Have Some Cap & Trade With Your CAFE?

May 26, 2009

In case you didn't know, the new American Clean Energy and Security Act of 2009 — our country's new fuel economy and emissions legislation — includes a huge new tax in the form of carbon Cap and Trade.

Some might consider the new American Clean Energy and Security Act of 2009 to be a great idea. I don't. Thinking people can disagree. However, for those who support the new legislation, I appeal to your right brain to consider the inclusion of Cap and Trade Carbon Taxes that are foundational to this new CAFE legislation.

Cap and Trade carbon taxes will give the government huge control over every economic sector by adding an "energy tax" to (conceivably) every product produced in the U.S. The Congressional Budget Office estimates that this tax will add a staggering $600 billion in annual federal tax revenues. This money will be used (in part) to increase spending on the creation of infrastructure for the development and deployment of grid-connected electric vehicles.

Oh sure they'll only spend the new tax revenue on that.

Anybody check to see what has happened to the Social Security Trust Fund?

If you believe in the trustworthiness of those in Washington, D.C., I've got an all-new 100-mpg fish carburetor design ready to be patented, and I'd be happy to cut you in on part of the action for a small investment.... Just doing some quick math reveals that a full implementation of Cap and Trade will cost over $1,600 per year for every citizen (children included) in the U.S. Thankfully, the cost may be a bit lower because illegal aliens will also be subject to the higher product costs.

The new taxes will make all products and many services more expensive, and will dramatically affect the transportation sector. Get ready to pay more to drive, and get ready to see Washington, D.C. go crazy as they decide what to do with all new money that will be coming out of your pockets. It is pure foolishness to believe that these new taxes will only be spent on transportation infrastructure projects.

If you'd like to read a unbiased, relatively complete assessment of the new American Clean Energy and Security Act of 2009, I've attached a three-page file here from a leading automotive research firm, CMS. You may not lean toward being a libertarian as I do, but unless you want to turn over control of our economy (and therefore our society and freedom) to the government, this should give you pause.

There is still time to influence your legislators about cap and trade, and I encourage you to do so. It will impact your life with cars, and your life in general, for the foreseeable future. That makes it worth a phone call or e-mail.

Because in my heart I yearn to be a libertarian, big government is an anathema to me. This said, I do understand and support the government's role in keeping the peace, keeping us safe, providing for commerce, etc. The basics. Cap and Trade taxes give the government way, way more economic control than they've ever had. I don't see this going well, as I explained here.

If I end up being wrong, then somebody put it in their planner to ping me in seven years to tell me, "You were wrong." Frankly, I hope somebody can send me that note, and it will come from a better, cleaner, more vibrant, economically stable time.

Obama Administration Announces New Fuel Economy Legislation

  • The proposed new national auto program standards will cover model years (MYs) 2012-2016 and will require an average fuel fleet economy standard of 35.5mpg in 2016 compared to the Corporate Average Fuel Economy (CAFE) program established by the Energy Independence and Security Act (EISA) 2007 legislation, which specified a minimum 35mpg in 2020.
  • The US Environmental Protection Agency (EPA) and the Department of Transportation (DOT) are jointly developing the proposed rulemaking that would apply to passenger cars, light-duty trucks and medium-duty passenger vehicles. These vehicle categories currently contribute approximately 60% of US transportation-related greenhouse gas (GHG) emissions.

US President Barack Obama has announced a new harmonized national policy intended to reduce fuel consumption and GHG emissions for all new cars and trucks sold in the United States. The proposed new national auto program standards will cover MYs 2012-2016 and will require an average fuel fleet economy standard of 35.5 miles per gallon (mpg) in 2016 (39mpg for cars, 30mpg for trucks), or approximately 250 grams CO2/mile (155.4 grams CO2/ km). This represents an accelerated goal attainment timeline of four years compared to the CAFE program established by the EISA 2007 legislation, which specified a minimum 35mpg in 2020.

The result is a projected reduction in oil consumption of approximately 1.8 billion barrels over the life of the program (equivalent to the amount of oil the US imports annually from Saudi Arabia, Venezuela, Libya and Nigeria combined), and a projected total reduction in GHG emissions of approximately 900 million metric tons.

National Auto Plan
The US EPA and the DOT are jointly developing the proposed rulemaking that would apply to passenger cars, light-duty trucks and medium-duty passenger vehicles. These vehicle categories currently contribute approximately 60% of US transportation-related GHG emissions.

The US EPA is proposing GHG emissions standards under authority of the Clean Air Act (CAA) of 1990 section 209 (b). Simultaneously, the DOT's National Highway Traffi c Safety Administration (NHTSA) is proposing CAFE standards under the Energy Policy and Conversion Act (EPCA), as amended by EISA. Both agencies issued a Notice of Upcoming Joint Rulemaking, which adopts uniform federal standards to regulate both fuel economy (CAFE) and GHG emissions while preserving the legal authorities of DOT, EPA and the state of California.

