U-M study finds current CAFE standards create profit incentive for larger vehicles
7 December 2011
The current vehicle footprint-based Corporate Average Fuel Economy (CAFE) standards create a financial incentive for automakers to increase vehicle size, except under certain limited conditions of consumer preference for vehicle size, according to a study by University of Michigan researchers Kate Whitefoot and Steven Skerlos.
Simulations of future vehicles under the footprint-based standards found that the sales-weighted average vehicle size increases by 2–32%, undermining gains in fuel economy by 1–4 mpg (0.6–1.7 km/L). Carbon-dioxide emissions from these larger vehicles are 5–15% higher as a result (4.69×1011–5.17×1011 kg for one year of produced vehicles compared to 4.47×1011 kg with no size changes)—the equivalent to adding three to ten coal-fired power plants to the electricity grid each year. Furthermore, their results suggest that the incentive is larger for light trucks than for passenger cars, which could increase traffic safety risks. Their paper is published in the journal Energy Policy.
This study illustrates that there may be a substantial financial incentive to produce larger vehicles, and that it can undermine the goals of the policy. The results show that the policy can be adjusted to reduce these unintended incentives by making it harder to lower the fuel economy targets by producing larger vehicles.—Kate Whitefoot, now a senior program officer at the National Academy of Engineering
The CAFE standards for 2011-2016 are footprint-based—i.e., track width times its wheelbase. The specific annual standards depend on the sizes of vehicles automakers produce, and are intended to boost average fuel economy to 35.5 mpg (6.6 L/100km) by 2016. However, each car company must meet a different standard each year determined by the actual footprints of the vehicles it sells.
This regulation design could potentially create an incentive for automotive manufacturers to increase the size of their vehicles and diminish the policy’s goal of reduced fuel consumption. Understanding this issue is both important and timely; policymakers are currently developing the CAFE regulations for vehicles produced from 2017 to 2025 and are planning to finalize these regulations by July, 2012.
Given these footprint-based standards, a profit-maximizing manufacturer will evaluate various tradeoffs to determine whether modifying vehicle footprint is desirable. These tradeoffs include the marginal reduction in the fuel economy standard, the cost of modifying vehicle footprint, the impact on vehicle fuel economy and other aspects of vehicle performance such as acceleration, and the resulting change in consumer demand. Therefore, any design incentives to modify vehicle footprint will depend on the relationships between these factors.—Whitefoot and Skerlos
Whitefoot and Skerlos used simulation analysis to test the hypothesis that the footprint-based CAFE standards will not create an incentive to increase vehicle size. They constructed an oligopolistic equilibrium model in which firms maximize profits with respect to the prices, acceleration performance, and levels of technology features of their vehicles. The top twenty automotive firms that sell vehicles in the United States are represented in the model.
The model incorporates engineering tradeoffs that carmakers consider as well as a wide range of possible consumer preferences. In the simulations, auto firms could adjust the size of their vehicles, add fuel-saving technologies, balance acceleration performance with fuel economy, and adjust vehicle prices.
Firms are differentiated as to whether they are expected to meet the CAFE standards even if it is more profitable to violate them. The model allows BMW, Jaguar, Mercedes-Benz, Porsche, and VW to violate the standard and pay the legally required penalties. The team conducted simulations with 473 different vehicles.
Results indicate that there is an incentive to increase vehicle size in all simulations except the scenarios in which consumer preference for size is at the lower bound ($340 per sq ft) and preference for acceleration performance is at the upper bound ($5,500 per 0.01 hp/lb). In those cases, firms have an incentive to shift production of their vehicles such that the average vehicle size decreases by 1.0–1.4 sq ft (0.09–0.13 sq m) due to low consumer preference for vehicle size compared to acceleration performance. In all other simulations, firms have an incentive to increase the size of vehicles sold, both by increasing the footprint of vehicle models and by shifting production toward larger vehicles. The incentive varies substantially depending on consumer preferences, from an average of 1.4–16.1 sq. ft (0.13–1.21 sq m). This compares with an average increase in size of 1 sq ft (0.09 sq m) between 2008 and 2011.
...To test the impact of the incentive to increase vehicle size on fuel economy, we compare simulation results to the average fuel economy that the CAFE standards would require if vehicle size and sales remain unaffected...Our calculations from this procedure indicate that the required average fuel economy under the MY-2014 footprint-based standards is 30.7 mpg (13.1 km/L). This is similar to NHTSA’s estimated value of 31.5 mpg (13.4 km/L). Simulation results indicate that the combination of increases in vehicle size and shifts in production to larger vehicles can reduce these fuel economy requirements. The resulting required fuel economy standards from the simulations are 1.4–4.1 mpg (0.6–1.7 km/L) lower than if vehicle sales and size remained unaffected.—Whitefoot and Skerlos
Whitefoot and Skerlos suggest three near-term measures to to reduce the incentive to increase vehicle size:
The slope of the function determining fuel economy targets based on vehicle footprint should be flattened for both passenger cars and light trucks, and even further for light trucks to avoid a divergence in size between these vehicle classes.
Potential incentives for automakers to change vehicle size in response to the CAFE standards should be carefully analyzed in all future rulemakings to inform the specific policy design.
Future rulemaking should either allow for modifications to the standards if it becomes clear that fuel-economy goals will not be met or endeavor to design the standards such that the effects of changes in consumer preferences are minimized.
For the long-term, they suggest considering alternative policy options to address fuel-economy goals and concerns regarding traffic safety.
The ideal solution would be a policy that could assess the impact of a vehicle on total traffic safety (including the vehicle’s passengers, passengers of other vehicles, and pedestrians) as well as assess the impact of the vehicle on total fuel consumption and would optimize these two objectives for the social good, giving automakers guidance on how to balance the objectives where they compete and rewarding them for developing solutions that improve both safety and fuel economy. Considering the practical difficulties of designing and implementing safety and fuel-economy regulations, however, this ideal is clearly a long way off if not impossible. All the same, policymakers and researchers should consider how to make steps toward this ideal.—Whitefoot and Skerlos
The research was funded by the Michigan Memorial Phoenix Energy Institute and the National Science Foundation.
Kate S. Whitefoot, Steven J. Skerlos (2001) Design incentives to increase vehicle size created from the US footprint-based fuel economy standards. Energy Policy doi: 10.1016/j.enpol.2011.10.062
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