Opinion: Who needs GHG Specs?

Climate policy specialists recommend GHG emission specs for correction of emission pathways. With U.S. EPA setting the GHG standards for vehicles, the effectiveness of these rules will be seen only in the future. However, such standards in the Indian context may still be far out.

The EPA standards for GHG require that by the 2016 model-year, manufacturers must achieve a combined average vehicle emission level of 250 grams of CO2 per mile. This would be equivalent to 35.5 miles per gallon if all reductions came from fuel economy improvements.

The new rules of NHTSA establish fuel economy standards reaching 34.1 miles per gallon (mpg) for the combined industry-wide fleet for model year 2016. These new rules kick-in from 2012 with standards at 29.7 mpg, then progressively increase until 2016.

This is consistent with President Obama’s call of May 2009, surpassing the goal of achieving CAFE of no less than 35 mpg by 2020 set in the Energy Bill of 2007. 

Interestingly, in this year’s rule the envisaged annual fuel economy increases are loaded on the later years compared to the front-loading envisaged in last year’s rule. It is apparent from the comparison that target standards for intervening years (2013 and 2014) were practically unchanged. What could be the reason for back-loading? Is it desire to rev up targets close to the magic number of 35 mpg? Or, is it pushing drastic steps farther out to give manufacturers more breathing space? Or, is it just to make them more compatible with the accompanying GHG standards?

Setting the standards

CAFE standards were one of the responses to the first oil shock. It would be hard to imagine today that new car fleet fuel economy had a trough at 12.9 mpg in 1974 in the U.S. It was all about big and bulky cars and inefficient engines. The Energy Policy and Conservation Act (EPCA) of 1975 established CAFE standards for passenger cars for Model Year 1978. This was the act which also established Strategic Petroleum Reserves besides several other measures. 

The CAFE standards called for an eventual doubling in new car fleet fuel economy. EPCA also granted NHTSA the authority to establish CAFE standards for other classes of vehicles, including light-duty trucks. NHTSA established fuel economy standards for light trucks, beginning in MY1979. 

Although putting CAFE standards in the U.S. has been widely seen as a significant policy win, they are benign compared to Europe with 45 mpg standards and even higher in Japan. 

The effectiveness of CAFE standards itself has been controversial. While the average fleet fuel economy certainly has risen very high from the abyss of 1974, arguments challenging its effectiveness are plenty. 

Were the rising oil prices during the 1970s and 1980s the cause behind the fuel economy improvements, regardless of the existence of the CAFE standards, as some argue? Were the majority of the gains in passenger car fuel economy during the 1970s and 1980s were technical achievements, rather than the consequence of consumers’ favoring smaller cars, as some others propose? It has been established that between 1976 and 1989, roughly 70% of the improvement in fuel economy was the result of weight reduction, improvements in transmissions and aerodynamics, wider use of front-wheel drive, and use of fuel-injection.

Then there was the gaping SUV loophole in the CAFE rules that technically let certain SUVs out of CAFE ambit. This loophole incentivized the manufacturers to produce SUVs and let the American economy guzzle more and more gas. This loophole was plugged in the rules announced in 2007.

Questions have also been raised on the role of CAFE standards in reducing CO2 emissions since petroleum consumption in the U.S. never got reined in. Especially its gasoline consumption kept on increasing. Gasoline consumption is a product of vehicles’ fuel economy (miles per gallon) and Vehicle Miles Travelled. Fuel economy did not improve as much as VMT rose. Another argument goes like this. When faced with additional costs consumers tend to retain older, more inefficient, vehicles longer. This may not result in desired tailpipe CO2 reduction.

To counter at least that and to deliver on President Obama’s call for having joint standards for fuel economy as well as GHG emissions, we see the EPA joining hands with NHTSA on the new rules.

Achieving the benefits

Besides cost recovery from consumers, manufacturers can also avail of additional credits for the CO2 fleet average program including Air Conditioning related credits, Flexible Fuel and Alternative Fuel Vehicle credits, Advanced Technology Vehicle Incentives for Electric Vehicles, Plug-in Hybrids, and Fuel Cell Vehicles, Off-cycle Technology Credits, and use of early credit options.

