Dealers Warn Fuel Rules Will Boost Car Costs By $5000: We Break It Down

January 18, 2012

Back in November, the Environmental Protection Agency and the Department of Transportation announced new fuel-efficiency regulations affecting vehicles built through 2025. Many automakers and environmental groups have praised the guidelines, but dealers warn that they could boost the cost of new cars by as much as $5,000. We'll try to cut through the spin so you know what to expect down the road.

What are the new guidelines?

In a nutshell, the new Corporate Average Fuel Economy (CAFE) regulations say that by 2025, automakers who sell vehicles in the U.S. will need to achieve a fleet-wide average of 54.5 miles per gallon. The specific rules vary by weight and class, meaning that passenger cars will need to achieve a combined rating of 62 mpg, while trucks and SUVs will have a far lower threshold of 44 mpg.

If those numbers sound high, they should: they're meant to sound impressive to an increasingly green-minded public. But remember, CAFE stats and real-world fuel-economy stats are two different things. Tracking through the math is best left to a separate article (like this one), but at heart, the CAFE rating for a vehicle is higher than its real-world fuel-economy. So chances are good that 2025 cars will be able to achieve less than 62 mpg and still earn that rating from the EPA.

Who likes the new regulations (and why)?

Obviously, environmental groups like the new CAFE rules because they promise to reduce auto emissions. In theory, they'll also scale back America's dependence on oil and reduce the need for drilling. 

Most automakers like the regulations, too, because they differentiate between classes of vehicles. That's important in the American market, where big vehicles -- especially SUVs and pickup trucks -- remain very popular. Automakers like GM and Ford, who sell many of those larger rides, will have an easier time meeting the new CAFE regulations because the EPA won't hold every vehicle to the same standard. In 13 years, chances are good that those automakers will be able to boost fuel efficiency and meet the new thresholds without having to develop entirely new powertrain technologies.

Who loathes them (and why)?

A handful of automakers have expressed concern about the new rules. Volkswagen in particular has been vocal in its criticism of the CAFE regs because -- according to VW -- they give truck and SUV manufacturers a break. For a company like VW, which relies mostly on passenger car sales in the U.S., that makes the road ahead far more difficult. Here's part of a statement from Tony Cervone, executive vice president of communications for Volkswagen of America, that was issued back in July, when the Obama administration announced what amounted to a rough draft of the EPA guidelines:

"Volkswagen does not endorse the proposal under discussion. It places an unfairly high burden on passenger cars, while allowing special compliance flexibility for heavier light trucks. Passenger cars would be required to achieve 5% annual improvements, and light trucks 3.5% annual improvements. The largest trucks carry almost no burden for the 2017-2020 timeframe, and are granted numerous ways to mathematically meet targets in the outlying years without significant real-world gains.

"The proposal encourages manufacturers and customers to shift toward larger, less efficient vehicles, defeating the goal of reduced greenhouse gas emissions.

"Volkswagen Group clean diesel products are among the most fuel efficient vehicles on the road today. Our new mid-size Passat TDI, built here in the US in Chattanooga, TN, achieves 43 mpg highway and can travel almost 800 miles on a single tank of fuel. If one-third of the vehicles on the road today were clean diesel, the US would save 1.4 million barrels of oil a day. Yet there is no consideration in the current proposal for the positive impact clean diesels can have on fuel consumption here in the US."

Auto dealers have also announced their opposition to the new CAFE regulations. In fact, just yesterday, the National Automobile Dealers Association (NADA) issued a press release warning that the rules could add $5,000 to the cost of a new car by 2025. That's largely due to the cost of the new technology -- hybrid systems, turbocharging, and other improvements -- that companies will need to develop to make their rides more efficient.

As the cost of cars increases, obviously, those cars become harder to sell. Not only do consumers shy away from pricey rides, but for folks who finance their cars, it causes a jump in monthly payments, which can make securing a loan more difficult. For dealers, those are scary propositions.

What impact will they have on car prices?

The EPA and the Obama administration have admitted that the new CAFE rules will require new technology, which will, in turn, cause car prices to rise. By their estimation, the worst-case scenario would be a jump of around $3,200.

NADA is conducting its own evaluation of the CAFE regulations, which should be released in the next few weeks. During yesterday's testimony before a joint committee of the EPA and the National Highway Traffic Safety Administration, Don Chalmers, chairman of NADA’s Government Relations Committee, said that initial results from the study indicate that the CAFE rules would result in higher costs than the EPA estimates -- around $5,000.

We think both numbers are off. In fact, independent analysts think that both may be too high.

Back in June, Boston Consulting Group estimated the cost of a new car to jump $2,000 due to the CAFE regs. That was backed up by Phil Gott at IHS Automotive. And keep in mind, those analyses came out before the EPA announced that it would consider trucks and SUVs separately from passenger cars.

Furthermore, as we saw at the 2012 Detroit Auto Show, automakers are already switching to fuel-efficient tech. Gas-sucking V8 engines were a rarity on the show floor, and in their place we found smaller, smarter four-cylinders, like the one on the forthcoming Cadillac ATS. As these technologies become more common, they benefit from economies of scale, becoming easier and cheaper to produce. That will reduce their cost down the line.

Bottom line: Yes, Virginia, you're going to pay more for a new car in 2025. Due to inflation, that's probably not much of a shock, but the CAFE regulations could add $2,000 or so to the sticker price beyond the cost of inflation.

However, the car, truck or SUV you buy in 2025 will be more efficient, meaning that you'll save in fuel costs over the life of the vehicle. The Obama administration estimates that the CAFE rules could save owners as much as $8,000 over the life of a vehicle. Even if that estimate is extremely optimistic, $2,000 in savings to offset the increased upfront costs seems reasonable.

In other words, there's no need to panic yet. But stay tuned, just in case. 

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