U.S. Congress Approves CAFE Bill; White House to Sign Today

The U.S. House of Representatives has voted on a revised energy bill shepherded by Congressional Democrats through the legislature, overwhelmingly approving the bill and sending it to the White House for signature into law. The House approved the bill 314-100, with 95 Republicans siding with Democrats to pass the bill. The bill's approval comes only after provisions were removed by the Senate which would have required renewable energy requirements for utility electrical generation, as well as the repeal of tax breaks for the top five oil companies that would have generated revenue that would have gone to fund renewable energy research and to help automakers develop technology for higher mileage vehicles. The Detroit News reported late on Tuesday (18 December) that President George W. Bush will sign the bill at a special presentation at the Department of Energy today.

Highlights of the new bill include:

• CAFE increases to 35 mpg by 2020: The centrepiece of the bill remains changes to the Corporate Average Fuel Economy (CAFE) regulations that will increase the level to 35 mpg combined car and truck ratings by 2020. The increases will come in stages over time, and will also maintain separate requirements for cars and trucks, two provisions that auto industry supporting legislators had worked to keep included in the bill.

• 36 million gallons of ethanol by 2022: This represents a six-fold increase in ethanol production, a measure generally expected to be a serious boost to farmers producing ethanol material stock such as corn. Despite the questionable production viability of cellulosic ethanol conversion, the bill requires a certain percentage of that 36 billion gallons be produced via cellulosic means and materials starting in 2015, when the main feedstock is expected to be switchgrass, wood chips, or other biomass.

• Efficiency requirements for consumer products: The new energy bill also specifies new energy efficiency standards for household appliances and light fixtures, as well as new standards for commercial and government buildings. It also calls for the phase-out of incandescent light bulbs.

• First-ever efficiency standards for heavy commercial trucks: The bill calls for the National Highway Transportation Safety Administration (NHTSA) to formulate standards for "work trucks" (vehicles between 8,500 and 10,000 lbs), as well as medium- and heavy-duty trucks, set to take effect in 2016.

• First-ever manufacturer-specific CAFE requirements: The NHTSA will also be required to create an all-new attribute-based system for fuel economy requirements that will be based on a vehicle's size; the total average of the two must equal 35 mpg, but it allows for different requirements for cars and trucks. Furthermore, a manufacturer's fleet also will have an impact on its required rating. Automakers like Volkswagen (VW) or Honda, which do not sell light trucks for the U.S. market, may face a higher 38 mpg or 39 mpg standard than General Motors (GM), which produces a full line-up, and may see average requirements below 35 mpg.

Outlook and Implications

The new bill is groundbreaking in that it is the first legislation to change passenger car CAFE standards since their inception in 1975 (light trucks received requirements in the mid-1980s). But the way in which the standards are going to be changes still creates uncertainty in how automakers should react. According to the legislation, NHTSA will be responsible for declaring what any given automaker's fuel efficiency standards should be given the size and make-up of its fleet. While that may or may not be a boon to the domestic industry (which by and large produces far more trucks than imported brands), it still results in uncertain targets from now until 2020. NHTSA will be responsible for setting the annual increases as well from between 2011 and 2020; presumably it will create a schedule and timetable well in advance of those model years in order to allow automakers to adjust their technology and production accordingly. Failure to do so would be disastrous for the industry, as would failure to create standards based on solid knowledge of technological efforts instead of political pressure and rhetoric.

For their part, both GM and Chrysler chimed in as supporting the new legislation, and President Bush is on board with signing the bill into law. But the effects on the automakers are going to be serious and severe. A presentation made by Global Insight's Phil Gott earlier this year at the Global Insight Global Automotive Conference in Dearborn (Michigan) illustrates exactly what now needs to happen in order for automakers to meet this 40% increase in average fuel economy by 2020. At the conference, Gott asked the question: "What combination of segments, engines, and drivetrains would give you the lowest-risk, lowest-cost path to 35 miles per gallon by 2020?" The answers were sobering:

• A massive shift in powertrain technology: By 2020, two-thirds of the U.S. vehicle fleet will need direct-injection engines (gasoline or diesel), reduced displacement, and forced induction. Diesel will need to be one-third of the market. Half of all vehicles will need to be hybrid, and half of those hybrids will need to be diesel.
• Massive investment in manufacturing infrastructure: Capital investment will be required to build nearly 8 million direct-injection engines, including component manufacturing, as well as infrastructure to build another 8 million hybrid vehicles and their components. The automakers will need to construct the equivalent of eight new diesel engine plants at a cost of US$1 billion each. Suppliers will need to tool up to make a minimum of 12 million turbochargers annually.