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A Chevy Volt assembly line in 2011.

Commentary: Strong fuel economy standards create jobs

Alan Baum and Dan Trustee are Michigan-based auto industry analysts.

Alan Baum and Dan Luria are Michigan-based auto industry analysts.

It’s not unusual for equally well-informed experts to look at a complicated issue and disagree about a detail here or an assumption there. But one recent analysis of the 2022-2025 national fuel-economy standards has us shaking our heads throughout.

A new report from the Center for Automotive Research (CAR) paints a dire picture of fuel-efficiency standards as job killers. When we took a close look at the analysis, we found a false argument based on assumptions that don’t make any sense, with an alarmist conclusion that is contrary to what our own research has found.

The truth is that robust fuel-economy standards are good for the auto industry, suppliers, consumers, and the American economy. Our analysis shows that consumers would be willing to pay increased costs associated with the 2025 standards—except in the unlikely event that gasoline drops below about $1.60 per gallon and stays there—because they will recoup those costs and more through fuel savings. And if gas prices return to $3 per gallon or more, the standards serve as a cost-effective insurance policy for automakers.

When we embarked on a study, commissioned by Ceres, on how meeting the miles-per-gallon standards might affect the automobile business, we started with a careful analysis—vehicle by vehicle and company by company—of what fuel-saving technology would have to be added for each automaker to comply. We assumed each company would focus on the technologies and vehicle segments in which it enjoys competitive advantages.

We found that the average additional costs associated with added fuel-saving technology in 2025 would be less than $2,000 per vehicle compared to 2010. Consumers would save enough money on gas to come out ahead in about three years, as long as gasoline stays higher than $1.60 per gallon. Carmakers would fare well, too: we found that even if gas prices dip to $1.80 per gallon, the Detroit Three would continue to be highly profitable because they would likely sell more high-margin pickups and SUVs and fewer small cars and CUVs.

The picture CAR paints is very different. But then it’s based on assumptions that make zero sense.

First, our vehicle-by-vehicle analysis showed an added cost of manufacturing of just over $1,900 per vehicle to reach the 2025 standards, starting from a 2010 baseline—and federal regulators’ numbers track pretty well with ours. The CAR team, on the other hand, randomly modeled three scenarios on added cost per vehicle. They assumed cost increases of $2,000, $4,000, or $6,000 per vehicle, just between 2016 and 2025. These numbers are supported primarily by a single study published way back in 1991. In car terms, that’s ancient history.

On this foundation of sand, the CAR team builds an argument that gets even more tenuous. They assume that carmakers would pass on all of their additional costs to consumers – at a price grossly inflated by marking up purchased component costs by an unrealistic 84 percent. In CAR’s analysis, this dubious assumption drives a plunge in sales, which leads to lower production, which in turn results in mass layoffs.

But this doesn’t make any sense.

These days each additional full-sized pickup sold by an automaker adds $10,000 to $12,000 to its profit. So there’s a lot of room for auto makers to absorb additional manufacturing costs and still turn a nice profit, without pricing vehicles so high as to jeopardize sales. In fact, this kind of pricing is already a regular occurrence; incentives on pickups are often high. Taking the approach that the CAR study envisions—sacrificing sales by passing on the full cost of fuel-saving technology rather than modestly reducing per-vehicle profit—would undermine the goal of any automaker, which is to make a profit. It’s just not realistic.

And while the CAR team inflates the costs of fuel-efficiency standards, they ignore the benefits. As our study found, keeping national fuel-economy standards strong serves as a valuable insurance policy for American automakers, protecting them from market losses if and when fuel prices rise again. In the past, these carmakers have been caught flat-footed during oil-price spikes, most recently in the mid-2000s. Retaining the 2022-2025 targets would help keep history from repeating itself.

Strong fuel-economy standards also help automakers stay competitive in the global market, where consumers pay much higher fuel taxes and so demand more kilometers per litre. This is especially important at a time of increased use of global vehicle platforms, which allow automakers to realize important economies of scale in both engineering and production. And satisfying the international market will be increasingly important in the future. Right now, U.S. automakers sell about half their vehicles domestically and half outside of the U.S. But by 2025, international sales will account for about two-thirds of their sales.

Maintaining high energy-efficiency standards also guarantees growth for suppliers. Our analysis found that, if current standards are maintained, “Tier One” automotive suppliers will gain about $90 billion in increased parts orders from the automakers through 2025. Increased orders mean more jobs – and Tier One suppliers employ two-and-a-half times as many Americans as car manufacturers do.

Strong fuel-economy standards spur investment and innovation that create jobs in auto manufacturing and throughout the supply chain. Saving drivers gas means saving them cash, which means more money spent on other goods and services. Far from killing jobs, maintaining strong national fuel-economy standards make our whole economy stronger and more secure.

Alan Baum is Principal of Baum & Associates, an automotive forecasting and research consultancy. Dan Luria is an independent industry analyst whose career included eight years in the UAW Research Department and 28 as VP and Research Director at the Michigan Manufacturing Technology Center.

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