The CAR report, the US Automotive Market and Industry in 2025, relies on technology and market forecast data from the National Research Council (NRC) and J.D. Power and Associates to project the technology segmentation necessary to achieve anticipated fuel economy mandates in 2025.

The 2010 NRC study, conducted under contract to NHTSA, provided estimated incremental retail cost and performance estimates for more than 40 technologies expected to be commercially available over the next fifteen years. CAR used this study to estimate the likely cost and price impact on new motor vehicles for three different powertrain pathways: spark-ignited; compression-ignited; and electrification.

CAR expanded the three basic pathways to a total of nine pathways, primarily by adding additional extensions for increased mass reduction in the vehicle, further variants of vehicle electrification, and the use of stop/start technology. Each of these nine pathways produced a specific fuel economy standard and cost estimate measured at retail price equivalence.

CAR did not assume any downsizing of the vehicle sales fleet or significant reduction in performance by vehicles in any segment as a means for increasing fuel economy standards by 2025.

CAR researchers used the four fuel economy scenarios developed by the EPA/NHTSA Technical Assessment Report for the upcoming CAFE regulations: 47, 51, 56 and 62 mpg. Each scenario was trended from the 2008 model year fuel economy ratings.

CAR researchers estimated the best (i.e., least-cost) technology mix for each scenario. Using these shared forecasts, each technology’s percent contribution to the fuel efficiency target and weighted cost of implementation, was calculated. The combined weighted cost of implementing each of these technologies provides an average per vehicle cost estimate for obtaining the higher mile per gallon requirement in each scenario. The results for each fuel economy scenario are:

• Scenario I: (47 mpg CAFE standard, 37.6 “real world fuel economy”); 3% Decrease in CO2: The base case assumes a continuation of the fuel economy increase from the 2010 to 2016 regulation. The 47 mpg target is equivalent to a 70.9% increase from the 2008 actual fleet mpg. The estimated cost of achieving the target is $3,744.

• Scenario II: (51 mpg CAFE standard, 40.8 “real world fuel economy”); 4% Decrease in CO2: The next scenario represents an average CO₂ reduction of 4%, or a corporate average fuel economy of 51 mpg, by the year 2025. The case includes a significant shift toward stop/start, HEV and PEV technology and a corresponding per vehicle cost increase of $5,270.

• Scenario III: (56 mpg CAFE standard, 44.8 “real world fuel economy”); 5% Decrease in CO2: At a 5% reduction in CO2 emission per year, or a fuel economy of 56 mpg by 2025, the next scenario experienced a major shift to HEV and PHEV technology. Meeting this standard would increase the average cost of a vehicle by $6,714.

• Scenario IV: (62 mpg CAFE standard, 49.6 “real world fuel economy”); 6% Decrease in CO2: The final scenario of 62 mpg by 2025 represents a yearly reduction of CO2 by 6 percent. The stretch case assumes standards at the high-end of what is currently being considered by the US government. A major shift to PHEV technology occurs as only two technologies, PHEV and BEV, are capable of achieving the targeted fuel economy. Meeting this standard would increase the average cost of a vehicle by $9,790.

CAR then forecasts the US market for light vehicles, the US production of such vehicles and employment in the US motor vehicle manufacturing industry in 2025. CAR uses a simple formula to calculate the economic value for vehicle buyers of higher fuel economy and safety mandates through 2025. The formula incudes baseline price plus the costs of fuel economy technology manufacturing, new mandated safety equipment, charging equipment, and the present value of electricity usage cost, minus the present value of fuel savings at $3.50 and $6.00/gallon US in 2009 dollars. CAR labels this construct as net price.

Effect on US vehicle sales, production and automotive employment of higher retail and net vehicle prices due to higher fuel economy and safety requirements. Miles per gallon/cost per gallon is found on the bottom row. Source: CAR. Click to enlarge.

The lowest net price change CAR found in percentage terms is -2.1% ($606 in extra value to the consumer) at a mandate level of 37.6 mpg in a market with $6.00 per gallon gasoline. The highest net price change is 27.7% ($8,026 in extra cost to the consumer) at a mandate level of 49.6 mpg in a market with $3.50 per gallon gasoline.

To estimate the effect of increases in the net price of new vehicles on new vehicle sales or revenue, CAR estimated the own price elasticity of vehicle demand using an econometric model. This allowed CAR to estimate the effects of higher mandated net prices for new vehicles on sales and vehicle prices in 2025. CAR estimated eight sales and average price levels, one for each fuel economy scenario and fuel price level.

