Testimony to the Senate Commerce Committee

 

 

10:30 am, Tuesday, March 6, 2007

Russell Senate Office Building, Room 253

 

David L. Greene

Corporate Fellow

Engineering Science and Technology Division

Oak Ridge National Laboratory

 

 

Good afternoon.   Thank you for inviting me to discuss the Corporate Average Fuel Economy Program and its current and prospective effectiveness.  The views I express today will be entirely my own and do not necessarily reflect the views of Oak Ridge National Laboratory or the Department of Energy.

 

 

 

Our nation and our world face crucial energy challenges.  Our nation’s oil dependence costs our economy hundreds of billions of dollars each year and undermines our national security (Greene and Ahmad, 2005).  The threat to the global environment from human induced climate change fed by increasing emissions of carbon dioxide from the combustion of fossil fuels becomes clearer with each passing day.  With demand for mobility growing rapidly around the world, sustainable sources of energy for the world’s growing mobility demands must be found.  There is no quick, easy solution.  Strong, comprehensive, sustained policies are required.  Significant technological advances are also essential.  The fuel economy policies we address today are by themselves not enough to solve these energy challenges.  But they are the cornerstone of any sufficient strategy.

 

 

 

Fuel economy standards have been successful in the past, not just in this country but around the world.  They can take many forms.  The EU has industry-wide voluntary standards.  Japan and China have mandatory weight-based standards.  The United States has mandatory Corporate Average Fuel Economy (CAFE) standards.  What all these standards have in common is that they have successfully raised the energy efficiency of motor vehicle fleets and saved enormous amounts of energy without significant negative side effects.  Our own CAFE standards brought about a 50% increase in on-road fuel economy over a period of 20 years.  This improvement saves American consumers more than 50 billion gallons of gasoline every year (Figure 1).

 

 

 

 

 

 

 

Source: U.S. DOT/FHWA (2004)

 

 

 

Fuel economy standards should be set at a level consistent with the urgency of our energy problems, at or an appropriate distance beyond what can be achieved cost-effectively with proven technologies that do not require significant changes in the size and performance of light-duty vehicles.  Timing is also an important consideration.  Manufacturers should be given sufficient lead time to redesign their entire product lines (approximately 10 years).  In this way the full impact of proven fuel economy technologies can be realized and manufacturers can be given a clear, long-term goal around which to plan. 

 

The National Research Council (NRC) Committee on the Impacts and Effectiveness of CAFE Standards, on which I was privileged to serve, defined the “cost-efficient” level of fuel economy as the level at which the marginal present value of fuel savings to the consumer of the next increment in fuel economy exactly equals the marginal cost of technology added to the vehicle to produce those savings (NRC, 2002).  Further, the Committee’s definition allowed no change in the size, weight, or performance of vehicles over a base year level.  In my opinion, fuel economy standards should be set at least as high as the cost-efficient level but not a great deal higher.  Figure 2 illustrates for an average passenger car the trade-off between increased price as a result of adding fuel economy technologies and the present value of fuel savings, based on the National Academies’ panel’s assessment.  The difference between the value of savings and increased price, the net value, is what an efficient market would maximize (all other things equal).  The difference between the lines graphed in Figure 2 and the NRC Committee’s cost effective analysis is that a higher price for gasoline, $2.00 per gallon, is assumed in Figure 2.  The cost-efficient level, the maximum net value to the consumer, is reached at 36 miles per gallon (MPG), 28% higher than the base year passenger car fuel economy. 

 

 

 

Why doesn’t the market produce this level of fuel economy without being compelled by fuel economy standards?  I addressed this question in my January 7, 2007 testimony to the Senate Energy Committee.  Like the market for most other energy using consumer durable goods, the market for automotive fuel economy is not efficient.  At the time of vehicle purchase, consumers do not fully value future fuel savings and therefore manufacturers, in general, do not make vehicles as energy efficient as they would if the market itself were efficient.  It is more effective to sell cars based on other features that excite car buyers.  And, of course, few new car buyers will voluntarily and on their own initiative pay more for the public benefits of reduced U.S. oil dependence or greenhouse gas emissions.

 

Figure 2 also shows that it is possible to push beyond 36 MPG, to 40 or even 42 MPG with little loss of net value ($100 to $300 per vehicle).  This range of 36 to 42 MPG, approximately a 30% to 50% increase in fuel economy, is where judgment about the importance of reducing oil use and carbon dioxide emissions should be exercised.

 

In June of 2006, in response to a request from Senators Obama, Lugar and Biden, I calculated cost-efficient levels of light-duty vehicle fuel economy increases at higher gasoline prices than assumed in the NRC (2002) report. The results are summarized in Table 1 below.  I used the NRC “average” fuel economy cost curves for all the numbers presented in Table 1.  Cost and savings estimates are in 2005 dollars.  The calculations in Table 1 apply to passenger cars and light trucks combined, unlike Figure 2 which applies only to passenger cars.

