A Strong Canadian Auto Industry in a Fuel Efficient Future A Strong Canadian Auto Industry in a Fuel Efficient Future A commentary on automotive industry policy in the context of climate change, vehicle fuel efficiency regulations and carbon-constrained markets Prepared by: Bob Oliver Transportation Programme Director Pollution Probe December 2007 Pollution Probe 17 A Strong Canadian Auto Industry in a Fuel Efficient Future About this Commentary Pollution Probe believes that Canada needs a long-term vision and strategy to build a strong and globally competitive auto sector for the future. The auto manufacturing industry in Canada is composed of vehicle assembly operations and component producers. Generally, these facilities supply foreign automotive markets, exporting mainly to the US, generating significant wealth for Canada. The consumer market for automobiles in Canada is mainly supplied with imported models, thus expanding choice for Canadians. The right mix of industry policies and consumer market policies could help create the conditions for the long-term success of Canada’s auto industry. A crucial element of this success will be the capacity for this industry to build products that are consistent with the goals of environmental and economic sustainability. This commentary begins with a discussion of why fuel efficiency standards are needed and why governments around the world are implementing regulations. Aspects of the auto manufacturing industry and the consumer automobile market in Canada are then presented, followed by a discussion of how industry and market policies could be aligned to benefit the auto sector, consumers and the environment. Table of Contents Vehicle Fuel Efficiency and the Case for Regulated Standards 1 The Auto Manufacturing Industry in Canada 4 The Consumer Automobile Market in Canada 7 Aligning the Auto Industry and Markey Policies 12 Concluding Remarks 15 Pollution Probe 18 A Strong Canadian Auto Industry in a Fuel Efficient Future Vehicle Fuel Efficiency and the Case for Regulated Standards Environmental and economic circumstances reduces emissions by 100 megatonnes of have thrust auto sector policy into the carbon annually.2 The National Academy of headlights of government lawmakers in Sciences in the US has calculated the Canada and around the world. Primarily at cumulative economic benefits of CAFE to be issue is the need to address climate change, in the range of $40–$80 billion in unadjusted which will require significant reductions in dollars.3 greenhouse gas emissions from light-duty vehicles (e.g., passenger cars, minivans, pickup The downsides experienced with improved trucks, SUVs and other personal-use vehicles). fuel economy were few (e.g., in the US, A comprehensive solution will include fuel- generally, the auto industry continued to conserving techniques, such as “eco-driving”, flourish under CAFE standards4 and vehicle more public education and information, safety performance is better than ever5 even possibly a fuel or carbon tax, and support for though today’s passenger cars are lighter than technology research and development. those of the pre-regulation era6), and now Generally, supporting a shift to a less other nations around the world are also automobile-dependent society is also needed. following a regulatory agenda for improving fuel efficiency.7 But this was not always the Hard policy measures implemented by government, such as fuel efficiency standards, are needed because none of the exercise of dominant market power — from the aforementioned measures will be sufficient to demand side — broke OPEC ’s ability to set world draw into the market new vehicles that oil prices for a decade.“ incorporate advanced technologies and 2 Committee on the Effectiveness and Impact of designs that reduce fuel consumption. In Corporate Average Fuel Economy (CAFE) theory and in practice, regulated standards Standards, National Research Council (2002). The work. Corporate Average Fuel Economy (CAFE) Impact and Effectiveness of Corporate Average Fuel standards that were first established in the US Economy (CAFE) Standards, National Academies in the mid-1970s required a doubling of new Press. pp.3. 3 car fuel economy levels over a 10-year period. Ibid. pp. 20. 4 Ibid. pp. 22–24. This single measure broke OPEC’s control 5 Ibid. pp. 25. over global crude oil prices until the mid- 6 Light-Duty Automotive Technology and Fuel 1 1990s and, to this day, continues to save the Economy Trends: 1975 through 2007, EPA420-R-07- US 2.8 million barrels of oil per year and 008, Environmental Protection Agency, Ann Arbor, Michigan. Note: Compared to 1975 levels, average passenger car mass is lower, but light truck mass is higher. 1 Lovins, Datta, Bustnes, Koomey, Glasgow (2005). 