How Will New CAFE Standards Affect Fleets?

Have you heard about the new CAFE standards we're going to have to meet by 2016? Like me, did you do a double take when heard that trucks are going to average 30 mpg (and cars 39 mpg)? 

The mind conjures up the "little engine that could" and a four banger rattle trap pickup hauling feathers up a hill moaning "I think I can, I think I can."

Add to that the added cost pegged at more than $1,300 per vehicle. For fleets, this is a nightmare scenario. But the reality will be far different. Here's how:

First, if you're staring at the 14/20 mpg on the window sticker of a new Silverado and you're wondering how GM will bring average truck fuel economy to 30 mpg in a few model years, don't worry too hard. It's the wrong comparison.

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, and this is an important distinction for fleets, vehicles with more than 8,500 lbs. GVW are exempt from the changes. CAFE standards exclude ¾- and one-ton pickups, and some cargo vans. The Dept. of Transportation is authorized to set the standards for that category (Class 2b light trucks, 8,500 lbs. - 10,000 lbs. GVWR), though they are not part of the average 35.5 mpg combined target rule.

Third, the CAFE program is sales weighted. In other words, a manufacturer can't put out 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?

To no one's surprise, manufacturers' design priorities will change moving forward. After the '70s oil shock cars got smaller. But since then we've been on an incremental horsepower surge and cars have gotten bigger, while technology has kept fuel economy about the same.

"That situation will flip," says John DeCicco, a consultant specializing in automotive and environmental strategies. DeCicco has been doing automotive technology policy work for 20 years and 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 improvement is not a $1,300 an additional mark up 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. This downsize trend started before CAFE changes, and even before the sky high fuel prices of 2008.

CAFE changes or not, the halcyon days of the big SUV are gone forever. "You can buy a Tahoe if you want one, but those volumes will never return to those levels," he says. "People are in a more austere frame of mind."

But will we see an increase in diesel and hybrid engine 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.

So is this pie-in-the-sky optimism? Add a comment.

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

Originally posted on Business Fleet