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October 30, 2014 by Andrew Hill

CAFE QUENCHING US OIL THIRST

A subject that gets a lot of attention at JATO is the CO2 emission standards set out by the European Union and how OEMs are looking to hit the targets. Getting less attention is what some might consider the US version of this regulation, Corporate Average Fuel Economy (CAFE) standards. Originally brought in by Congress in 1975 in the wake of the Arab Oil Embargo, it was intended to improve the average fuel economy of cars and light trucks sold in the United States to lessen reliance on foreign imports. It is now more concerned with helping the US auto industry become more ‘green’ in the face of global climate change, and improving fuel economy for consumers in a recession hit market.

A new proposal by the federal government in 2009 lead to most of the major OEMs signing an agreement that new cars sold with a model year of 2012 to 2016 would have an average fuel economy standard of 39 miles per US gallon in 2016. A further agreement in 2011 has meant that OEMs will increase the fuel economy of new cars with a model year of 2017 to 2025 to 54.5 miles per gallon by 2025.

Rather than directly incentivising consumers to choose fuel efficient vehicles, CAFE attempts this indirectly by making it more expensive for OEMs to build inefficient vehicles through introducing penalties (over $873,000,000 of fines have been collected since 1985).

So, in the last five years has CAFE resulted in any visible trends in the US automotive market?

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The chart above shows that fuel economy in the US has indeed been improving. The next question we need to answer is what have been the contributing factors…

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Looking at the different segments, there is nothing to suggest that consumers have been making decisions to change their vehicle type based on CAFE legislation. When we consider that CAFE is not something that directly affects them – unlike the CO2 legislations in European countries that typically affect the taxes applied on a vehicle – it is unsurprising that this is the case. It will be interesting to see in the future whether OEM vehicle introductions will be influenced by CAFE, but for now there has been no clear effect on the different segments’ share of the market.

In Europe, a key way for manufacturers to increase efficiencies has been to reduce the weight of their vehicles – but the opposite is happening in the US and vehicles have actually been getting heavier (the average kerb weight of a car in 2009 was 1725kg vs. 1760kg in 2013). This is in part due to increased competition in the market over the last few years where vehicles are being sold at a higher spec and with more features to attract cash strapped consumers. This average option per version was 27.99 in 2010 vs. 41.82 in 2013, which could suggest OEMs are now offering a greater variety of options to consumers shopping in lower segments. Vehicle weight has also been affected by the increased safety equipment demanded by Federal Motor Vehicle Safety Standards (FMVSS).

So vehicle weight has not been a contributing factor to improving fuel efficiency, but rather a continuing challenge for OEMs.

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In the chart above we can see a very noticeable trend for decreasing engine size. There has been a big increase in vehicles fitted with engines from 1.0-1.9 litres, while vehicles fitted with engines greater than 3.0 litres have been on the decline. This would suggest the main way OEMs are looking to increase fuel efficiency to meet CAFE standards is to fit their vehicles with smaller, more economical engines. When we also consider that compressor use is on the rise (growing over 10% in the last five years), and that we are also seeing a growth in the number of transmission speeds and CVT being used, we can assume that enhancing powertrain technology is key for OEMs.

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If we look at fuel type trends we can see that gasoline continues to dominate the market, although E85 vehicles have seen strong growth over the last five years. It’s important to note, however, increased sales of vehicles capable of consuming E85 does not necessarily mean that this fuel is being used. While priced less than gasoline, E85 is a less efficient, and it is actually more expensive to operate a vehicle on this fuel in most cases. So why the growth of E85 vehicles? It appears as though they are being used by OEMs as a way to manipulate the CAFE standards, as they get a bonus in the CAFE calculation for dual-fuel vehicles, helping to lower their average MPG.

So, this is arguably an example of CAFE standards impacting the market.

Electric vehicle sales as a whole unsurprisingly took a hit when federal tax credits ceased to be awarded to Hybrids in 2009. However, these credits are still available to consumers for Pure Electric and Plug-in Hybrid vehicles, as well as there being different incentives in each state (e.g. purchase rebates, tax credits and access to carpool lanes). This helped to see overall sales of electric vehicles recover in 2012 and 2013. Even with this being the case the percentage on non-gasoline vehicles in the market has not grown enough to make a real impact on OEMs achieving CAFE standards.

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The overall result is that we are seeing a trend for increased fuel economy in the US, even though some of the factors we would usually associate with fuel efficiency in Europe have not been improving.

In terms of the future, this would suggest that OEMs will need to look to satisfy both the consumer demand for fully loaded cars, while utilising the latest technologies to increase the efficiency of their power trains to make sure they hit CAFE standards. This is not an easy challenge and JATO is here to support our customers in making fully informed decisions!

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