The CAFE Game

Automotive Industries, August, 2001 by James Cole

U.S. legislators have been busy with CAFE standard this summer, but what does it all mean?

When George W. Bush was elected and the Congress was taken over by the Republicans, auto industry executives thought their biggest wish had been granted: They could eliminate CAFE (Corporate Average Fuel Economy) forever. Now these executives are scrambling to stop one of the biggest CAFE increases in 20 years, and the once confident auto industry is getting a cold shoulder from both the new administration and Congress. What caused this dramatic turnaround?

For years the auto industry has fought off increases in CAFE through a barrage of tactics including complaints about uneven playing fields, consumer preference, inadequate technology and an indifferent public.

Today, those market differences have. been eliminated. Japanese and European companies have introduced new mid-sized SUVs and full-sized trucks. They are creating markets for mid-size and full-size luxury vehides. The gap in CAFE performance is closing. And American car companies have bridged the early 2 technology gaps. Hybrid vehicles are being developed by DaimlerChrysler, General Motors Corp. and Ford Motor Co. These vehicles will be launched in high volume vehicle lines with the hope that many customers will adopt the new technology. Other efficiency advancements include engine cylinder deactivation and new transmissions, which could improve performance by 20 to 30 percent

Breakdown of the Old Coalition

The auto companies have relied on a unique coalition of legislators from both the Republican and Democratic parties to defeat CAFE increases in the past. Last year, auto industry representatives believed that the political cost of proposing higher CAFE standards would prevent Congress from setting new, higher standards. They proposed a study to evaluate CAFE, thinking that this report would put an end to these discussions.

What the auto companies failed to take into account was the overnight change in the political landscape. Members of Congress began to question every position taken by the auto industry after the Firestone hearings. Auto companies were then hit with three powerful events: a large increase in oil and fuel costs, the loss of control in the Senate and a miscalculation about their former allies in Congress and the administration.

As gasoline and fuel oil prices skyrocketed across the country, consumers suddenly started to look for more fuel efficient vehicles. Congressmen were being called daily about high fuel costs. And Congress began to examine the cost of ignoring CAFE.

A shift in power to the Democratic Party in the Senate also brought CAFE to the forefront. As newly-Independent Senator Jeffords takes over the Environmental Affairs committee, environmentalists will work hard to increase CAFE.

Other miscalculations followed and legislators told shocked auto company executives that they could expect a minimum increase of five to 15 mpg over 10 years.

Even the Bush Administration realized that the increasingly hostile voter sentiment would only penalize Republicans in the midterm elections if he prevented the increase from coming to a vote or failed to sign the bill. Bush quietly signaled that he would not stand in the way of an increase in CAFE standards.

Automakers responded in turn by expanding their lobbying effort in a frenzied attempt to prevent new higher standards from being set. They tried to show legislators how the increase would hurt American jobs and industry

Meanwhile, the independent Fuel Economy panel is reported to have concluded that SUVs and trucks can be made substantially more fuel efficient, and that U.S. competitiveness would not be impacted by increasing the standard. Auto companies were shocked. Although the panel did not reach a conclusion as to the increase amount, Congress is sure to view this report as a green light to a CAFE increase.

In order to minimize the damage, automakers recently accepted a small increase, which is expressed in fuel savings and not a higher CAFE standard.

The real fight will be carried out on the House floor where environmentalists are keying up for a full floor vote on this issue. Auto companies will have to expand their lobbying and communication efforts to make headway over the summer. If they lose the fight in the House, the Senate will surely increase CAFE standards substantially.

Thus, automakers have lost a tremendous opportunity to eliminate CAFE. The House committee has increased the standard, but look to the Senate to substantially increase the average. Expect the car standard to be increased to 30 to 35 mpg and the truck standard to be raised to at least 23 mpg in the next five years, and 27 mpg in 2011 in the Senate proposal.

The independent committee report, which was once viewed as the salvation of the auto industry position, will be used to justify a substantial increase in the standard. The bill will then be sent to conference committee where an agreement will be struck which increases the standard. Bush will sign the increase, much to the chagrin of the auto industry.