Automakers beat US fuel-economy targets for second consecutive year - EPA report

The US Environmental Protection Agency (EPA) has reported on automakers' results in terms of meeting federal regulations relative to 2013 model-year vehicles. The report indicates US automakers have exceeded targets for reducing greenhouse gases (GHG), and so are more efficient, for the second year in a row. While a useful gauge for evaluating progress, measures of improvement are not fully indicative of full compliance with EPA regulations. As the report says, "For the 2012 and 2013 model years, there are two ways to describe a manufacturer's compliance status: (1) they have demonstrated compliance, or (2) they have not yet demonstrated compliance. No manufacturer is yet out of compliance with the GHG program in the 2012 or 2013 model years; their actions in subsequent years will ultimately determine final compliance."

The report details results of the vehicle fleet for the 2013 model year, based on data reported through March 2014. For evaluating compliance with EPA's GHG requirements, the report says that “the GHG standards and compliance values are based on the results achieved on EPA's city and highway tests, weighted 55 and 45 percent, respectively,” referred to as the 2-cycle test, which evaluates tailpipe emissions, with results production-weighted as well.

According to the report, the manufacturers achieving the most reductions in CO2 emissions, as measured by the two-cycle test, expressed in grams per mile (g/mil), were Jaguar Land Rover (improved by 47 g/mil), Nissan (improved by 29 g/mil, and Mercedes-Benz (improved by 23 g/mil). Fiat Chrysler Automobiles (FCA) achieved an overall increase of 13 g/mil. The EPA details a car total, a truck total, and overall fleet total; however, being production based, the car and truck figures cannot be summed into an overall figure. Toyota achieved improvement in its truck fleet (reduced by 7 g/mil), but its cars saw an increase in emissions by 3 g/mil, and the company saw an overall decline. Ford also saw its overall fleet emissions increase by 6 g/mil, though the emissions of its trucks fell by 10 g/mil and cars by 5 g/mil. The overall US vehicle fleet saw tailpipe emissions decline by 8 g/mil, from 302 g/mil in the 2012 model year to 294 g/mil in the 2013 model year. The US fleet saw trucks reduce CO2 emissions by 10 g/mil, while those of cars dropped 8 g/mil. Truck sales have increased, but so has fuel economy. The CO2 emissions calculation is one figure by which the EPA determines regulatory compliance, and then issues credits or deficits. Other factors on which automakers can gain credits toward compliance, which have much less impact, include offering flexible-fuel vehicles and reducing emissions and leaks from air-conditioning systems.

Along with reporting CO2 improvements, the EPA disclosed the status of automaker compliance credits, which can be carried forward against future years or sold to other manufacturers. The industry as a whole has 299,626,971 credits carried forward to the 2014 model year. The EPA expresses credits in terms of megagrams, while compliance is expressed as grams per mile (CO2). Toyota (103.4 million credits) has twice the number available to the second-place automaker, Honda (50.2 million credits). General Motors (GM) and Ford are at a similar level, with 29.18 million and 28.54 million credits, respectively. The only automakers to buy, sell or forfeit credits related to the 2013 model year were Tesla, which sold 1.048 million to FCA, and Hyundai and Kia. Hyundai and Kia each lost credits as part of a settlement over misstated fuel-economy results on 2012 model-year vehicles.

However, several automakers were unable to earn credits for the 2013 model year, though with banked prior credits they are in compliance. Among them are FCA, Volkswagen, BMW, Volvo, Mercedes-Benz, and Jaguar Land Rover. FCA saw the largest credit deficit, with a 1,631,285 credit deficit for 2013, while Mercedes lost 377,880 credits, Volvo 297,006, and BMW 259,619. Low-volume automakers that also earned deficits in their credit banks included Ferrari, Lotus, McLaren, and Aston Martin.

For the 2013 model year, the report cites only one sale and one purchase of credits (Tesla's sale of 1.04 million to FCA); since 2010, Honda has sold 434,383 credits, Nissan 950,000, and Tesla 1.27 million. The report does not indicate the transaction prices, as that information is confidential between the parties. On the purchase side, FCA has bought 1.693 million credits, Ferrari 90,000 credits, and Mercedes-Benz 877,713 credits.

Calculating the credits that each company has can be complicated, however, based on fleet performance, as well as EPA rules on whether and when an automaker can buy or sell those credits. An automaker can carry a credit forward to offset a subsequent deficit, but cannot carry forward a deficit if it has a credit, and is limited to the number of years a credit or a deficit can be carried forward; additionally, an automaker can use credits in its passenger-car totals to offset its own light-truck deficit, or vice versa.

Impacting on the results of manufacturers including Nissan and Tesla, EPA's GHG programme provides credits for advanced technology vehicles, though this is limited to the first 200,000 qualified vehicles an automaker builds for the 2012-16 model years. Electric vehicles (EVs) can use zero grams per mile, while plug-in hybrid EVs (PHEVs) are allowed to count only emissions from gasoline (petrol) engine operation, and miles travelled on use of electricity are counted as zero grams per mile. The EPA's rule is intended to encourage the proliferation of the technologies. The report notes that all manufacturers are well below the 200,000-unit mark.

Outlook and implications

The EPA report indicates that automakers have been largely able to achieve the targets set to date - with some in compliance through their ability to buy credits rather than meeting the CO2 compliance factor directly. Going forward, however, greater consumer acceptance of more effective solutions is expected to be required to reach the 2025 targets. To encourage that consumer acceptance, the vehicle mix at dealers could change in the near or long term.

Credits bought and sold may prove key factors in manufacturers' strategies in the near term. FCA and Mercedes-Benz, so far, have bought credits, while Toyota seems content to build up a bank. With the large bank that Toyota has and its current ability to generate more credits, it is uniquely positioned to weather potential years of either earning fewer credits or even being in deficit at one point or another. The EPA allows credits to be carried forward only for five model years; after 2014, automakers will lose 2009 banked credits. For Toyota, that could be a loss of about 30 million credits.

Commenting on the EPA report, IHS Automotive analyst Devin Lindsay, who is responsible for the alternative powertrain forecast for North America, said, "Despite the current progress, more work needs to be done. This is where excess credits and electrification comes into the landscape. We will continue to climb the fuel-economy cost-to-benefit tree, reaching more expensive technologies. Those with more credits banked do not need to search for higher ground to gather the more expensive fruit. As a result, Toyota, already successful in hybridization, can afford to be selective instead of taking a gamble, which one might say those pushing rapid deployment of PHEV models are doing. By contrast, OEMs without a considerable credit bank account must gamble even in the midst of a low-cost fuel environment. Consumers may begin to see a dealership mix that favors the vehicles offering higher fuel economy or credit-gathering alternative fuel technologies. A V8 may be a bit harder to find, while smaller displacement and hybrid versions might be plentiful, pushing consumers in the direction favoured by the government regulations."