Obama plan welcomed despite costly measures

Bloomberg

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U.S. automakers say they won’t have to overhaul their technology or flood the market with tiny cars buyers may not want under President Barack Obama’s standards for fuel economy and greenhouse-gas emissions.

Even as they face more than $21 billion in annual costs to meet the new standards by 2016, General Motors and Ford Motor will benefit from a single national system, rather than a patchwork of state rules, and an approach that allows them to tweak the fuel efficiency for each category of vehicle sizes and weights.

The plan announced by Obama at the White House on Tuesday "gives the automobile manufacturers a lot of flexibility," said Robert Sawyer, professor of energy studies at the University of California, Berkeley. "It’s designed in part to not penalize the U.S. manufacturers versus their Japanese competitors. The U.S. automobile industry will be able to deal with it." Automaker chief executive officers, including Fritz Henderson of GM and Alan Mulally of Ford, stood alongside Obama and environmentalists at the White House Tuesday and endorsed his plan. It would require the industry to produce vehicles that get, on average, 35.5 miles per gallon by 2016 models, up from the 27.3 average in 2011, the last year before the new plan takes effect.

The plan won’t "necessarily" force Ford to make smaller vehicles, Mulally said. "We can make the size of vehicle that people really do want," he said. "The command is, no matter what the size, that we will improve fuel efficiency every year going forward."

It won’t be easy, said Kim Hill, associate director of the Center for Automotive Research in Ann Arbor, Michigan. In addition to honing their technology, automakers will have to pay to retool plants for smaller, though not necessarily mini-sized, vehicles to meet the goals by 2016.

"Some of those costs will have to be incurred on a much more rapid timeline," Hill said. "This is where you might find Chrysler and General Motors, who are already on the edge, saying, ’Where are we going to get that money?’"

Chrysler and GM are surviving on U.S. aid. Obama’s auto task force pushed Chrysler into bankruptcy reorganization and may do the same for GM if it doesn’t meet goals to revamp its operations and finances by June 1.

There may be 16.8 million vehicles sold in the U.S. in 2014, according to a study by A.T. Kearney, a consulting firm. If that rate held until 2016, automakers would face $21.8 billion in added annual costs, based on the White House estimate that the policy will carry a price tag of $1,300 per vehicle for 2016 models, including the cost of meeting currently mandated standards.

"It costs more to make fuel-efficient vehicles, it costs more upfront," Lisa Jackson, administrator of the Environmental Protection Agency, said Tuesday in an interview. The cost "pays for itself" for consumers through fuel savings after three years of driving, she said. The 5 percent annual increase in fuel mileage over five years would save 1.8 billion barrels of oil and reduce 900 million metric tons of greenhouse gas emissions by 2016, according to the administration. That is the equivalent of taking 177 million vehicles off the road.

Auto firms achieved some key goals in Obama’s plan. They will face one federal standard rather than regulations by states, which could apply different rules, raising costs. The companies also won assurances that the overall 35.5 mpg goal can be achieved through a series of standards set by vehicle size and weight rather than for entire fleets. That removes pressure to produce small cars to compensate for making pickups and sport utility vehicles.

Smaller vehicles

Automakers will be forced to eventually reduce the size of vehicles in their fleets, said Bret Smith, an alternative-vehicle analyst.

"The goal is to let you have your cake and eat it too - to be able to keep the vehicles you want," Smith said. "But the reality is that there will be downsizing because it’s so expensive to make the larger vehicles more fuel-efficient."

The details of Obama’s plan will be crucial, said Dan Becker, director of the environmental group Safe Climate Campaign in Washington. The administration should take steps to prevent automakers from manipulating their fuel-economy targets by moving vehicles among weight classifications, he said.

"It has a threat automakers will game their way out of the rules by adding bulk to vehicles so they qualify for weaker standards," Becker said.