President Obama’s plan for tighter limits on vehicle emissions promises to be a boon for the environment and for the cause of US energy independence, but it comes at a cost for struggling automakers and consumers.
It could add $600 or more to the price of a new car at a time when recession-bound shoppers are already reluctant to buy.
It demands new investments from automotive manufacturers that are in or near bankruptcy.
The White House vigorously defends the plan’s virtues, but some auto industry analysts say the plan’s timing and economics are challenging. What Mr. Obama proposes is a historic boost in environmental standards – including the first-ever direct curbs on greenhouse-gas emissions for US cars – during a historically deep recession.
“It’s going to be very expensive for consumers and manufacturers,” says Rebecca Lindland, who tracks the industry for the consulting firm IHS Global Insight in Lexington, Mass. Although surveys show public support for curbing auto emissions, “consumers haven’t shown a willingness to pay for it,” she says.
Obama's own task force cautious
This doesn’t mean the effort can’t work. It just has a hard hill to climb on alternative fuel.
Where Obama has called on the US industry to take the lead in developing a new generation of clean cars, the task force threw cold water on one of GM’s biggest efforts to move in that direction. In assessing the viability of GM’s restructuring plan this spring, the panel said that although the electric-powered Chevrolet Volt “holds promise, it will likely be too expensive to be commercially successful in the short term.”
Why resistance is weaker
Several political forces have combined to build momentum for tighter control of emissions. These include Democratic control of the White House and Congress, the current dependence of GM and Chrysler on federal aid, and growing public support for action to combat the threat of climate change caused by greenhouse gases.
Those factors help explain why, despite the challenges involved, carmakers have lined up to support Obama’s new plan. The auto companies want to be willing participants in what they see as an inevitable transformation for the industry, and they see gains from having a single, clear standard for emissions.
Obama’s plan includes several elements:
•Each company would have to achieve the fleetwide Corporate Average Fuel Economy (CAFE) standard of 35.5 miles per gallon by 2016. That’s 0.5 m.p.g. higher and four years faster than the federal emissions rules currently call for.
•In addition to cutting ground-level pollutants, the goal for the first time is an explicit reduction in the carbon emissions linked to the threat of global warming.
•The system would cover the whole nation, offering manufacturers the benefit of a single standard. The state of California, which has long set up alternative standards that other states can choose to follow, is agreeing to stick with this new federal rule at least through 2016. California would save money by avoiding the need for its own compliance program for the similar greenhouse-gas limits it has been seeking to impose.
•The changes would take effect through a federal rulemaking process, which could be made easier by the up-front support of key stakeholders such as major carmakers, environmental groups, and California. The Environmental Protection Agency and the Department of Transportation, in an unusual move, collaborated to frame the plan.
Automakers prefer a nationwide standard
Although the auto industry has opposed the tighter standards at the state level, key players are backing the Obama plan.
“Energy security and climate change are national priorities that require federal leadership, and the president's direction makes sense for the country and the industry,” GM chief executive Fritz Henderson said in a statement released Monday. “GM and the auto industry benefit by having more consistency and certainty to guide our product plans.”
Automakers also applauded the administration’s plan for setting targets for emissions by individual classes of vehicles, as well as the overall fleet goals. That step will help ensure that consumers can continue to choose among vehicles with a range of sizes and traits.
But how many will they buy, and when?
Vehicle sales volume has fallen by about 40 percent over the past year, with drivers opting to postpone purchases or buy used cars instead. Although virtually all carmakers have taken a big hit, foreign brands have gained market share relative to the Detroit Three.
Shoppers fickle about fuel economy
The big rise in gasoline prices early last year buoyed demand for fuel-efficient cars. But that trend didn’t persist when gas prices later fell. Analysts say that’s a sign that car shoppers care about much more than environmental performance, and that their concern with fuel economy depends on fuel prices.
In a briefing before the president’s Tuesday announcement, a senior administration official said the added cost per vehicle would be about $600 per car in 2016, on top of the estimated $700-per-car cost of the CAFE standard that carmakers were already trying to hit by that year.
Consumers would recoup much of the added cost through savings on fuel over time, the official said. Cars by 2016 would get 39 miles per gallon on average, up from about 27.5 under current standards. Light trucks would rise from about 23 to 30 m.p.g. over that time.
Obama is providing some economic cushion for carmakers by planning for the new rules to phase in at a slower pace than California had outlined, while ending up at the same target that the state has set.
That gives carmakers time to adjust their product plans. And it provides a window for economic recovery to begin before consumers feel the worst of the sticker shock.
It will be a lot easier for GM and its peers to survive, as well as fund the development of new cars, if total vehicle sales rebound strongly. Lately sales have been running at an annual pace of about 10 million units, whereas sales had gone above 16 million before the recession.
Many economists say that having the right incentives in place, not just rules, could be vital to making the program work.
Those could include carrots such as tax incentives for clean-vehicle purchases, or sticks such as higher gas taxes that set a floor for the price of carbon-based fuel.
Obama’s economic stimulus package, passed in February, includes tax breaks worth up to $7,500 for the purchase of plug-in hybrid cars – which still are not widely available in the marketplace. A smaller incentive in the stimulus measure allows taxpayers to deduct sales taxes on new cars purchased this year.
Congress is also considering a “cash for clunkers” program designed to encourage trade-ins of old gas-guzzling vehicles.
At the root of the emissions plan is Obama’s view that recovering from recession and meeting long-term national goals are complementary, not contradictory, goals.
“I don’t accept the conventional wisdom that suggests that the American people are unable or unwilling to participate in a national effort to transform the way we use energy,” he said in a recent speech.
Obama and the carmakers are now banking together on the idea that preserving US factory jobs will be best achieved through an aggressive transition toward a clean-car future.
Even before this week’s announcement, GM had fashioned a restructuring plan in sync with Obama’s vision. The company intends to have 26 hybrid models by 2014, up from eight at the beginning of this year.
US taxpayers stand to gain or lose depending on how the transition goes. New federal aid could make the government a majority owner of GM in the weeks ahead. Chrysler, also getting federal support, recently entered bankruptcy. The other Detroit-based carmaker, Ford, has been surviving without government assistance despite steep losses.