Fuel Standards Expert Dan Sperling: Why CAFE Is a Good Thing for Fleet Owners

Just a few months ago, the Obama administration announced a whopping increase in the federal fuel-efficiency standards, a program known as CAFE, which will require vehicle manufacturers to achieve a fleet-wide fuel efficiency of 54.5 miles to the gallon by 2017. What will these changes mean for the field service industry, the vehicles they drive and the costs fleet operators face? To find out we called Dan Sperling, author, Director of the Institute of Transportation Studies at the University of California in Davis, and member of the California Air Resources Board, to find out.

How big a deal are these new standards?

It’s the biggest thing that the Obama administration has done for climate or energy. It’s going to have the biggest impact and be the most important, and it was also surprising how aggressive these standards turned out to be.

What sort of impact will they have?

The standards don’t until take effect until 2017. There’s a different set of standards already in place through 2016, so the biggest effect in the near term will be to signal to the industry that fuel efficiency is a top priority. That means they have to start investing now in the R&D and the technology development to be ready for those standards.

What sort of pushback has the Air Resource Board heard from the field service industry — are fleet operators in general opposed to these changes?

It’s pretty mixed, because many of them are very excited because it means the vehicles will be more fuel-efficient. I haven’t analyzed carefully who exactly in that world is saying what, but for them basically, if they have vehicles that are used a lot — in other words if they accumulate a lot of mileage — then they should be very excited by this because they’re going to save a lot of money. If they have vehicles, on the other hand, that they only drive five or ten miles a day, that are just used minimally, then they’ll probably be upset because they’ll probably be paying more for the vehicle but not saving the money from the reduced fuel consumption.

Do you think concerns about increased prices for vehicles are legitimate?

The whole idea here is that you’re spending more money to make it more efficient, but then you’re getting much more back in terms of reduced energy costs, so the benefits to almost all consumers will be very large and the benefits to society will be huge.

The estimate is that for the average light-duty vehicle in 2025, the average car will cost $2,000 more, but that you’ll save about $6,000 in fuel. It’s a big money saver, so it’s great for consumers and it’s great for society. It’s great for everyone, really. That’s why the car companies agreed to this. There were some tough negotiations that went on, and Obama’s chief negotiator, this guy Ron Bloom, gets a lot of credit for negotiating with the car companies where almost all of them agreed to the standards. That was remarkable. That’s a story in itself — how these car companies, who just a few years ago were complaining about any increased fuel-economy standards, turned around and embraced essentially a doubling of the standards.

Why do you think the car companies changed their minds — was it primarily politics or technology that changed?

I think it’s both. All of them started realizing that there was a lot of technology available that was at hand or almost at hand, and that it really was technically and economically feasible to dramatically improve the fuel economy of the vehicles.

You know “Government Motors” was still in the position of having to be somewhat responsive to the Obama administration, but all but two — Volkswagon and Daimler — agreed to it.

How difficult is it going to be to meet these standards?

I think it’s very manageable. The only hesitation I have in saying that is that the way people make decisions about cars is based upon getting very near-term benefits. We know that when people buy cars they want a return, so if they pay extra like for fuel efficiency, they want a return within two or three years. And in a lot of cases that’s not going to happen here. Now in some ways that’s irrational thinking. It’s kind of like Daniel Kahneman’s new book, Thinking Fast and Slow. Consumers don’t make decisions that are rational in many cases, and this is one of the examples of it, because if you keep the car for four or five years you break even, and then of course you start making money. But people don’t make decisions that way, and so you need these regulations to basically force people to do what’s good for themselves.

What’s going to happen with the standards is, as the standards get more aggressive the cost of the vehicle is going to go up, and people are going to balk at paying that higher cost because [the time it’ll take to make up for the higher cost of the car will go up to] four or five years instead of two or three years. That’s going to create an awkward situation. So I’m personally in favor of adopting a policy called “feebates.” This is something that a few European countries have already done. The French call it bonus-malus, and it’s the idea that if you buy a gas-guzzler, then you pay a fee. If you buy a very efficient vehicle, you get a rebate, and so you make it revenue-neutral, but it creates a market signal to support those more fuel-efficient vehicles. And so I believe that eventually we need that “feebate” idea to be superimposed on these aggressive standards. If we do that, I think it’ll be relatively easy to meet the standards.

What are the prospects for a “feebate” system here? Does it have strong support?

It’s not quite mainstream yet, at least in the U.S. It’s a little more in Europe in some countries, but I think that as it becomes obvious to these companies that there is this tension between what they’re trying to sell and what people are willing to pay for that they’ll warm up to the idea. In the past the car companies have said, “You can’t make us sell cars that people don’t want to buy.” I think we’re going to approach that reality at some point, and that’ll cause the companies to warm up to the idea of “feebates” as a way of reconciling consumer behavior with the regulatory requirements.

Is there anything you think people often misunderstand or aren’t aware of about these new standards?

The standards are set up in such a way that they do not stimulate or encourage downsizing of vehicles. They are set up in such a way that essentially there’s a standard for every size vehicle and so the bigger the vehicle, the more lenient the standard, and therefore there’s no incentive to sell smaller vehicles.

This was a political compromise a few years ago to do it this way. In the European standards, they have a similar thing. The U.S. standards are footprint-based — they’re based upon the space between the four wheels, and so there’s a standard for every footprint. In Europe, the standards are based on weight, so therefore in Europe there’s a very weak incentive to reduce weight, but there is an incentive to downsize. So if you make it space-based, there’s no incentive to reduce the space. And so in the U.S. what you’ll see is a lot of investment in lightweight technology, lightweight materials, and designing to make the vehicle lighter. That’s going to be a big part of how they meet the standards — by “lightweighting,” but not by downsizing.

I’d prefer neither one—and it was this way it was in the U.S. until just a few years ago. Every company just had a requirement average for all of the vehicles. So it used to be in 27.5 miles per gallon for every company and you could do it however you wanted. You could make the vehicles smaller, lighter, but we got rid of that. It was politics because the Detroit car companies said if you have a standard like that, that favors the Japanese who make small cars and it’s biased against them because they make big vehicles. That’s why they developed this footprint-based standard. I think the opposition to getting rid of that is diminishing, but it would be a better to encourage both weight reduction and size reduction.

So we won’t see a noticeable shift toward the sort of small vehicles you see more of in Europe?

They’ll be some shift, but not because of the standards. There will be a shift because of changes in demographics. The baby boomers have gotten older, so they don’t need the big minivans and so on.

ABOUT Jessica Stillman

Jessica Stillman is a freelance writer based in Cyprus with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist, among others. Follow her on Twitter at @EntryLevelRebel