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Wednesday, August 29, 2012

Myths and Truths about 55mpg CAFE

Ranting against the CAFE regulations is one of my favorite topics.

Here are some of my reactions to some of the myths that the Obama administration is promoting about the new 54mpg-by-2025 CAFE plan.

"Cars will still be affordable"--no, not exactly.  The government's estimate on the average mark-up to meet CAFE was around $2,000/car.  However, realize that this is based on various assumptions, which may not play out, and probably does not take unintended market consequences into account.  If batteries continue to be very expensive; if there is a shortage of key materials because everyone is rushing to electrify; large vehicles may have to be over-priced to offset losses on small vehicles, and etc.  The other unintended side effects: if cars are more expensive up front, financing will be harder to get for some customers, causing lost sales.  People will hold on to used cars longer, making used cars more expensive, and ironically, reducing fleet fuel economy and safety.

"Consumers will be able to choose" -- Actually, I see consumers being pushed towards smaller, lighter vehicles and hybrid-electric vehicles, giving up some utility and cargo capacity.  I also larger vehicles like pickup trucks becoming more expensive.  The wealthy will be able to buy whatever they want, even V8 powered muscle cars, but the average joe will be pushed towards small cars.

"This will create jobs" -- dubious.  Yes, you may need more engineers to engineer the advanced fuel saving powertrains.   However, that may be offset by losses in dealerships and other secondary jobs, if overall new car volume goes down.   And if China starts importing cheap fuel efficient or battery electric cars down the road, undercutting the American makers, expect job losses.  If new car volume is reduced, manufacturing jobs will suffer also.

"Energy Independence" -- sort of.  Less oil use is good, for that goal.  And so is electrification.  However, the raw materials of electric vehicles--rare earth metals like neodymium, and battery components like lithium, are overwhelmingly supplied by countries like China and Russia.  We will be at the mercy of a different sort of cartel.

"Good for the middle class" -- Higher cost vehicles, less choice in the market, older average age of vehicles on the road, possible job losses in dealerships and manufacturing plants.  The only thing good here for the middle class is a smaller gas bill.

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