Car and Driver: New Math: Higher Fines Nudge Automakers toward MPG Targets

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Affordable V-8 muscle cars and some of the thirstiest trucks may again be living on borrowed time after this week. Or these American favorites might become more expensive, because the economics of building and selling them in the U.S. market have just been upended.

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To avoid running through a maze of numbers, it’s essentially this: Selling a full lineup of vehicles today involves some complex calculations. If automakers make too many vehicles with low fuel-economy ratings, they need to balance that out with enough high-efficiency models like hybrids or plug-in vehicles. And if they don’t get that balance right and sell too many cars with low mileage, they’ll be hit with a federal fine—one that just increased by more than 150 percent.

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While nothing else has changed yet about the way in which the federal government’s Corporate Average Fuel Economy program is calculated or enforced, in an industry that’s used to making some cost/benefit calculations about product mix and what to keep building, this could change the business case behind building entire vehicle lines or powertrain variants.

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Serving Its Purpose, Or Not?

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The news about the fine hike’s effect on the auto industry broke this past weekend, before the release of the EPA’s technical assessment report that for the most part applauded automakers for meeting standards that were rapidly phased in beginning in 2012. The latter release is part of a midterm evaluation of the current CAFÉ standards, looking ahead to 2022 through 2025. Automakers, regulators, lobby groups, and environmental organizations will be carefully studying the terms of this report in coming weeks—and we’ll be studying it and related developments.

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Although it has nothing to do with that review process, the new fine announcement could have a greater near-term impact on some automaker product decisions than ratcheting up CAFE targets. Declared in a Federal Register notice from July 5, the hikes are part of a sweeping ramp-up of penalty amounts in a range of federal agencies and areas, “pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvement Act of 2015.”

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The fine hike is going to punish (as is intended) automakers who have been simply paying the fine especially hard.
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In the meantime, while automakers are circulating memos on which variants might get cut (or which plug-in models might get a stronger push), the fines for failing to comply will impose more hurt—until they get the right mix of efficient vehicles, that is.

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The fine hike is going to punish (as is intended) automakers who have been simply paying the fine especially hard. And it will apply to automaker’s results from the 2015 model year, which haven’t yet been assessed.

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A Game of Costs and Benefits to Automakers

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The current regulations, phased in beginning in 2012, have been a much higher-stakes system than the previous regulations. It’s rewarded real cars-delivered volume, by rated fuel efficiency, requiring larger automakers to balance out significant volumes of gas-guzzling, low-mileage vehicles with significant volumes of hybrid or diesel models. And the penalty just went from $5.50 per 0.1 mpg over the fleet target, per vehicle produced, up to $14.

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It could dramatically increase the amount of the fines automakers pay—amounts that already are significant. From 2010 through 2014, Jaguar Land Rover paid a whopping $48.2 million in fines, while Daimler (Mercedes-Benz and Smart) paid $28.2 million. This is not to be confused with U.S. greenhouse-gas emissions targets, which automakers are having much greater success meeting.

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The Alliance of Automobile Manufacturers, who called the fine increase “draconian” and expressed concern about vehicle affordability, pointed to that issue: “Automakers were already preparing to face the unfair reality of having to pay significant CAFE fines despite meeting the more aggressive EPA standard.”

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There’s hope of a more unified set of regulations, looking well ahead to that 2022–2025 window. But with the standards under a midterm review, and a public comment period just ending last month, it’s unfortunate timing for automakers for the impact of the higher fines.

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Will It Curb Repeat Offenders?

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Andrew Linhardt, Washington representative for the Sierra Club, says that this entire line of automaker complaints comes across as disingenuous, considering that they’re questioning the costs of violating regulations.

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If they were meeting the standards, they wouldn’t be complaining about the higher fines.
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“They were expecting lower fines that would permit them to make more inefficient vehicles,” said Linhardt. “We don’t have a lot of sympathy for those who have been breaking the rules on this . . . If they were meeting the standards, they wouldn’t be complaining about the higher fines.”

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The Sierra Club hopes that the steeper fines will lead to more electric cars, powered by renewable energy. And any company who continues to pay the fine rather than build enough high-efficiency vehicles leaves some green credibility behind.

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“Obviously the automakers are annoyed, but it’s unclear to me that the higher fines are going to have a huge effect,” says John DeCicco, a research professor at the University of Michigan Energy Institute, who takes a more nuanced prediction on the effects.

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• How the EPA is Helping Carmakers Hit 2025’s 54.5-mpg CAFE Standard-
• The CAFE Numbers Game: Making Sense of the New Fuel-Economy Regulations -
• The 54.5-mpg CAFE Target Looms Large—Here’s How Companies Currently Stack Up-

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With those EPA greenhouse-gas standards in place, and the severe penalties threatened by EPA violations—like the threat of a denial of a license to sell vehicles, as happened to VW because of its diesel scandal—DeCicco sees it as “belts and suspenders” regulation.

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“The particular incentives faced by any given automaker vary, and so it’s possible that the higher CAFE fines will have an influence on the product strategies of some firms, in particular, the Europeans who have traditionally been paying the fines. So it could push them to introduce more PEVs than they might otherwise.”

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So automakers, send out your meeting alerts and cancel your vacations. There are some new calculations to be made.

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