The 1981–1984 automobile fuel economy standards—Can they be achieved?

AppliedEnergy8 (1981) 143-173

THE 1981-84 AUTOMOBILE FUEL ECONOMY STANDARDS CAN THEY BE ACHIEVED?

LARRY R. GSELLMAN

The Mitre Corporation, Metrek Division, 1820 Doltey Madison Boulevard, McLean, Virginia 22102 (USA)

SUMMARY

The current automobile fuel economy standards" were established in June 1977. Several studies completed since then recommended that the Department of Transportation (DO T) modify the current schedule. However, all of the studies were completed before the 1979 gasoline shortage. This paper compares the studies performed to assess alternative schedules and identifies major differences. Major differences among the studies include the definition of' economic practicability', cost estimates, estimates of automobile sales losses, and the impact of EPA test procedures. The results of the comparison, along with an analysis of the mix of new cars soM and used car prices since the gasoline shortage, are used to determine if the current schedule can be achieved. Observations regarding improvements to the fuel economy programme for establishing post-1985 standards are also presented.

INTRODUCTION

The Energy Policy and Conservation Act (EPCA) of 19751 established automobile fuel economy standards for the model years 1978, 1979, 1980 and 1985. This law directed the Secretary of Transportation to establish standards for the 1981-1984 models. In June of 1977, the Secretary of Transportation issued the 'current schedule' for the automobile fuel economy standards for 1981-1984 models. 2 Since then a number of studies have been performed and recommendations have been made that the current schedule be relaxed. Most of the studies performed were completed during the past year and were either completed or essentially finished prior to the gasoline shortage which occurred during the spring and summer of 1979. In light of the above, a thorough 143 Applied Energy 0306-2619/81/0008-0143/$02'50 (C, Applied Science Publishers Ltd, England, 1981 Printed in Great Britain

144

LARRY R. GSELLMAN

review of the studies was conducted with the purpose of identifying the differences among the studies and major issues which need to be resolved to determine whether the impacts of the 1979 gasoline shortage indicate that a reassessment of the current schedule is warranted. Observations regarding improvements to the fuel economy programme for establishing post-1985 standards are presented.

Scope A total of 13 studies were identified which related either directly or indirectly to the issue of alternative fuel economy schedules. A summary of these studies and their characteristics is presented in the Appendix. The studies were reviewed and those satisfying the following criteria were selected for comparison: (1) (2) (3)

The study compared the current schedule with at least one alternative schedule. A recommendation was made. The recommendation must be based upon quantitative information.

Only five studies satisfied these criteria. They include three prepared by the Department of Transportation (DOT), 2 -4 one by Chase Manhattan Bank 5 and one by the Department of Commerce (DOC). 6 Ford and General Motors also provided submissions to D O T which satisfied the above criteria; however, because of corporate confidentiality these reports were not available for review. Discussion of the assessments made by Ford and General Motors presented in this paper are based upon information presented in the June 1979 D O T report. For purpose of the assessment, the D O T reports, including their annual reports to Congress, were reviewed as a single report because they are interrelated and numerous references among the reports are made. As a preponderance of the information used in performing the comparative assessment is based upon D O T publications, many of the issues discussed in the paper focus on D O T reports. This focus is due entirely to data limitations resulting from the confidential industry data and not due to the purpose and design of this paper. For example, in the discussion of cost data, a historical plot of cost estimates to achieve the standards based upon D O T estimates is provided. Comparable cost estimates from industry would also be of interest; however, again because of the confidentiality problem, these data were not available. The comparison presented is only for the industry as a whole. Impacts on individual firms within the industry, although discussed in all the studies, are not addressed here. Therefore, issues such as the impact of the alternative schedules on competition within the industry are not discussed. Following the comparison, consumer reactions following the 1979 gasoline shortage are analysed, the applicability of the study results in light of the reactions are discussed and, finally, an assessment of the feasibility of satisfying the current schedule is presented.

THE 1 9 8 1 - 8 4 AUTOMOBILE FUEL ECONOMY STANDARDS

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Overview The issues associated with the appropriateness of alternative schedules for automobile fuel economy must be resolved within the framework of a dynamic environment. Because the studies being compared were published at different times, it is important to establish the temporal relationship among these studies and to identify significant events which may have influenced the scope and characteristics of these studies. These relationships are depicted in Fig. 1. In 1977, DOT issued two reports--the support paper for the rulemaking activity, 2 and secondly the final impact assessment of the automobile fuel economy standards. 3 These two studies provided the background information for the promulgation of the current schedule. In both reports alternative schedules are assessed. The final impact assessment provides a thorough analysis of the alternatives studied with emphasis on the potential increases in the price of automobiles, the impact on the consumption of energy, on employment and on other resources. Only summary information is provided in the rulemaking support paper. DOT indicated that a benefit/cost analysis would be useful but was not required based on their interpretation of the intent of the act. The Chase study, 5 the DOC report, 6 and the Ford and General Motors submissions were published during a five-month period at the beginning of 1979. It is interesting to note that, from a temporal point of view, the studies coincided with the increased emphasis within the Federal government on regulations and their impact on inflation. This emphasis was initiated by President Carter's speech in October 1978. STUDIES RECOMMENDING ALTERNATIVE SCHEDULES

