Posted on July 17, 2016 by Matt Pressman
The price for investing in a gasoline-powered automotive future just went up. As reported in Automotive News yesterday, "Automakers worried about the cost of meeting fuel economy targets are waking up to a startling new reality: The cost of not meeting them is about to get a lot higher. Next month, the National Highway Traffic Safety Administration [NHTSA] will more than double the fine it assesses automakers that fall short of their annual Corporate Average Fuel Economy [CAFE] standards. For many automakers, that increase could upend the economics of their fuel economy compliance." Indeed, many automakers will feel the burn... but, not Tesla Motors [NASDAQ: TSLA]. Tesla Motors is the only automotive company with an all electric vehicle strategy.
Above: The zero emissions Tesla Model S (Source: Hybrid Cars via Tesla Motors)
How tough are these new fines for the auto companies that promote gas guzzlers with low fuel mileage? "For NHTSA, that meant raising the rate used for calculating CAFE penalties to $14 from $5.50. The $8.50 difference amounts to big bucks because it's applied to each 0.1 mpg that an automaker falls short of its fuel economy target and then multiplied by the number of vehicles from that fleet sold in a given model year."
Above: Examples of automakers who've received prior CAFE fines (Source: Automotive News via NHTSA)
"'This is a badly needed reform,' said Roland Hwang, transportation director at the Natural Resources Defense Council, who said the $5.50 rate made it cheaper for automakers to miss the target than to try to achieve it." Furthermore, for the scores of auto companies (competing with Tesla) with a fleet that suffers from low fuel mileage, the fines could start piling up almost immediately. "NHTSA confirmed to Automotive News that the steeper penalties will apply to 2015 model year vehicles for which it has yet to issue compliance reports. That means automakers at risk of missing their targets still don't know how much more the increased fines may have already cost them."
Above: While its competitors struggle to get 20 MPG, the Tesla Model S has no trouble with CAFE standards as it's getting nearly 90 MPGe (Source: U.S. Department of Energy)
Hybrid Cars notes that automakers will surely fight these CAFE standards, but "Major automakers have a several decade-long history of opposing regulatory initiatives that they eventually got on board with. Aside from 1990s California rules successfully contested, carmakers have fought such cost-increasing innovations as mandatory seatbelts, airbags, 5-mph bumpers, catalytic converters and other emission controls... In short, while they may utter protests, contest details, and posture as would any good car salesman worth his salt, after settling on negotiations, automakers will have to do what it takes to make their numbers, including the profit numbers."
Above: Fully electric car sales in 2015 still only represents a tiny 0.41% of total sales, but, pressure on fuel mileage standards may push more automakers towards electrification (Source: Hybrid Cars)
Hybrid Cars also referenced Roland Hwang who explained, "as carbon reduction becomes a global priority, the world’s automotive markets are heading toward electrification... factors including the Volkswagen diesel emission settlements point to a potential for any perceptive dam to break... Like Tesla, which is called 'disruptive,' if VW means it and introduces many more competitive electrified vehicles into its global brands, it could force others to follow a path they are veering toward to one degree or another."
Above: CAFE standards will rise to a 54.5 mpg fleet average by 2025 (Source: Hybrid Cars)
Detroit News talked to Carol Lee Rawn (from sustainability firm Ceres) about CAFE standards who explains, "U.S. automakers have been caught flat-footed before, when prices at the pump rose and they weren’t ready with the kind of fuel-efficient vehicles buyers wanted. Strong fuel economy standards offer insurance against future gas price spikes.” And Scientific American quotes former Transportation Secretary Ray LaHood, "I'm happy to see so many people care about CAFE standards... I have no doubt oil prices are going to go back up again and people are going to be looking for fuel-efficient cars."
Above: Auto companies are paying a high price for the poor fuel mileage and carbon emissions from their gas-powered cars (Source: Union of Concerned Scientists)
Regardless of prices at the pump, the price of outsized carbon emissions emitted from fossil fuel vehicles is mounting. A few weeks ago, Bloomberg reported, "Volkswagen AG’s $15.3 billion agreement to get a half million emissions-cheating diesel vehicles off U.S. roads sets an auto-industry record that will only go higher as criminal probes and lawsuits on three continents roll ahead... after the carmaker admitted last September to systematically rigging environmental tests since 2009 to hide that its diesel vehicles were emitting far more pollutants than allowed under U.S. and California law." With CAFE fines increasing and VW's recent dieselgate fiasco, Tesla Motors is looking more and more like the car company with the right strategy for the future.