Manufacturers are scrambling to bring more fuel efficient vehicles to market but buyers aren’t following suit
After a second consecutive record sales year for new vehicles in Canada that was driven entirely by growth in the truck segment, and with oil and gas prices touching recent historic lows, it is a good time to revisit an important issue for our industry: environmental and fuel-efficiency regulations.
Climate change and environmental concerns have been high on public agendas for years but only recently have we seen large-scale policy attempts aimed at mitigating carbon emissions.
This is certainly good news for the planet and future generations.
But not all environmental policies are created equally, and despite industry acquiescence at the introduction of the onerous corporate average fuel economy (CAFE) standards in 2012, serious questions remain as to their viability in a world of booming truck sales and $40 barrels of crude.
The CAFE standards, introduced in conjunction with the United States in 2012, were seen by many as a win for the industry.
Yes, they mandated ever-more stringent fuel efficiency on new cars and trucks, regulating what in the past was decades of advancement in just a few years. But technology doesn’t advance on a straight line, and manufacturers and their engineers provided comfort that while expensive to implement, the standards would be achievable.
Crucially, they would be harmonized with the U.S. providing consistency and predictability for the industry and assurances that over-ambitious provinces or states wouldn’t seek to “go it alone” on fuel economy regulations.
In Canada, CAFE is requiring a fleet average of 6.6 liters per 100 kilometers for the 2016 model year. The next phase of the regulations will impose further gains to a fleet average of 4.4 liters per 100 kilometers by 2025, a huge undertaking in less than a decade.
Even at the outset, there were voices of dissent warning that the key assumptions underpinning CAFE flew in the face of years of consumer behaviour.
Under the regulations, the efficiency of a manufacturer’s fleet is not calculated based on the vehicles they construct but on the ones they sell.
Manufacturers are rightly making billions in investments in fuel efficiency and alternative propulsion systems in a race to build the carbon-light vehicle of the future.
But under CAFE they may end up caught between regulations that mandate a fleet average mileage in which their customer base refuses to comply. Under such a scenario, something would have to give.
For evidence, look no further than Canadian vehicle sales in 2014, a record year: sales in the broad car segment were actually down from 2013 levels, whereas truck sales boomed by 11 per cent, providing more than 100 per cent of total sales growth last year.
Eleven points of growth on truck sales is the clearest signal yet that the CAFE rules are on a collision course with the mighty Canadian consumer, who looks at a 79 cent liter of gasoline and opts for the crossover instead of the sedan, or the V8 and not the fuel sipper.
Even to the extent that mandated fuel economy targets are successful in spurring the investments needed to make new vehicles more efficient, they could become self-defeating.
New cars of every sort are more efficient today than in past years, a trend set to accelerate in future years.
On the surface, this is good news for the consumer and the environment, and the consumption curve of nationwide gasoline demand is finally starting to bend downwards as a result of years of efficiency improvements.
But making a vehicle more efficient and therefore less expensive to operate can only lead to more driving, congestion, and emissions from the fleet.
The resurrection of the idea of a carbon tax (euphemistically, carbon “pricing”) from the dead is part of the emerging acknowledgment that a “sector by sector” approach to GHG rules — under which CAFE squarely falls — is far from the most economically efficient way to reduce emissions.
These regulations are implemented by political leaders, and so politics plays a huge role in the process as it rightly should.
For reasons beyond the scope of this column, imposing costs on the industry that could amount to thousands of dollars per vehicle through regulations is more politically acceptable than, say, an increase in the gasoline tax, which would mitigate emissions without putting manufacturers through the onerous and massively expensive process of potentially building thousands of vehicles that no one will ever buy for anything close to a profit.
The CAFE regulations will remain a vital component of Canada’s carbon regulation regime.
But with energy prices where they are and with consumers responding in kind, they could end up on a collision course with market realities.
If today’s trends continue, regulators should brace themselves for increased calls for “flexibility” in their application of the standards.
