“Fueled for Thought,” By Joe O’Brien, Source North America
Earlier this year, the U.S. Environmental Protection Agency (EPA) and U.S. Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) released a proposal to freeze the country’s Corporate Average Fuel Economy (CAFE) standards. The proposal seeks to hold the fleet average to the 2020 requirements of 36.9 miles per gallon (mpg) for cars and light-duty trucks through model year (MY) 2026. Previously, the fleet average was required to gradually increase to 54.5 mpg by 2025. In addition, the proposal seeks to withdraw California’s authority to create its own set of emissions regulations that are more stringent than the federal standards. California and a group of 19 other state attorneys general have pledged to challenge the proposal through litigation.
How would this change affect the fueling market? Let’s review the key rulemaking milestones that led to this crossroads and define a few probable outcomes if the proposed CAFE standards are finalized.
Origins of the Proposed CAFE Standards
Today’s standards are promulgated by three legal authorities, each with slightly different – yet intrinsically related – responsibilities: the EPA, the NHTSA and the California Air Resources Board (CARB). The NHTSA sets fleetwide average fuel efficiency standards for each new model year. The EPA sets national tailpipe emissions standards for certain pollutants for new light-duty vehicles. CARB develops greenhouse gas emissions standards for cars sold in California and 13 other states.
The origins of the proposed CAFE standards began forming about 50 years ago. A few key milestones precipitated the most recent emissions proposal:
1966 – California established the first tailpipe emissions standards in the United States.
1967 – The Federal Air Quality Act is enacted, giving California the ability to set more stringent air quality rules due to the state’s unique geography, weather, population and vehicles, which contribute to the state’s notorious smog problems.
1970 – The Clean Air Act (CAA) is signed. It authorized the establishment of national vehicle emissions standards and provided California the unique authority to establish emissions standards that are more stringent than federal standards.
1975 – In response to the 1973 oil crisis, Congress established the first CAFE standards for cars and light trucks within the Energy Policy and Conservation Act. The new standards sought to increase automakers’ average fleet fuel economy for passenger cars to 27.5 mpg by 1985. (As a matter of perspective, the average fuel economy for a passenger car was less than 15 mpg in 1973).
1977 – Congress amended the Clean Air Act (CAA) to allow states to adopt California’s emissions standards. (Currently, 13 states and the District of Columbia follow California’s emissions standards.)
2004 – California developed its own greenhouse gas emissions standards for light-duty vehicles.
2007 – The Energy Independence and Security Act sought to raise the combined fuel economy average of cars, light trucks and SUVS to 35 mpg by 2020 and “to the maximum feasible average fuel economy standard for each fleet for that model year” through 2030.
2009 – The federal government, state regulators and auto industry cooperatively established a “National Program” that allowed automakers to build a single national fleet of new vehicles that meet both the federal and state requirements under the CAA and CAFE program.
2012 – The California Air Resources Board adopted its “Advanced Clean Cars” package, which includes Low Emission Vehicle (LEV) and Zero Emission Vehicle (ZEV) regulations. The LEV regulations updated the state’s 2004 standards to ensure new cars and light trucks produce fewer emissions that contribute to climate change and smog. ZEV requires major manufacturers of passenger vehicles and light trucks to sell an increasing percentage of ZEVs in a given year.
Potential Market Impact
California, 18 other states and Washington D.C. announced they would file a lawsuit to oppose the emissions change if the proposed rules are adopted. If the relaxed CAFE standards are adopted and California’s authority is retracted, the fueling market will be impacted. Three likely scenarios are:
- The U.S. experiences higher fuel consumption than previously projected.
Presuming fuel economy standards in 2025 are not as strict as the 2007 requirements, there isn’t an unprecedented surge in electric vehicle sales and Vehicle Miles Traveled (VMT) remains steady (or increases), we can expect increased fuel sales. According to one report, the relaxed fuel economy standards could yield an additional 500,000 barrels of U.S. oil demand per day by the early 2030s. This represents about 2 to 3 percent of projected consumption. Increased fuel consumption would also yield additional gas tax revenue that could help states fund new infrastructure projects.
- Conflicting global and U.S. demands hinder auto manufacturers.
It’s uncertain times for U.S. automakers, who are coming to terms with an increasingly competitive global market. Spurred by international policies, advanced emission-reducing technologies are selling strong in foreign countries. This sales trend is happening amid a deluge of innovative technologies like autonomous and connectivity capabilities. If the proposed fuel economy standards for the U.S. are finalized, auto manufacturers may be unclear about how to prioritize their production goals.
- The U.S. auto market becomes more homogenous.
The current proposal strips California of its special authority to establish its own more stringent greenhouse gas emissions standards and rescinds an order that automakers reach a specific sales goal for electric vehicles (EVs) there. If the proposed rule is finalized, 13 additional states and the District of Columbia that have adopted California’s standards also would be required to relinquish California’s more stringent fuel economy standards in favor of the federal standard. By conforming to the less stringent mandates, automakers would not be obligated to sell as many EVs, prices for EVs may increase and demand for charging technologies could diminish.
However, if the federal standard remains frozen at 36.9 mpg, and California (and the states that follow California’s standards) are permitted to maintain their more aggressive emissions controls, two incongruent markets for auto and fuel may emerge. In the eastern U.S., Maine, Vermont, New York, Massachusetts, Connecticut, Rhode Island, Pennsylvania, New Jersey, Delaware, Maryland and the District of Columbia currently follow California’s emissions standards. In the western U.S., Oregon and Washington join California in its more rigorous greenhouse gas regulations – as does New Mexico in the Southwest. Combined, these states account for almost 40 percent of new vehicles sold. It’s important to note that nine of the states following California’s emissions standards also have adopted California’s ZEV program. Fuel sites in areas bordering both markets would be uniquely positioned to benefit from the increased demand of both traditional and alternative fuels.
The EPA estimates that freezing the fuel economy standards could reduce vehicle costs by $2,340 per automobile by 2026 (theoretically, automotive manufacturers who are not beholden to invest in new emissions technologies would pass on the savings to consumers). While others argue cost-conscious consumers looking to curb fuel expenses will continue to demand advanced fuel economy technologies, regardless of what standard the regulatory agencies settle on.
The EPA and the NHTSA indicated they will reach a final decision about the emissions standards this winter. Fuel marketers, fleet operators and general consumers should keep a close eye on what subsequent adjustments automakers make to their future fleet offerings and vehicle purchasing decisions. Their response will be an indicator of what fuels will be dominating demand.
Joe O’Brien is Vice President of Marketing at Source™ North America Corporation. He has more than 20 years experience in the petroleum equipment fuel industry. Contact him at firstname.lastname@example.org or visit sourcena.com to learn more.