Current CAFE [www.consumerenergycenter.com]

7. 7 Higher CAFE standards will create disproportionate risks for automakers. Consumers do not value fuel economy. To increase efficiency, automakers must change vehicle design. If consumers will not pay for changes, automakers must absorb the costs. [www.shell.com] [www.gmcanda.com] Less than 10 mpg Over 1000 mpg

8. 8 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]

9. 9 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]

10. 10 Policy should improve fuel efficiency and reduce the current and future risks to the auto industry. Federal fuel economy policy should improve fuel economy levels, minimize the risks of the policy to the auto industry, minimize future risks of higher gas prices, and maintain consumer choice. Future oil prices will be higher and more volatile. [EIA, AEO 2006]

11. 11 CAFE standards have a role in fuel economy policy. CAFE standards set a floor for fuel economy. NHTSA sets light truck CAFE standards that are cost-effective. NHTSA should also set passenger car standards. CAFE standards maintained fuel economy levels. [EPA 2006]

12. 12 CAFE standards should be part of a larger policy package. CAFE standards do not prepare automakers for future risks. CAFE standards result in gradual improvements. As percent light truck increased, combined fuel economy declined. [EPA 2006]

13. 13 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. Consumer incentives would encourage the market to demand greater efficiency. [www.irs.gov] [www.communitytoyota.com]

14. 14 A market incentive based on efficiency will reduce the risks of improving fuel economy. The amount of the feebate is proportional to gallons per mile. It would encourage a shift to smaller vehicles. It would reward each gallon of fuel saved equally. A feebate rewards buyers of efficient vehicles and penalizes buyers of inefficient vehicles.

15. 15 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. Questions? [www.hybridcars.com]