 

As with all such analyses, there are some caveats.  The NRC study is now five years old, and there have been significant technological developments since its publication.  Some of the technologies used to construct the NRC fuel economy cost functions have already been adopted in existing vehicles but have been used to increase power and weight rather than fuel economy.  On the other hand, important new technologies have also been developed.  Second, at fuel costs above $3.50 per gallon the indicated cost-efficient fuel economy levels are beyond the range of what could be achieved using the fuel economy technologies considered by the NRC study.  These numbers are printed in italics in Table 1.

 

The cost-efficient analysis assumes constant light-duty vehicle weight and performance.  Fuel economy technology can also be used to increase horsepower and weight while holding fuel economy constant.  Setting fuel economy standards involves an implicit judgment about the importance of having even heavier and more powerful vehicles than we have today versus reducing oil dependence and mitigating greenhouse gas emissions.

 

The cost efficient analysis is limited to existing, proven fuel economy technologies.  There is no doubt that technological advances will be made over the next ten years.  This fact allows decision makers to have greater confidence that the targets set can be achieved without harm to the automobile industry or to motorists.  Indeed, when the NRC committee finished its study just five years ago, it concluded that neither hybrid nor clean diesel engines could be considered proven technologies.  Today there are a dozen hybrid models to choose from and clean diesels will soon be available.  The cost-efficient method does not rely on technological progress but it does expect it.

 

 

 

Fuel economy standards are not the only effective way to realize greater fuel economy.  Feebates are a way to emphasize the value of reducing petroleum via the purchase price of vehicles rather than future fuel savings.  Feebates give a rebate to purchasers of low fuel consumption vehicles and impose a fee on buyers of high fuel consumption vehicles.  While feebate systems can take many forms, perhaps the most appropriate formulation bases the rebate or fee on fuel consumption (gallons per mile), thereby giving equal value to every gallon of fuel saved. 

 

Feebate systems consist of a pivot point and a rate.  Vehicles whose fuel consumption is below the pivot point receive a rebate while vehicles with fuel consumption above the pivot point are charged a fee.  There can be a single pivot point or different pivot points for different types of vehicles.  The rate specifies the additional value of saving fuel.  Feebate rates on the order of $1,000 to $1,500 per 0.01 gallons per mile should achieve fleet average fuel economy improvements of 30% to 50% (Greene et al., 2005).  The feebate rate determines the incentive to use fuel economy technology to increase fuel economy.  The pivot point determines which vehicles gain (receive a rebate) and which vehicles lose (pay a fee). 

 

Feebates have two important advantages over fuel economy standards.  First, they are a continuing incentive to adopt energy efficient technologies and use them to increase fuel economy.  Once a fuel economy standard has been met, there is no additional incentive for manufacturers to increase fuel economy beyond the value of future fuel savings to consumers.  A feebate system (especially if indexed for inflation) provides a continuing added incentive.  There is always a rebate to be gained or a fee to be avoided.  Second, feebates put a cap on the costs manufacturers will have to incur to increase fuel economy.  Manufacturers are required to meet fuel economy standards regardless of the cost.[1]  There is no reason why a manufacturer would spend more to gain a rebate or avoid a fee than its value.  Thus, the feebate rate puts a cap on the economic costs that might be incurred to increase fuel economy.

 

The chief disadvantage of feebate systems is that they do not guarantee that a desired level of fuel economy improvement will be achieved.  Feebates depend on manufacturers and consumers efficiently trading off the higher cost of fuel economy technology and the value of rebates or fees.  Since both affect the purchase price of a vehicle, there is good reason to expect markets to respond efficiently, but there is no guarantee.

 

Today, we have half of a feebate system for passenger cars in the form of the Gas-Guzzler Tax.  There is no comparable policy for light trucks.  I can think of no good reason for taxing inefficient passenger cars but not light trucks.  Furthermore, half of a feebate system is less than half as effective as a full feebate system.  I urge you to consider a complete well formulated feebate system for all light-duty vehicles.  Should you decide not to implement a complete feebate system, I would urge you to abolish the gas-guzzler tax for passenger cars in favor of higher fuel economy standards for all light-duty vehicles.

 

 

 

Critics of the CAFE system have raised many objections to it over the past thirty years.  Two criticisms have been especially potent in preventing progress:  CAFE is unfair.  CAFE is unsafe.  The first is accurate.  The second is incorrect.  I have addressed the safety issues in other testimony and other publications (Greene, 2005; Greene and Keller, 2002; Greene, 2007).  Regardless of one’s viewpoint on these two issues, the reformed CAFE standard adopted by the National Highway Traffic Safety Administration (NHTSA) for light trucks nullifies both criticisms.  It adjusts each manufacturer’s standard according to the size mix of vehicles it produces.  It removes any incentive for downsizing that an unreformed CAFE system might create.  At the same time, it keeps nearly all significant fuel economy technologies in play.  It also creates the opportunity to finally eliminate the distinction between cars and light trucks in a unified set of footprint-based standards.  I congratulate the staff of NHTSA for this important innovation.

