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Auto Makers Enter New Round of CAFE Talks Healthier, Better Armed

Executive Summary

One key item auto makers want to talk about is bringing the consumer into the mix, either through higher fuel taxes or greater tax incentives to pay for advanced technology.

WASHINGTON – Expect an auto industry with sharper teeth when manufacturers sit down with federal policy makers and environmentalists to craft the next round of U.S. corporate average fuel economy increases in the coming months.

Neutered two years ago from the collapse of new-vehicle sales amid a foundering economy, auto makers dropped their historically combative stance over stricter rules and gave over to an historic hike in CAFE in return for a single national tailpipe emissions standard.

Count on a higher degree of engagement this time around, especially with a hike in fuel-economy and carbon-dioxide-emissions reductions equivalent to 62 mpg (3.9 L/100 km) on the table.

“I would certainly hope there is close collaboration,” Jonathan Browning, president and CEO of Volkswagen Group of America Inc., says of coming work on the new standards.

The National Highway Traffic Safety Admin., the Environmental Protection Agency and the state of California, along with a heavy dose of input from auto makers, will release a proposal by Sept. 1 outlining the new round of fuel-economy and emissions regulations for the 2017-2025 timeframe.

This year, auto makers begin stepping toward a fleet-wide fuel economy of 35.5 mpg (6.6 L/100 km) by 2016, a standard handed down in 2009 as auto makers limped through the worst sales year in the post-war era.

While executives at the show here pledge to meet whatever standards are put in place, they also will come to the table in much better shape than they were two years ago. Sales rose 11.1% last year and the Detroit Three are seeing their strongest profits in a decade.

That means more money to lobby harder for equivalent fuel-economy rules close to 47 mpg (5.0 L/100 km) by 2025, also suggested earlier this year by regulators.

One auto maker source confides to Ward’s here his frustration working the halls of Congress in 2009, when company cutbacks led to staffing shortages. The bench will be much deeper this time, he says.

But perhaps more importantly, Capitol Hill heavyweights General Motors Co., Ford Motor Co. and Chrysler Group LLC finally are delivering after years of empty promises to regulators.

GM has the Chevrolet Volt extended-range electric vehicle and a new hybrid drivetrain bowing this year on the Buick LaCrosse, as well as a refreshed small car lineup with a subcompact made in the U.S.

“We’re in a stronger position now,” one GM insider says of the auto maker’s bargaining position vis-a-vis regulators and environmentalists.

Ford has continued to grow its hybrid lineup and next year brings a plug-in hybrid-electric vehicle to market. Chrysler soon will start selling the fuel-sipping Fiat 500 in the U.S. and a PHEV model comes next year.

“As an industry, we’ve earned more credibility,” says CAFE-talks veteran Kathryn Clay, vice president-research and technology policy at the Washington-based Alliance of Automobile Manufacturers.

Ed Welburn, head of GM Design, says in his keynote address to the Washington Auto Show, “We’ll use our technological expertise to work with the government to meet future CAFE and emissions standards.”

The previous round of CAFE talks, which dates back to 2007 when the industry dropped its lawsuits against California’s proposed emissions standards and set the table for the combined fuel economy and CO2 federal rules, brought auto makers to the front lines in the war against climate change.

“One thing we always remind people is that we are moving toward a carbon-constrained economy and automotive is the only carbon-constrained industry,” Clay tells Ward’s. “We are leading the transition. We have given the most.”

Jake Jones, longtime legislative affairs leader at Chrysler, says 2009 represented a “sea change” for the CAFE rulemaking process, with the Obama Admin. bringing all the parties together for the first time. He is pleased with California’s recent decision to continue working alongside NHTSA and EPA on tailpipe emissions for 2017-2025.

“We’re encouraged by the continuation of the process,” he says. “We just have to make our argument. We’ll present our data, and we think the government will come away saying, ‘This is something we have to talk about.’

“We’ve got to operate on good faith, that we’ve all come to the table to work together on a solution,” Jones says.

One key item auto makers want to talk about is bringing the consumer into the mix, either through higher fuel taxes or greater tax incentives to pay for advanced technologies such as hybrid powertrains and diesel engines.

“Technology can deliver high levels of efficiency, but technology does not address customer demand,” says Browning.

“What is going to make the U.S. customer willing to pay for those technologies?” asks Browning, who came to VWA in June after running GM’s Vauxhall brand in the U.K. In Europe, fuel taxes drive consumers to more efficient vehicles.

“We can’t give away technology for free,” he adds.

It might be the industry’s oldest argument inside the Beltway, but the prospect of a federal measure such as a higher fuel tax to alter consumer behavior is stronger than ever today after pump prices spiked in 2008 and consumers rushed to smaller, more fuel-efficient vehicles.

After prices receded months later, Americans returned to their old buying habits and whipsawed auto maker inventories. Last year, trucks outsold cars, 51% vs. 49%, for the first time since 2007, Ward’s data shows.

To boost its chances of getting the nod from a reluctant Congress, any proposal to hike fuel taxes likely would include a provision to refund the extra cost to individuals through an income-tax refund.

“We have to remember, the consumer is in the driver seat,” Jim Colon, vice president-product communications at Toyota Motor Sales U.S.A. Inc., says here while calling for “realistic” new fuel-economy standards from regulators.

The historical whimsy of consumers and the length of the 2017-2025 timeframe combine for another key talking point from auto makers and forms an argument to leave 2025 standards open to revision.

Electric vehicles, for example, are expected to help auto makers meet high regulatory targets, but the technology remains in its infancy and it is unclear if consumers will embrace a departure from the internal-combustion engine.

“The auto industry does appreciate the lead time of 2025, but we’re looking much further out than ever before,” Clay says.

“So one priority is asking for a different structure with a mid-point review that will depend on things such as gas prices, or the perhaps the introduction of a gas tax.

“We need to factor in those sorts of things and build in checkpoints to see if our assumptions were correct,” she says.

Auto makers also will warn against picking a favorite technology to fund. In last week’s State of the Union address, Obama promised more federal research and development dollars to fund more efficient vehicles but again emphasized his goal for 1 million EVs on the road by 2015.

Previous attempts by Washington to pick the next big technology have not been successful. The fervor behind hydrogen fuel-cell vehicles earlier in the decade sputtered.

“The attempt to pick a technology over the last generation has amounted to nothing more than abject failure,” says John DiCicco, a senior lecturer in the School of Natural Resources and Environment at the University of Michigan.

So far, the Obama Admin. has invested $2.4 billion of Recovery Act money into battery research and development for advanced technology vehicles, and right now EV buyers can receive a tax credit of up to $7,500 on their purchases.

But at the same time, the nation’s flex-fuel infrastructure continues to expand slowly and tax credits for diesel technology expired last year without renewal.

“If we incentivize one technology, we should incentivize the other” Browning says.


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