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Friday, July 08, 2011

CAFE May Cramp High End Luxury Market

An interesting piece in the WSJ, here, expains that luxury car makers such as Porsche and Mercedes may be severely impacted by future CAFE rules.

Future U.S. government fuel economy regulations could saddle auto makers with steep fines or even bar the sale of certain models. Violations of proposed government standards could cost auto makers up to $25,000 a vehicle beginning in 2016, up from current levels of $5 to hundreds of dollars per vehicle.
The issue for the luxury automakers is that CAFE is a fleet average, not a per-car requirement. Large full line carmakers like GM can produce lots of Cruzes to offset a few Cadillac V8's. However, Mercedes doesn't sell enough high MPG vehicles to avoid paying today's fine. And when CAFE marches north of 50mpg average, Mercedes only option is to find some hybrid electric powertrains schnell.

I am not a fan of CAFE because of the way it hides regulation from the consumer, and distorts the car market. However, I don't see why luxury car makers such as Mercedes should be exempt. If CAFE is the regulatory regime, and the goal is to reduce fuel consumption, the luxury car makers should not be allowed to skate.

Now, don't get me wrong, I am not saying that powerful cars should be banned. But I think the wealthy folks who love European luxury cars can afford a "CO2 premium" for their sins. I also admit, bad economic policy aside, that I like the competitive advantage that CAFE gives the full-line automakers such as the Detroit 3.

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