FORDANDGENERALMOTORS SUBMISSIONS 1 ~-~ DOC CHASE

I dune

I January

1977t

1978

I

January

January

1980

1979

STUDIES | RECOMMENDING / RULEMAKINGSUPPORTPAPER CURRENT SCHEDULE FINALIMPACTASSESSMENT

REPORTONREQUESTS TOREDUCEFUEL ECONOMYSTANDARDS •

RELATEDEVENTS

v

s

FEDERALCONCERN 1979 WlTHIMPACTOF GASOLINE GOVERNMENT SHORTAGE REGULATIONS Fig. 1. Time-phasedrelationships.

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LARRY R. GSELLMAN

The June 1979 D O T report 7 was prepared in response to the industrial submissions. Although the report did discuss a number of issues, major emphasis in the report was directed toward comparing the direct benefits and cost of alternative schedules proposed by industry. This is interesting because previous D O T reports did not attempt to compare alternatives on a benefit/cost basis. One might conclude that the activities of the Federal government to address the regulatory process and its impact upon inflation had an influence upon the approach used by DOT.

ASSESSMENT OF DIFFERENCES

The comparison of the five studies revealed numerous differences, ranging from relatively small and insignificant ones such as use of terminology to large differences which not only influence the conclusions drawn, but also had a major bearing on the approach used in performing the studies. Only the four most important differences are presented in this paper. These are: (1) the criteria used for selection of the recommended schedule; (2) the technical and cost data used; (3) estimates of consumer response to price changes and vehicle characteristics, and (4) estimates of the impact of EPA test procedure changes. Criteria

The five studies' recommendations were based upon the application of different criteria. The differences resulted from the various interpretations of the statutory requirements. The Act (EPCA) states that in establishing standards for fuel economy, D O T should consider four factors, (1) technical feasibility, (2) economic practicability, (3) effects of other Federal standards, and (4) the need for the nation to conserve energy. There was general agreement among the studies with respect to the interpretation and application of all factors except economic practicability. The difference in the definition of economic practicability is probably the major reason for the differences in recommendations presented in the studies. The D O T studies recommended the current schedule. Those using the broader definition concluded that a schedule with a slower annual increase in the standard should be adopted. D O T defined a schedule as being economically practicable if compliance with the schedule is within the financial capabilities of the automobile industry, and would not produce substantial dislocation in the auto industry or in the economy as a whole. No definition of economic practicability is presented in the law. As a result, D O T had to develop a definition. The process followed by D O T in developing the definition followed the logic shown in Fig. 2.t Also shown in Fig. 2 is a process by" which an alternative definition may be developed. t A more detailed legal presentation of the DOT processis presentedin AppendixA of the rulemaking paper.3

THE

1981-84 AUTOMOBILE FUEL ECONOMY STANDARDS

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The first step was to define feasibility as a synonym for practicability. If one accepts the use of feasibility as a synonym for practicability, the remaining steps to a working definition are straightforward because definitions of feasibility and economic feasibility are presented in the Conference Report. However, feasibility was defined in the Conference Report in its strictest interpretation. Using this definition therefore implies that Congressional intent was that practicability also be defined in its strictest interpretation. In addition, in the Conference Report, economic feasibility was defined. The definition of economic feasibility from the Conference Report then provided the basis for DOT's definition of economic practicability presented earlier. ALTERNATIVE DEFINITION Economic practicability

DOT DEFINITION Economic Practicability

Economically Practicable

Feasibility

1

With Little

Defined in Strict" Sense: 'Capable of being carried out' °

I

Fig. 2.

I

l 1

Possible to Perform with LittleWaste

Economic Feasibility: 'Manufacturer has economic capabilityto carry out requirements' •

Economic Practicability

Possible to Perform

Waste

Maximise Net Benefits

• From Conference Report

Procedures followed in defining 'Economic Practicability'.