 

However, there is one loose end that needs to be tidied up.  The NHTSA should have done a careful automotive engineering analysis of the potential for a footprint based standard to have unintended consequences.  Is it likely to cause design changes that could be undesirable with respect to safety, consumer satisfaction, or roadway geometry?  I doubt it.  But prudent regulation requires that such possibilities be expertly examined.  And so, if the Senate decides to proceed with a footprint-based fuel economy standard, I urge you to require that such a study be done.

 

Let me add that feebates can take as many forms as fuel economy standards.  There is no reason, for example, why a footprint-based feebate system could not be implemented.  Instead of basing the feebate rate on gallons per mile, it would be based on gallons per footprint mile (square feet × miles).

 

 

 

An important issue that has received too little analysis is who should set the fuel economy standards?  Should it be the Congress or the Executive Branch?  If it is the executive branch, should it be the Department of Transportation, the Department of Energy or the Environmental Protection Agency?  In 1975, Congress set ambitious standards for passenger cars and left the establishment of standards for light trucks to the NHTSA.  The result was less ambitious standards for light trucks.  Yet over the past few years, NHTSA has raised the light truck standards twice by modest but meaningful amounts and has instituted important changes in the form of the standards.  Congress has not raised the passenger car standards in more than 30 years.  In my opinion, a one time increase in fuel economy standards will not be adequate to address the problems of climate change and of oil dependence. A 50% increase in fuel economy by 2020 would need to be followed by an increase of 100% over current levels by 2030.

 

I don’t claim to know who should set fuel economy standards but I do have some observations that I believe are relevant.  First, oil dependence is a problem that we “solved” temporarily and incompletely twenty years ago.  And when we “solved” the problem we seemed to lose interest in the policies necessary to keep it solved.  And so it has come back.  We will be struggling with the problem of climate change, in my opinion, for decades, much as we have done with urban air pollution.  Indeed, climate change appears to be even more difficult and has a much longer time horizon.  Twenty years from now, I think that it will still be clear that we have not solved the problem of climate change and that we must keep working at it.  In my view, this argues for locating the authority over fuel economy standards with the agency that has the greatest interest in and responsibility for addressing climate change.

 

 

 

If Congress elects not to set fuel economy targets itself, it is absolutely critical that Congress give clear and strong guidance about the importance of fuel economy standards to addressing the problems of oil dependence, greenhouse gas emissions and sustainable energy for transportation.  There are many ways that strong guidance could be given.  It could take the form of statements about the importance of the problems fuel economy standards help solve.  It could be in the form of recommended targets. 

 

Regardless of the form of its guidance, Congress should clearly express to the regulating agency how important increasing fuel economy is to solving our oil dependence problem, mitigating carbon dioxide emissions to reduce the probability of dangerous climate change, and developing sustainable energy sources for transportation.  Congress’ guidance should be clear and emphatic enough to sustain progress when some might think the oil dependence problem is solved.  It should give clear direction to regulators about the importance of mitigating greenhouse gas emissions versus continuing the horsepower race. As the 2002 NRC report pointed out, Congress has both the authority and responsibility for establishing the priority of these societal goals.

 

Thank you for this opportunity to present my views. I hope they are helpful as you pursue your important work.  I look forward to your questions.

 

 

 

Greene, D.L. 2007.  “Policies to Increase Passenger Car and Light-Truck Fuel Economy,” testimony to the U.S. Senate Committee on Energy and Natural Resources, January 30.

 

Greene, D.L.  2005.  “Improving the Nation’s Energy Security: Can Cars and Trucks be Made More Fuel Efficient?” Testimony to the U.S. House of Representatives Committee on Science, February 9, Serial No. 109-3, U.S. G.P.O., Washington, DC.

 

Greene, D.L. and S. Ahmad.  2005.  Costs of U.S. Oil Dependence: 2005 Update, ORNL/TM-2005/45, Oak Ridge National Laboratory, Oak Ridge, Tennessee.

 

Greene, D.L. and M. Keller.  2002.  “Dissent on Safety Issues: Fuel Economy and Highway Safety” in National Research Council’s Impacts and Effectiveness of Corporate Average Fuel Economy (CAFE) Standards, National Academies Press, Washington, DC.

 

Greene, D.L., P.D. Patterson, M.Singh and J. Li.  2005.  “Feebates, Rebates and Gas-Guzzler Taxes: A Study of Incentives for Increased Fuel Economy,” Energy Policy, vol. 33, no. 6, pp. 721-827.

 

(NRC) National Research Council.  2002.  Impacts and Effectiveness of Corporate Average Fuel Economy (CAFE) Standards, National Academies Press, Washington, DC.

 

(U.S. DOT/FHWA) U.S. Department of Transportation, Federal Highway Administration.  2004. Highway Statistics 2004, table VM-1, Washington, DC.

 

(U.S. EPA) U.S. Environmental Protection Agency, Office of Transportation and Air Quality.  2006.  Light-Duty Automotive Technology and Fuel Economy Trends: 1975 through 2006, EPA420-R-06-011, Ann Arbor, Michigan.

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