01 Jun 2007 No to New Fuel Economy Standards: Consumer Choice, Not Congress, Should Drive Detroit’s Decisionmaking, by Eric Peters

If the government decides to pass a law requiring that McDonalds sell only low-fat chicken breast wraps and diet soda, the result would be more business for Wendy’s and Burger King — and empty stores for McDonalds. 

So it is with the proposal, H.R. 1506, the Fuel Economy Reform Act, co-sponsored by Democratic Rep. Ed Markey and GOP Rep. Todd Platts to impose a 35-mpg fuel efficiency requirement on the auto industry. 

The legislation differs from previous fuel economy standards in that it would apply to both passenger cars and “light trucks” — a category of vehicle that includes pick-ups, SUVs and minivans — and which has up to now been held to a separate (and less stringent) fuel economy standard of 21.5-mpg vs. 27.5-mpg for passenger cars.  

As a result, Markey-Platts would disproportionately hurt American car companies, which have their profit centers in large pick-ups and SUVs — while giving a competitive leg-up to imports, which make most of their money selling smaller, inherently more economical passenger cars.

It’s much easier to tweak the design of a compact or mid-sized front-wheel-drive passenger car with a four or six-cylinder engine that already gets 32 mpg to the 35 mpg mark than it is to get a full-size, V-8 powered truck or SUV from 20-something mpg to 35 mpg.  Thus, the impact of the Markey-Platts bill will hurt American car companies most where they are especially vulnerable — at a time when they can least afford another legislative knee-capping.

GM, Ford and Chrysler have all posted alarming losses recently, even as the quality and appeal of their vehicles has been on the upswing.  Hitting them with a 35-mpg fuel economy edict would have the same effect as sucker punching someone already laid low by the flu.

Of course, it’s easy to wag a finger at “wasteful” pick-ups and SUVs from the halls of Congress — and the editorial pages of big city newspapers.  But the fact is many people (farmers, people with trailers to pull or large families to haul, contractors, etc.) simply need these kinds of vehicles — and nothing else will do.  You can’t tow 9,000 pounds with a Camry.  Sometimes, miles-per-gallon is not the sole reason for buying a vehicle.

Nor should it be.

And moreover, 35-mpg (and more) vehicles have been available for many years — since the 1980s, in fact. But the market for these vehicles has always been limited, because to achieve high mileage, other attributes — size, power and capability — have to be sacrificed.  Not everyone (or even many of us) want to drive around in a car the size of a Toyota Tercel. Some do, of course — and the automakers have several models available to meet that need.  But should Washington be force-feeding such cars on an unwilling marketplace?

And that, ultimately, is what the Markey-Platts bill is all about.

People already have a number of choices in the 35-mpg and more category — including the latest generation of gas-electric hybrid SUVs, like Ford’s Escape. True, it may cost them extra to get the additional 5-10 mpg — as in the case of the hybrid Escape, which costs about $3,000 more than the standard, gas-only version of this vehicle.  Or they may have to drive a smaller, less powerful/capable vehicle — like the new class of “B-car” subcompacts, including the Honda Fit, Nissan Versa, Toyota Yaris or Chevy’s Aveo.

But the point is, the options are already out there — no legislation required.

But if the Markey-Platts bill becomes law, these options will become a mandate — and we’ll all have to pay in one form or another.  The add-on cost of the necessary research and development, specialized technology (everything from advanced engine designs to hybrid systems, etc.) will be either tacked onto the price tag of larger vehicles, or spread out and hidden in higher across-the-board costs of each automaker’s entire product lineup.1 Maybe the extra 5-10 mpg that could be realized is worth an extra grand or two in “up front” costs.  But maybe not.

Shouldn’t the choice be the consumer’s to make? 

And if the market plays its trump card and simply decides to say “thanks, but no” — electing not to buy these more efficient but also more expensive vehicles — it will mean reduced shareholder value and ultimately, plant closings and job losses for the auto industry.  Even a relatively small decrease in demand for new vehicles — say 5 percent or so — could be absolutely devastating to an already shaky industry, with American brands suffering the most.

Backers of the Markey-Platts proposal seem rather cavalier about these potential repercussions. Perhaps it’s easy to dismiss concerns about what could amount to as much as several thousand dollars in add-on costs per vehicle1,2 when you’re a six-figure DC lawmaker, activist or editorial writer. But for the average person in this country, that kind of money is a big deal indeed.

We all want more efficient vehicles — but the issue is more complex than waving a legislative wand and making it so.  Concern over fuel prices should not lead to ill-considered lawmaking — or political grandstanding.

Hopefully, wiser heads will prevail.

Eric Peters is a senior fellow at the National Center for Public Policy Research.

Footnotes:

1 . See NCEP Background Paper, “CAFE Safety Valve” (http://www.energycommission.org/files/finalReport/I.6.b%20-%20CAFE%20Safety%20Valve.pdf), page 4 table, “Pessimistic Technology Case” ($250 per vehicle at 35 mpg CAFE; $270 per vehicle at 40 mpg CAFE); “Mid-range Technology Case ($210 per vehicle at 35 mpg CAFE; $260 per vehicle at 40 mpg CAFE); “Optimistic Technology Case” ($150 per vehicle at 35 mpg CAFE; $200 per vehicle at 40 mpg CAFE).

2. See Small Business Entrepreneurship Council letter to Congress, dated April 20, 2005, stating: “The National Academy of Sciences estimated that higher CAFE standards have boosted prices for cars by $500 to $2,500, and for pickup trucks and SUVs by $500 to $2,750.”  The letter is online at http://www.sbsc.org/content/display.cfm?ID=1465, as of June 14, 2007.