DOC in their report took issue with DOT's definition and recommended the use of a less restrictive definition for economic practicability. Chase in the benefit/cost study did not explicitly discuss the issue. However, implicit in the criteria used for their recommendation is a definition of economic practicability based upon consideration of benefits and costs. DOT in their report indicated that although a benefit/cost study might be desirable, it definitely was not required to satisfy the statutory requirements. None of the other studies reviewed presented a logical process similar to the one used by DOT by which an alternative definition of economic practicability could be developed. However, such a process could be formulated. One approach to arriving at a definition which is compatible with the implied definition used by the other studies is presented in Fig. 2. The first step is simply a transformation of the parts of

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LARRY R. GSELLMAN

speech. The next steps entail selecting appropriate definitions for the two words and combining them into a single definition for the combination. The final step is one possible interpretation which might be applied to the definition as it relates to the criteria used by the other studies. Individuals favouring this definition might also argue that Congressional intent was not to have economic practicability defined as a synonym for economic feasibility. If they had intended such an interpretation they would have used economic feasibility instead. Applying this logic, then one must conclude that economic practicability is not the same as economic feasibility. Technical and cost characteristics

As one would expect, much of the data used to develop the estimates of the performance and costs of the technologies to be used to achieve the standards was not presented in the reports. As a result, reasons for the differences identified could not be determined directly from the reports. However, the estimates are important elements of any assessment of alternative strategies because all estimates of resulting direct and indirect benefits and costs must be based on these characteristics. The technology characteristics, in terms of the potential increase in fuel economy and the feasible market penetration which can be expected by 1985, are summarised in Table 1. A consensus exists among all studies with respect to the potential of the technologies and their feasible market penetrations, i.e., the percentage of automobiles which could be equipped with the technologies by 1985. There is, however, one subtle difference among the estimates not readily observed from the table. All estimates other than the D O T estimates were provided as ranges reflecting concern with the uncertainty and risk associated with the technologies' potential for improving fuel economy. Chase also provided estimates of ranges, s although only their expected value is presented in Table 1. Harbridge House, on the other hand, provided a combination of ranges and maximum values. 8 Only D O T provided TABLE 1 TECHNOLOGY CHARACTERISTICS

Technology lndustry a Improved transmissions Automatic Manual Reduced drag Reduced rolling resistance Parasitic losses Lubricants Weight reductions

Impact on fi~el economy (°/o improvement) DOT Chase b Harbridge House (Sept. 1979)

7-11 3 5 3-7

8-11 5 5

9 4 4

< 10

1-4 1-3 1 3

5 1 4 3 23

3 2 2 28

2 5

" Based upon data presented in the Chase study. 5 b 50 ~o probability of occurrence.

<5

20~25

Market penetration by 1985 (°/i)" Industry DOT

60 8 80

85 15 80

80 80 100 100

80 80 100 100

THE 1981 84 AUTOMOBILEFUEL ECONOMY STANDARDS

149

estimates which did not reflect a concern about the risk and uncertainty associated with the potential of the technologies. This apparent lack of concern about the risk associated with the development and implementation of new technologies is one of the major points addressed in the D O C study. A consensus regarding the price increases required to achieve the schedules does not exist. Table 2 summarises the most recent estimates. 7 The table presents estimates of price increases to satisfy the current schedule and an alternative linear schedule proposed by industry. Shown on the table are estimates made by D O T and each firm for the strategies presented by the firms. Also presented are D O C ' s estimates of differences which may occur as a result of relaxing the schedule. It should be noted that D O C ' s estimates are simply averages of the cost estimates provided by industry and therefore are really not independent assessments. The differences between D O T ' s estimates and Ford's estimates are small, and given uncertainties, are insignificant. The differences between D O T ' s estimates and G M ' s estimates, however, are quite large. Since both schedules achieve the same goal, i.e. 27.5 mpg, in 1985, the difference in estimates is due entirely to the rate at which that goal is achieved. TABLE 2 ESTIMATES OF PRICE INCREASESTO ACHIEVESCHEDULES

Changes in automobile prices (in 1978 $) Ford path Price increase for MY 198(~1985 Current Linear Difference in 1985 M a x i m u m differencea

DOT 502 477 29 141

FORD

12 142

GM path DOT 443 392 51 108

GM 510 370 140 310

DOC

70 226

Maximum difference is for model-year 1983 for all estimates. No other cost data to use as a basis for comparison were identified during the review of the studies. Chase did not provide estimates of the costs associated with achieving the standards in their report. They relied primarily on a market survey to estimate the consumer response to the new vehicle characteristics. In the final impact assessment, estimates of price increases required tO achieve several alternative schedules were presented. 2 Figure 3 shows the data plotted against fuel economy in m p g for the current schedule and three alternative schedules. Also shown in Fig. 3 is a plot of mpg as a function of time for the schedules. The three alternative schedules had slower increases in fuel economy standards. Schedules A and C are essentially the same. Schedule B has the slowest rate of increase of all four schedules. The estimates of price increases to achieve schedules A, B and C as can be seen from the figure, are approximately the same. The price increase estimates for the current schedule which is the most demanding, from

150

LARRY R. GSELLMAN

an increase per unit of time point of view, had the lowest increase in automobile prices. This relationship is quite surprising because one would expect the schedule which required the fastest increase in fuel economy, i.e., the current schedule, to also have the highest increase in automobile prices. (Price increases for schedules A, B and C are based upon slightly different assumptions than the price increases for the current schedule. However, these differences are small and would not be expected to have such a major impact upon prices).