When adopted, these standards would represent a harmonization of national policy in accordance with the separate statutory frameworks under which the US EPA and DOT operate and would subsequently address the current administration's commitment to reconsider the denial of the California waiver by the Bush administration.

The Respective Plans in Detail
EPA and NHTSA will propose two separate sets of standards, each under their respective statutory authorities. The goal will be to establish compatible standards beginning in 2012 and achieve harmonization of standards in MY 2016.
EPA Proposal

  • Will propose a national CO2 vehicle emissions standard that would achieve on average 250 grams/mile (155.4 grams CO2/ km) of CO2 in MY 2016. The standards for earlier years would begin with the 2012 MY, with a generally linear phase-in from MY 2012 through to MY 2016.

 NHTSA Proposal

  • Expects to propose CAFE standards that would include a harmonized CAFE standard for MY 2016. Compatible CAFE standards for earlier MYs would increase from the MY 2011 CAFE standard to the MY 2016 level of the national program.

 Key Similarities

  • Both proposals intend to utilize attribute-based standards for passenger cars and light trucks. The agencies currently intend to propose the vehicle footprint as the attribute for GHG and CAFE standards, with footprint defined as a vehicle's wheelbase multiplied by its track width.
  • Each vehicle manufacturer would have a GHG and CAFE standard unique to its US vehicle sales fleet with a separate standard for passenger cars and light trucks depending on the footprint of the vehicle. Manufacturers of smaller vehicles would face more stringent standards (higher mpg requirements).
  • EPA and NHTSA will propose new and separate footprint-based standards for passenger cars and light trucks that will be different from footprint standards (curves) provided in the CAFE rule for 2011 and 2012. Expected changes to the shape of the curve will address concerns about the steepness of the slope and allow a fl attening of the passenger car curve, more in line with the shape of the truck curve.

Key Differences

  • Under the GHG standard, the EPA will allow vehicle manufacturers to generate credits by reducing emissions of hydrofluorocarbons (HFCs) and CO2 through upgrades to vehicle air conditioner systems and would take into consideration the averaging, banking and trading of credits. However, these strategies are disallowed for CAFE calculations under EPCA.
  • As a result, the agencies do not anticipate a one-to-one correspondence between EPA's GHG standards and NHTSA's CAFE standards. CAFE will be slightly lower than the mpg equivalent of the GHG standard.

Additional Compliance Options

  • Generating credits would be allowable for manufacturers that achieve a fl eet average CO2/CAFE level better than the standard and conversely generating debits for achieving below the CO2/CAFE standard.
  • Flexible-fuel and alternative fuel credits would be allowed for under CAFE calculations for dual-fueled or flexible-fuel vehicles (FFV) and dedicated alternative fuel vehicles. EPA intends to allow FFV CO2 credits in line with EISA limits only during the period from MYs 2012 to 2015 and may consider an extension of the program if manufacturers are able to demonstrate real world usage of alternative fuel by consumers.
  • Additional compliance options (credits) are being considered by the EPA.

1. 1.    Vehicle manufacturers selling less than 400,000 vehicles would be allowed to meet a 125% standard.
2. 2.     There are potential credit opportunities for over-compliance in 2009 to 2011 and there would be consideration of credit opportunities for electric vehicles and plug-in hybrid electric vehicles to generate "super credits" in the form of a compliance formula multiplier.
3. 3.    There is also an option for generation of credits for employing vehicle-based technologies such as solar panels on hybrids, adaptive cruise control, air conditioning systems and active aerodynamics.

