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How Will New CAFE Standards Affect Fleets?

January 2010, by - Also by this author

At a Chevy dealership recently, I found myself staring at a new Silverado window sticker with 14/20 mpg. I wondered how we'll be able to increase corporate average fuel economy (CAFE) in new vehicles by 40 percent to a combined 35.5 miles per gallon by 2016. (Cars will need to average 42 mpg, trucks 26 mpg.)

The mind conjures up a rattle trap pickup hauling feathers up a hill moaning "I think I can, I think I can," like The Little Engine That Could. And that tin machine is supposed to cost $1,300 more. For fleets, these new CAFE standards present an unwelcome scenario.

However, meeting that target will be less onerous for a few reasons. 

First, EPA window sticker fuel economy numbers were recalculated in 2008 using a new method that reflects modern driving conditions. The new numbers are on average about 21 percent lower than today's EPA numbers. However, by law CAFE standards are, and will continue to be, calculated based on the old formula. Therefore, the incremental improvement needed to achieve the new numbers is not as big a leap as it seems.

Second, an important distinction for fleets, vehicles with more than 8,500 lbs. GVW are exempt. CAFE standards exclude ¾- and one-ton pickups, and some cargo vans.

Third, the CAFE program is sales weighted, meaning a manufacturer can't offer one low-volume, fuel-efficient model to satisfy the standard. This will factor into the economics of model offerings described below.

So what will change?

Manufacturers are no longer using technology to chase horsepower while keeping fuel economy numbers static.

"That situation will flip," says John DeCicco, an automotive technology policy consultant who has been a senior fellow for automotive strategies with the Environmental Defense Fund. "Fuel economy numbers will increase on each redesign while average horsepower numbers will not go up, or not nearly as much as they have in the past."

Six-cylinder engines with turbo charging and direct injection, combined with aerodynamics tweaks and lighter parts, will boost fuel economy and do the same work as an eight-cylinder engine. However, eight-cylinder pickups and vans will still be around for those who need them.

"Horsepower will be available, but at a price," DeCicco says.

This is where the sales-weighted nature of the regulations comes in. Manufacturers would use a pricing strategy to steer sales toward more fuel-efficient vehicles. Buyers that want or need more power will pay more, while buyers of the most fuel-efficient vehicles will get a discount.

The added $1,300 cost for this fuel economy boost is not a $1,300 additional markup on every window sticker. Cost and price are not the same, DeCicco points out.

Costs will be mitigated to varying degrees by:

  • the OEMs themselves in a competitive sales environment
  • parts manufacturers under the same competitive pressures
  • slightly smaller OEM fleet mix of vehicles, which cost slightly less to produce
  • the offset of buyers that will pay for more horsepower and luxury

DeCicco believes that consumers will be able to buy the new high-tech six-cylinder engines for not that much more than a regular six-cylinder engine. "There is a very good chance that consumers will essentially get the fuel economy boost for free."

Will our vehicles shrink in size? DeCicco maintains that the overall mix will skew to smaller vehicles, though the changes will be subtle.

Will we see an increase in diesel and hybrid penetration? "The upshot is ambiguous," DeCicco says. Both come at a higher cost relative to other ways of getting efficient, mostly through advanced gasoline-powered engines, aerodynamics and weight reduction.

The upshot: From a fleet perspective, buyers can expect to get vehicles of modestly improved fuel economy without paying much higher prices. Where the price premium will come in is with power and performance, if you want that, and with more advanced technologies like hybrids and diesels.

In terms of whether increasing CAFE standards or the gas tax is a better way to reduce energy consumption, that's an editorial for another day.

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