Column: Fuel economy standards strengthen automakers

Drew Kodjak

If President Trump and Congress want to inspire automakers to build more cars here in the U.S., then pulling out of the Paris Climate agreement, and threatening to roll back motor vehicle fuel economy standards are precisely the wrong way to do it. Throughout my travels around the world over the last decade I’ve heard repeatedly that motor vehicle emission standards are one of the best ways to improve the international competitiveness of any nation’s domestic car industry. Now that China is the world’s largest motor vehicle market, and auto companies are competing for dominance in the emerging electric vehicle market, maintaining the U.S. leadership on vehicle fuel economy policies is critically important for the long-term competitiveness of U.S. carmakers.

The logic behind linking auto fuel economy policies to improved international competitiveness is a three-step process, so bear with me for a moment. In the first step, we demonstrate the link between vehicle emission standards and technology innovation. These standards enable carmakers and their component suppliers to invest with confidence in emerging technologies, secure in the knowledge that there will be a market. The Ford F-150 provides a useful case study. In 2010, the average combined fuel economy of the F-150 was 15.9 mpg. New fuel economy standards implemented in 2012 inspired Ford to invest in a downsized, turbocharged EcoBoost engine and an all-aluminum body. These innovations have contributed to a 21 percent increase in fuel economy from 16 to 19 mpg over four years.

Once carmakers invest in new technologies, they gain a first-mover advantage over their competitors as costs drop and efficiencies improve due to “learning by doing” and economies of scale. In the 1970s, Corning developed the catalytic converter for the U.S. market in response to new motor vehicle emission standards. After two decades of refinement, Corning brought its catalytic converter to China, giving the company a huge competitive advantage where it enjoys about 50 percent market penetration. Similarly, even after 15 years, Toyota still dominates the hybrid vehicle market in the US and in Japan because their first mover advantage allowed them to get ahead of others on the learning curve. Since it entered the market in 1998, each generation of the Prius has seen a 25 percent increase in electric motor power, a 20 percent increase in engine power, a 3 percent cost decrease relative to the Corolla, and a 10 percent increase in fuel economy.”

Over the last 50 years, we have witnessed the steady diffusion of auto emission standards throughout the world. The pattern has been well documented since the world’s most progressive standards tend to start in California and then spread to the U.S. government, over to Europe, and then to the rest of the world. Historically, emerging markets such as China, India, Mexico and Brazil have adopted emission standards from the U.S. and Europe after a lag time of between 5 and 10 years. This lag time gives U.S. manufacturers and component suppliers the opportunity to benefit from learning by doing and economies of scale from the technologies they invested in to comply with auto standards developed in the U.S.

There is also an important jobs element to this story. Manufacturing plants and suppliers tend to locate where the markets are. For example, BMW and Mercedes, both German companies, build SUVs in the U.S. and export to Europe because the largest market for SUVs is in the U.S. B-segment small cars, which are most popular in Europe, are all produced there and exported to the rest of the world. It’s no coincidence that Tesla is located in California, the home of the Zero Emission Vehicle requirement.

There’s nothing wrong with any country seeking to encourage investment in manufacturing in its own country. The point here is that if we want the auto manufacturing of the future to be located in the U.S., we need policies that incentivize investments in cutting-edge efficiency technology. And if we want to help our domestic manufacturers to make long-term investments in the cars of the future, then sticking with existing standards, and even strengthening them, is the right way to go.

Drew Kodjak is executive director of the International Council on Clean Transportation.