Unification Strategy (Legislation, Technology, Energy, Manufacturing Profitability)
The proposed national auto program adopts uniform federal standards to regulate both fuel economy and GHG emissions while preserving the legal authorities of the DOT, EPA and California. The program addresses many hotly debated issues surrounding the denial of the California request to regulate CO2 emissions (referred to as the California Waiver Request) by the former Bush administration. The national auto policy will achieve national CO2 reductions greater than those achievable in aggregate by the state of California and 13 other states proposing to adopt the California ruling. The policy will meet those reduction goals on a more aggressive timetable than originally proposed by the state of California.
Ten car companies (Ford, Toyota, General Motors, Honda, Chrysler, BMW, Nissan, Mercedes-Benz, Mazda and Volkswagen) have embraced the national program because it provides more certainty and predictability to 2016 and includes flexibility that will significantly reduce the cost of compliance. Additionally, the proposed GHG legislation is quite similar to the framework recently established for manufacturers in Europe and provides a rational and comprehensible framework that also recognizes GHG reduction contributions, which can be derived from improvements in vehicle-based technology rather than simply relying on propulsion unit effi ciency. The manufactured cost of vehicles is obviously expected to be higher due to the technology response to legislation, but the general consensus among manufacturers is that this now also allows for the attainment of pricing power in certain vehicle segments. Traditionally, manufacturers have not been able to build smaller, more fuel-efficient vehicles at a profi t. With political and consumer sentiment now favoring effi ciency, the dynamic is changing.
A critical strategic component necessary for achievement of the 2016 standards and a healthy and profitable manufacturing sector is affecting a change in consumer preference. To date, vehicle manufacturers' product plans have typically experienced dramatic shifts in response to energy price. When the US per gallon fuel price exceeds 3.5% of disposable income ($3.50 to $4.00 per gallon), consumers choose to purchase smaller or more fuel-efficient vehicles in significantly greater numbers. As the fuel price declines nearer to the present-day 2% of disposable income level ($1.75 per gallon), the consumer response is to choose to purchase larger, less fuel-efficient vehicles. This dynamic is significantly disruptive to product planning, manufacturing and especially profitability as manufacturers struggle to "flex" billions of US dollars worth of fixed manufacturing assets from profi table to unprofitable sales mixes. The goal is to add certainty to this dynamic by achieving a sustained higher energy price that will cause consumers to consistently purchase fuel-effi cient vehicles and encourage the sustained profitable production of smaller vehicles. This higher energy price will be achieved through a new carbon cap and trade scheme currently being debated in the US House of Representatives.

Transition to Carbon Cap and Trade
First and foremost, carbon cap and trade is a mechanism to cap carbon emissions (CO2) across all economic sectors. The automotive sector has been historically targeted for reductions since it was the only sector that had an established reduction framework (CAFE). The framework currently under debate would also target CO2 reductions for sectors such as electrical power generation, chemical manufacturing and other transportation sectors such as aviation and shipping.

Secondly, carbon cap and trade will target consumer response by increasing attainment cost for energy. The American Clean Energy and Security Act of 2009 (ACES) also known as H. R. 2454 or the Waxman and Markey bill, seeks to establish the cap and trade framework as part of a broader clean energy, energy efficiency and reduction of global warming strategy. It is generally accepted that the compliance costs for these measures could increase public electrical utility rates by up to 40% (+2.5 cents per kW/hr) in some US states and increase the consumer cost of gasoline to much nearer the $4.00 per gallon threshold where consumers would begin to reduce their energy use and increasingly purchase fueleffi cient vehicles.

A study by the Congressional Budget Office (CBO) estimates that a fully implemented carbon cap and trade system could generate an additional $600 US billion in annual federal tax revenues. On this premise, the American Clean Energy and Security Act of 2009 also seeks to dramatically increase spending on the creation of infrastructure for deployment of grid-connected vehicles. This translates to funds available for the purchase of electric vehicles and the establishment of charging stations or battery exchange facilities.

Opportunities for Automotive Suppliers
New standards are expected to conservatively raise vehicle prices by at least US $1,300 per car by 2016, according to an analysis by the Obama administration. With future fuel at prices expected to be significantly higher than today's US $2.00/gallon due to the implementation of the US carbon cap and trade and expected increased global energy demand, the technology payback period will be signifi cantly shortened.

A combination of friction reduction, a trend toward utilization of gasoline direct injection (DI-Gas) and turbocharging are key enabling powertrain technologies that OEMs are adopting to improve fuel economy and attain CO2 reduction of their existing fleets. Six-, seven- and even eight-speed transmissions will become increasingly commonplace. Additionally, the importance of attaining credits for fl ex-fuel capability, or "super credits" for signifi cantly electrified vehicles, will be vital.

As the vehicles approach their major cycle changes, new smaller/lightweight platforms will arrive, and the importance of efficiency gains via improved air conditioning systems, the addition of vehicle-based solar panels, adaptive cruise control, grade logic devices and active aerodynamics, among other "Eco Innovations," will be critical.

Bottom line, the new rules will not require a dramatic sales mix shift from light trucks toward passenger cars, nor will they call for the invention of new or unproven technologies. Compliance will be achieved with known vehicle and propulsion technologies, spread across a greater number of vehicles in the portfolio but significantly sooner than originally planned by vehicle manufacturers. In fact, the opportunity to gain pricing power (profit) may be especially acute in the light truck segment as demand increases and the number of competitive offerings declines.

Credit should be given to the current administration for creation of such a comprehensive plan, which includes the nation's first compressive de facto "automotive sector plan." Costs to the consumer will not be insignificant. Vehicles will inevitably become somewhat smaller and more expensive. Energy in all forms will be more expensive, which will translate into higher costs of all products, but hopefully this can be offset somewhat by savings from energy conservation, which would help achieve national energy and security objectives.

Ultimately, profitability and sustainability of the automotive sector's business plan should be the most important goal. Subsequent goals would focus on establishing sustained consumer preference for efficiency. This would enable manufacturers to establish pricing power for technology and attain not only profitability on smaller vehicles, but ultimately sustainable mobility.



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