7 An, Gordon, He, Kodjak, Rutherford (2007). Winning the Oil Endgame, Rocky Mountain Passenger Vehicle Greenhouse Gas and Fuel Institute. pp. xiii. Excerpt: “When the US last paid Economy Standards: A Global Update, The attention to oil, in 1977–1985, it cut its oil use 17 International Council on Clean Transportation. per cent while GDP grew 27 per cent. Oil imports pp. 8. Millikin (2007). A Global Survey of Highly fell 50 per cent, and imports from the Persian Fuel Efficient, Low Greenhouse Gas Emitting Gulf by 87 per cent, in just eight years. That Vehicles, Pollution Probe. pp. 3. Pollution Probe 1 A Strong Canadian Auto Industry in a Fuel Efficient Future case. In Europe, for example, countries first reduce tailpipe CO2 emissions by 25 per cent experimented with higher fuel taxes instead from the 1995 fleet-average level of 180 g/km of fuel efficiency standards. This strategy was to 140 g/km by 2008. In 2006, it was partly successful — higher fuel prices, estimated that only five automakers were on combined with other economic and track to meet this goal: Fiat, Citroën, Renault, structural factors, kept per-capita fuel Ford and Peugeot.9 Unsatisfied with the consumption levels lower in Europe than in voluntary performance of three-quarters of other parts of the world, and lower taxes on the industry, the Commission is now diesel compared to gasoline led to wider preparing to implement a regulated standard market adoption of diesel-powered vehicles. of 120–130 g/km to be achieved by 2012.10 This is an important factor because the properties of diesel permit engines to operate Europe’s shift from taxation to regulation is on a more mechanically efficient cycle, consistent with economic theory on fuel essentially generating more power from less prices and fuel efficiency. While the fuel. However, higher fuel prices did not expectation is that higher fuel prices should result in sufficient market demand for lead people to be more frugal with fuel use, vehicles that incorporated advanced and that this should lead people to seek more technologies to reduce fuel consumption. fuel efficient vehicle options as a way to save fuel, the reality is that demand for fuel In the early 1990s, European regulators efficiency-enhancing technology content in a concluded that automakers were not making new vehicle remains — at best — only part of optimal use of available technology a diffuse response to the price signal. The advancements to improve fuel efficiency figures on page 3 offer one explanation why: levels, despite the pricier fuel regime.8 as technology is added to a vehicle to raise Opportunities to improve fuel efficiency were fuel economy, the incremental price of the often traded off against increases in other vehicle increases — but so do the fuel savings. vehicle attributes, such as horsepower, The difference between fuel savings and price acceleration rate, speed and weight. This is increase represents the net value to the similar to what happened in North America consumer. As shown in Figure 1A, when, after the 1980s, lawmakers and discounting the fuel savings over the life of regulators ceased to significantly tighten the vehicle means the maximum net value is CAFE standards. Increases in vehicle weight achieved at 33 mpg, even though 39 mpg is were partly the result of added safety achievable at no net cost. The economically components, often required by law, but were rational consumer would, therefore, not pay mostly the result of increases in vehicle size for 39 mpg despite the environmental and features. Other loads, such as benefits that would result if everyone paid for entertainment and passenger comfort this level of fuel efficiency (i.e., choosing systems, also draw an increased share of the optimal, cost-effective fuel efficiency over engine’s power output. To reverse this trend and to make fuel efficiency a top priority for automakers, the 9 European Federation for Transport and European Commission negotiated a Environment. (2006). T&E Bulletin, No 152, October voluntary target with the auto industry — 2006. www.transportenvironment.org/docs/ Bulletin/2006/2006-10_bulletin152_web.pdf 10 European Commission proposal to limit the CO2 emissions from cars (December 2007). 8 Oliver (2005). Greenhouse Gas and Vehicle Fuel http://europa.eu/rapid/pressReleasesAction.do? Efficiency Standards for Canada , Pollution Probe. reference=IP/07/1965&format=HTML& pp.130. aged=0&language=EN&guiLanguage=en Pollution Probe 2 A Strong Canadian Auto Industry in a Fuel Efficient Future Figure 1A: Price and Value of Increased Fuel Figure 1B: Price and Value of Increased Fuel Economy to Passenger Car Buyer, Using NRC Economy to Passenger Car Buyer, Using NRC Average Price Curves and Valuing Fuel Savings Over Average Price Curves with a 3-year Simple Payback 14-year Vehicle Life $2,500 $2,500 $2,000 $2,000 $1,500 $1,500 $1,000 $1,000 $500 $500 Constant 2000 $ Constant 0 Constant 2000 $ Constant 0 -$500 -$500 28 30 32 34 36 38 40 42 44 28 30 32 34 36 38 40 42 44 Miles per Gallon Miles per Gallon ○○○ Fuel Savings Price Increase○○○ Net Value Fuel Savings Price Increase Net Value Note: Figures A and B assume cars driven 15,600 miles per year when new, decreasing at 4.5 per cent per year, 12 per cent discount rate, 14-year vehicle life, $1.50 per gallon gasoline, 15 per cent shortfall between EPA test and on-road fuel economy.