Traffic on Golden Gate Bridge

Traffic on Golden Gate Bridge (Image by: caribb)

U.S. President Barack Obama late last week announced an aggressive agreement to  increase the corporate average fuel economy (CAFE) to 54.5 miles per gallon for cars and light-duty trucks by model year 2025.

The agreement, made with 13 major automakers, including Ford, GM, Chrysler, Honda, Jaguar/Land Rover, Hyundai, BMW, Kia, Mitsubishi, Mazda, Nissan, Toyota and Volvo, is the next phase of the Obama administration’s national vehicle program, building on a 2009 historical agreement that raised fuel efficiency to 35.5 mpg for 2012-2016 vehicles.

The fuel economy programs set forth under the Obama administration mark the first meaningful update of fuel efficiency standards in three decades, and the most significant climate change action made by Obama since he took office. At a time when Washington has been mired deep in divisive debt ceiling talks, this latest agreement contains good news for the environmental policy community, automakers and associated new technologies, and the average American.

The Environmental Protection Agency and the White House estimate that over the life of the program, Americans will save $1.7 trillion in fuel costs and 12 billion barrels of oil. By 2025, they estimate that a new car will save $8,200 in fuel costs, compared to what they would pay at the pump with a similar 2010 model, and that oil consumption will be reduced by 2.2 million barrels a day. Also by 2025, the plan will eliminate six billion metric tons of carbon dioxide pollution. While the 54 mpg stipulated in this agreement is less than the 62 mpg environmentalists initially pushed for, it is still significant, doubling the roughly 27 mpg that the average car gets today. Even when one factors in the 20-percent discount that federal officials use to rate a vehicle in real-world driving conditions, which would place the average 2025 vehicle at roughly 43 mpg rather than 54, the agreement is still ambitious, say automobile executives.

For years, American automobile companies fought the implementation of tougher efficiency standards, most notably in California, which fought the companies in multiple lawsuits. Yet when the lawsuits failed, the EPA allowed California to set its own stringent standards, thus paving the way for this agreement. Also paving the way were the federal automotive industry bailouts in 2008 and 2009 that followed the Wall Street financial crisis. The bailouts not only required greater efficiency in American vehicles, but also gave the Obama administration greater negotiating power in setting national standards, which the companies prefer over a number of changing standards across different states.

Some critics of the agreement argue that the increased cost of efficient vehicles will make them difficult for some people to buy up front, even if they save later on in fuel costs – but the Boston Consulting Group says the costs would be in the area of $2,000, which would easily cover the fuel savings (the Center for Automotive Research puts the number at $6,700). Furthermore, people tend to buy cars using loans, which means the accurate comparison is between monthly car payments and monthly fuel savings, not between up-front and down-the-line costs.

The joint White House and EPA announcement says the EPA and the National Highway Traffic Safety Administration (NHTSA) are also considering incentives for “game-changing” new technologies for emissions improvements, which the Wall Street Journal says could include features that automatically shut off an engine when it’s idling or solar panels on car roofs. Car companies are pleased with the long-term nature of the agreement, because it will allow them to test out new technologies over time. It will also require both car and battery companies to become more innovative and internationally competitive.

The WSJ report adds that the agreement will allow Obama to formally propose the rules by the end of September. It will be a historic and welcome way for the White House to start the fall.

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