Midterm Evaluation of Fuel Economy Standards

Summary:

In 2012, the U.S. National Highway Traffic Safety Administration (NHTSA) and the U.S. Environmental Protection Agency (EPA) together finalized a rulemaking establishing fuel economy standards for cars and light-duty trucks for model years 2017 through 2025. The agencies estimated that the extension of the National Program would result in an average fleet-wide level of 163 grams per mile of carbon dioxide tailpipe emissions in model year 2025, equivalent to 54.5 miles per gallon if achieved only through fuel economy improvements.

The 2012 rulemaking required that the agencies conduct a Midterm Evaluation (MTE) of standards for MY 2022 through 2025 to determine whether they remain appropriate. Released in July, the Draft Technical Assessment Report is the first of three steps of the MTE process, which will be followed by a Proposed Determination in 2017 and then a Final Determination no later than April 1, 2018.

Improved light-duty fuel efficiency has been critically important in lowering the oil intensity of the economy, which in turn strengthens U.S. economic and national security by insulating businesses and consumers from oil price volatility.

Conditions in the global oil market have changed substantially since EPA and NHTSA released the final 2012 rule. Largely driven by surging American oil production, but alongside slower-than-expected demand growth and the outcome of OPEC’s November 2014 meeting—at which Saudi Arabia and its allies decided to go against historical precedent to sustain production levels and ultimately Saudi Arabia in fact flooded the market with some of its spare capacity—prices plummeted to multi-year lows by January 2015. At the time the MY 2017 through MY 2025 light-duty vehicle (LDV) standards were issued, EIA’s most recent gasoline projection was $3.85 per gallon in 2015 (average) and $4.19 per gallon in 2025 (average). In fact, gasoline averaged just $2.51 per gallon in 2015, approximately 35 percent lower. Gasoline is currently projected by EIA to average $2.97 per gallon in 2025.

The structural imbalance in the oil market is perfectly consistent with the longer-term elements of the Saudi strategy—including sharply reduced investment in developing new non-OPEC oil supplies, reduced competition to oil in transportation, and potential structural shifts in oil policy in the United States and other oil-consuming countries. In effect, these (uncertain and ever-changing) trends will reduce the market’s already limited capacity to respond flexibly as prices rise, requiring significantly higher prices to balance the market.

In the 2012 rule, EPA and NHTSA assumed that in 2025, 66 percent of LDV sales would be cars and 34 percent would be trucks, such as pickups and SUVs. Last year, however, the government was projecting that by 2025, 52 percent would be cars and 48 percent would be trucks. This sales mix translates to a fleetwide mpg-e of 50.8, equivalent to 36.0 mpg on-road fuel economy (the TAR Reference Case). Notably, even this fleet mix is far more heavily weighted towards cars than today’s sales mix. Accordingly, the National Program may fall far short of its oil savings goals if the fleet continues to skew more heavily toward trucks.

SAFE continues to support the National Program. SAFE also encourages the agencies to consider other issues as part of the MTE. These issues include extending the incentive multiplier for advanced fuel vehicles (AFVs), examining the future role of autonomous and connected vehicle technologies, exploring the emerging role of carsharing, ridesharing, and other new mobility business models on vehicle usage patterns and fuel savings, and adjusting the energy security analysis.

In its 2006 report, Recommendations to the Nation on Reducing U.S. Oil Dependence, SAFE, under the auspices of its Energy Security Leadership Council, recommended that increased fuel economy standards serve as the centerpiece of a series of policies to enhance the nation’s energy security. This culminated in the passage of the Energy Independence and Security Act of 2007, which, to a significant extent, incorporated SAFE’s recommendations. Most importantly, it required that beginning with MY 2011, fuel economy standards be increased to reach a combined average of 35 miles per gallon (mpg) by 2020.