Further, evidencing that the CO2 fleet average rules are feasible, EPA did an extensive modeling exercise to project the technology (and resultant cost) required for manufacturers to meet the current 2011 MY CAFE standards and the final 2016 MY CO2 emission standards. This is done for each manufacturer and the total is calculated. It is an interesting study by itself provided in the rules, for someone inclined to dig through the 1400+ pages. 

The conclusion is that most manufacturers will be able to do what is required, in terms of deployment of technological changes, for meeting the standards. Strikingly, Tata – by way of $2.3-billion acquisition of Land Rover and Jaguar– is among those unable to meet final 2016 standards in the model simulation, besides BMW, Porsche, Daimler and Volkswagen. Tata stands out as the manufacturer needing to cover the farthest distance to meet 2016 standards. At the same time, Toyota, Honda, Hyundai, Kia, Subaru, and Suzuki, all are estimated to achieve the target comfortably.

This program is expected to achieve CO2 reduction of 960 million tons over the lifetime of vehicles regulated, which is equivalent to taking 50 million cars and light trucks off the road in 2030. 

It remains to be seen whether the new rules would really result in the expected benefits.

Is India Ready for GHG standards?

Before we answer that question, it would be better to ask is India ready for fuel economy standards.

The Petroleum Conservation Research Association (PCRA) and the Bureau of Energy Efficiency (BEE), signed a MoU appointing the former as the technical advisory for setting these standards. That was in August 2007. 

The Society of Indian Automobile Manufacturers (SIAM) announced a ‘Voluntary Labeling Programme’ in September 2008 to disclose fuel economy details of vehicles manufactured by its constituents by March 2009. 

There are as such no legal obligations on the part of Indian automobile manufacturers to notify fuel economy levels of vehicle models they manufacture. Yet Maruti Suzuki formally revealed fuel efficiency for all its vehicl, and some other manufacturers did informal disclosures. Lately, SIAM has also come out with information on fuel economy of various 4-wheelers and 2-wheelers.

So perhaps, India is ready for development of such standard for the auto industry.

However, given that in the U.S., as one author puts it succinctly, the corporate average fuel economy standard (CAFE) remains more of a goal and tracking system than a mandate with sharp teeth, what hope do we attach for such a standard for India, with its own track record of implementation of its policies.

One reassurance is that the steps India has taken so far throughout the reforms process that began in 1990 have been slow but firm, grounded to the reality of India. For instance, there was never hurry in going full throttle with financial sector reforms – be it banking, insurance or full capital account convertibility. 

The process of making fuel norms stricter was also in steps, as guided by the roadmap of Auto Fuel Policy. From April 1, 2010, 13 cities in India are required by law to use gasoline and diesel with Euro-IV norms, while rest of the country should be on Euro-III standards. It is only after five years that this step has been put in force, and all this while the certainty of new norms had not diminished. This gave refineries time to plan investment in requisite technologies for stricter grade fuel production as well as automakers to phase-in new vehicles while phasing out older models.

Lastly, factors such as affordability and Indian customers’ penchant for value for money have been prominent in keeping the basket of vehicles full of small cars, which are inherently more fuel efficient than SUVs. That trend might just be shifting with increasing disposable incomes in India. It might be the right time to give due consideration to setting the GHG standards as well.

GHG Specs!

As mentioned in the beginning, the famous ‘price versus quantity’ debate will not end with EPA’s GHG standards for the U.S. In climate change context, it pits the proponents of carbon tax against those for mechanisms such as cap-and-trade. The essential trade off is whether we increase the price of fuel – through tax – or allow for increase in price of vehicles – through pass-through of cost of meeting the standards. 

In the end, it is not just specs, as in specifications, required for carbon course correction as some specialists prefer. Also required are specs for all for correcting the vision for carbon. 

Dr Ashish Rana works in a leading private sector company. He has been a Lead Author in Working Group III of the IPCC. The views expressed here are solely those of the author and do not reflect those of his employers.

References:

http://www.epa.gov/otaq/climate/regulations.htm

http://petroleum.nic.in/autopolicy.pdf

http://fpc.state.gov/documents/organization/120606.pdf
http://www.financialexpress.com/news/maruti800tobephasedout-cosaysnoimpactonoverallsales/441865/

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