Summary of NADA Fuel Economy Studies
NADA STUDIES RELATED TO THE MODEL YEAR 2017-2025 FUEL ECONOMY PROPOSAL
On February 13, 2012, NADA commented to the Environmental Protection Agency (EPA) and the National Highway Transportation Safety Administration (NHTSA) on a 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas (GHG) and Corporate Average Fuel Economy (CAFE) proposal.
In its comments, NADA raised several serious concerns stating that EPA and NHTSA both underestimated the true costs of the proposal and failed to consider how raising up-front vehicle prices will prevent consumers from entering the new car market. NADA emphasized how potentially significant marketplace disruptions would slow fleet turnover, delaying the environmental gains the rules were originally created to implement.
In support of its contentions, NADA included four scholarly papers with its comments. Below is a brief summary of these studies:
- Look Back at EPA’s Cost and Other Impact Projections for MY 2004-2010 Heavy- Duty Truck Emissions Standards by Patrick Calpin and Esteban Plaza-Jennings
This retrospective study examined EPA’s 2004-2010 heavy-duty truck emission rules and compared EPA’s predicted compliance costs to actual OEM compliance costs. When put side by side, NADA found that EPA underestimated per vehicle costs of compliance by up to 320%. Whereas EPA predicted vehicle prices would increase by $5,000 per truck, NADA found that truck prices increased by over $21,000. The study raised doubts about EPA’s ability to accurately predict the actual regulatory costs such as with respect to the MY 2017-2025 fuel economy proposal.
- Retail Price Equivalents and Incremental Cost Multipliers: Theory and Reality as Applied to Federal CAFE/GHG Standards by Michael Whinihan, Ph. D., Dean Drake and David Aldorfer
The study examined the accuracy of EPA and NHTSA’s MY 2017-2025 CAFE cost predictions, finding that the government significantly underestimated the true costs of its proposal by using a new and unproven retail markup factor. An appropriate markup factor should take into account the indirect or overhead costs associated with R&D, pensions and health care, warranties, advertising, maintaining a dealer network, and profits. Historically, the government and vehicle manufacturers have both used a 2.0 markup factor when calculating vehicle prices. Yet, in the MY 2017-2025 proposal, EPA and NHTSA used an average 1.25 markup, thus underestimating increased vehicle prices by a factor of 1.6. When an appropriate 2.0 markup is applied to the proposal’s estimated costs, average per vehicle cost estimates increase from $3,000 to $5,000.
- The Effect of Proposed MY 2017-2025 Corporate Average Fuel Economy (CAFE) Standards on the New Vehicle Market Population by David Wagner, Paulina Nusinovich, and Esteban Plaza-Jennings
Because 90% of new car buyers rely on financing to acquire new vehicles, this study investigated how increased vehicle prices affect consumers’ ability to secure vehicle financing. As lending sources do not consider vehicle fuel economy during the loan approval process, higher vehicle prices will force some potential new car buyers entirely out of the new car market. Using the government’s $3,000 per vehicle price increase estimate, some 6.8 million licensed drivers will no longer be able to qualify for the least expensive new vehicle on the market. A $3,000 per vehicle price increase will also impact on other parts of the automobile market. For example, 6.6 million licensed drivers would be unable to qualify for a seven passenger family vehicle. By significantly disrupting the new vehicle marketplace, the proposal’s regulatory costs will force millions of consumers into the already strained used vehicle market.
- Willingness to Pay for MY 2025 Fuel Economy Mandates: Government Estimates vs. Economic Reality by Thomas Walton, Ph.D. and Dean Drake
The EPA/NHTSA proposal suggests that U.S. car buyers are willing to spend $6,000 per vehicle in order to achieve 54 MPG in 2025 (with gas at $3.54 per gallon). That estimate, however, is inconsistent with the purchasing decisions of today’s vehicle buyers. EPA and NHTSA call this phenomenon the “energy paradox” which they attribute to an irrational undervaluation of future fuel savings. This paper examined a wide array of existing literature to demonstrate that the “energy paradox” does not exist. Rather, consumers prefer many other vehicle attributes in addition to fuel economy. For example, some consumers might value size and performance while others may prefer to spend their money on luxury features. Thus, by forcing new car buyers to spend money on fuel economy improvements, EPA and NHTSA likely will shrink demand, as consumers will no longer be able to afford the new vehicles they desire.