Based on the results, CAR believes the risk connected to mandating permanent fuel economy standards in the long run is very serious. In this study, for example, CAR estimated the potential cost to the consumer of a 49.6 mpg fuel economy standard as well as likely safety technology mandates through 2025. The cost to the consumer of purchasing a motor vehicle would rise by nearly 40 percent and the net cost by 27.7 percent over five years.

As a result, US sales of vehicles would fall by 5.4 million units and US vehicle production by 3.3 million units. Motor vehicle and parts manufacturing employment would fall by 264,500, causing a total employment loss for the US economy of 1.69 million. This loss would happen by 2025 but would start to cumulate with the increase in standards in 2017.

Requirements to downsize vehicles would only increase these loss estimates, as the consumer value of vehicles would be seriously reduced. The average age of vehicles on US highways and roads would certainly rise from its record level of 10.4 years in 2010, since it is assumed that consumers will still have the option of holding on to their remarkably durable vehicles for a much longer period of time. This would reduce the effect of safety and fuel economy mandates, as the replacement rate for operating vehicles would fall to record low levels.

The motor vehicle manufacturing industry is the largest manufacturing industry in the United States. This...will be placed at serious economic risk if the industry is committed by law to the use of technologies that are too expensive or inefficient or to the production of vehicles that consumers do not want or need. That is why the potential cost of a rush by regulatory authorities to mandate permanent, long-run fuel economy standards could be very high in both economic and social terms.

The automotive industry is a high capital cost, long product cycle industry. The 2012-2025 period contains only two standard vehicle platform cycles and one powertrain product cycle at current development rates. These product cycles will cost the industry many tens of billions of dollars; major errors in forecasting technology development and efficiency or consumer acceptance could put a vast investment at risk. This risk includes the potential of a second automotive crisis threatening the very existence of the US motor vehicle industry. Technical progress of these cycles must be continually monitored. If progress does not occur, prices for consumers will rise dramatically and US sales and production of vehicles will fall.

—“The US Automotive Market and Industry in 2025”

Recommendations. Based on its findings, CAR offers a number of policy recommendations:

• CAR proposes that the EPA and NHTSA, under their current statutory authority, adopt a periodic review process of the proposed and final MY 2017-2025 fuel economy and greenhouse gas rules. The review process would permit the agencies to determine (on an ongoing basis) whether fuel economy and greenhouse gas standards should be adjusted, based on consumers’ willingness to buy vehicles that must comply with the standards, as well as any new developments in technology, costs, safety, fuels, infrastructure and other relevant factors. In addition, the review process would allow the agencies to determine what other developments or policies might be needed to achieve the standards.

• FE (fuel economy) technology progress must be reviewed on a regular basis and mandates adjusted accordingly to set realistic goals. A permanent NRC/NAS review committee should be formed to monitor real FE technology development; the committee should be comprised of representatives from leading manufacturers, engineering service firms, and government regulators with a role for environmental NGOs and academics.

• CAR says a new process is needed for the review of technologies, the consumer market and proposed fuel economy standards. CAR further believes this review process should be ongoing, even after the standards have been mandated. CAR recommends a periodic review process be completed every three years. CAR says the need is justified by the many uncertainties existing for the major technologies being considered for improving fuel economy and the equally uncertain prospects for consumer acceptance of these technologies in the light vehicle market. It is important that this review process begin immediately, prior to the NHTSA/EPA deadline of July 31, 2011. CAR proposes that workshops and meetings be organized by NHTSA/EPA without delay.

The risk of permanent, inflexible mandates can be minimized through periodic review. The need for such reviews may, indeed, pass in time as technologies develop and as the market for new products becomes better understood. The review process is available to EPA, NHTSA, and CARB and should be connected to rule-making. The global automotive industry has never been more competitive. Many new technologies will appear and be tested in auto markets all over the world. Vehicle firms operating in the US market will have every incentive to employ these technologies if they are efficient and if there is consumer support. If they don’t employ the technologies, other companies will. A flexible standards-setting process permitting automotive firms to introduce the most valuable product in an era of ever-rising energy prices is the best and surest way of improving fuel economy and reducing emissions in the long run.

—“The US Automotive Market and Industry in 2025”

Resources

• The US Automotive Market and Industry in 2025