28

500

g

26 ~

~

24

) 400

~5

22

o

80 81 82 83 84 85 __ ModelYeo~r KEY: -- --

300

~ l J ~ B

__

rC

o-

~.co.

!i

200 o

a CurrenlSchedule

J

~.~

~__ CS ~rh:dnjie

100

0

_j

I

20

t Required

I

21

22

I

I

I

23 24 25 Fuel Economy(rnpg)

I

26

I

27

Required by1985

by 1980 Fig. 3.

/

28

DOT 1977 estimates of price increases for alternative schedules.

Estimates of price increases to achieve the current schedule have changed since the promulgation of the schedule in 1977. These estimates extracted from the three D O T documents are shown in Fig. 4. The price increase estimate has more than doubled in the two years since the schedules were established. As indicated in the figure the rates of increase may be slowing. An assessment of industry estimates might help in understanding why the increases have occurred and what one might expect in the future. For example, if industry estimates have been decreasing, then one might conclude that the changes have been due to a learning process on both parts and that the learning is essentially complete.

THE 1981-84 AUTOMOBILEFUEL ECONOMY STANDARDS

151

Consumer response Estimates of consumer response as reflected in projected sales are probably the most significant quantitative differences among the studies. The D O T rulemaking paper relied upon the Wharton Automobile Model to develop estimates of the impact of the schedules on sales. Two estimates were developed, one for a $400 price increase over the 1981-1984 time-frame, and the second for a $1000 increase. Peak sales losses occurred in 1981 in both cases. These were estimated respectively to be 600

A General Motors

500

o Ford erol Motors

400

300 _ 8 ~ -= o

200

100 o 0

1 June

I June

I danuory

I June

1977

1978

1979

1979

Ysor F i g . 4.

Price increases required to achieve fuel economy standards from model years 1981-1984. O, DOT estimates; A, other estimates.

2 ~ and 6 ~ . No estimate was provided for the price increase estimate to achieve the current schedule presented in the rule making paper, i.e. $50 to $150, or the $195 estimate in the final impact assessment. A reasonable estimate can be developed by extrapolating the data presented above. Using this approach, peak sales losses resulting from the current schedule when compared with the no regulation situation, i.e., fuel economy remains at 20mpg through 1985, would be less than 1 oj/__an. insignificant amount. The Chase study developed estimates using two different approaches. The first approach used Chase's Car Market Model which they have used to forecast

152

LARRY R. GSELLMAN

automobile sales for a number of years. This model considers energy, economic, demographic and automobile characteristics in developing estimates. The second approach relied on consumer surveys conducted specifically for their study. The results of the surveys were used to develop the New Car Buyer Model which estimates how potential buyers may respond to changing automobile characteristics. Major options available to the buyer, considered by the model are to delay purchase, to buy a used car or to select a smaller new car than desired. The model is based upon the premise that manufacturers will limit the availability of large cars to achieve the average fuel economy standards. Results obtained from both models were similar. Based upon the results, Chase estimated that sales losses for the current schedule relative to their base case schedule, i.e., linear increases to 26 mpg in 1985, would range from 2(~40 ~o per year over the 1981-1984 time frame. Chase did not estimate sales losses relative to the no regulation situation. The methodologies used in both studies have limitations. Surveys are limited because, in m a n y cases, consumer actions are significantly different than indicated by surveys. This is especially true if the surveys are conducted in a dynamic and rapidly changing environment. Based upon a review of the results of the survey, it appears that it did not provide any indication of the voluntary shift in vehicle size observed in 1979. The Wharton Demand Model is a long-run model concerned with the existence of, and movement toward, long-run equilibrium levels of auto demand. The key factors in the model are the real income of families, scrappage rate as a function of the average age of the stock, and the average age of the population. Any potential consumer resistance to changing automobile characteristics, such as that used as a major focus for the Chase survey, does not appear to be an integral part of the Wharton Demand Model. Results obtained from the model and used as a basis for the rulemaking paper were based upon two critical assumptions: (1) real income would increase at 5 ~o per year through 1978 and then at 2 ~/oper year thereafter, and (2) the inflation rate would remain at 5,5 ~o per year to 1980 slowing to 4 ~o by 1985. Since the estimates of automobile sales provide the basis for calculating indirect impacts and benefits, differences of a magnitude indicated above produce significantly different results. The effect of these two estimates on the indirect impact of gasoline consumption over time is shown in Fig. 5. Because D O T estimates only small changes in sales as a result of the schedule, the gas savings relative to the alternative linear schedule are always positive and increasing.t Chase, on the other hand, projects a strong possibility that the current schedule, when compared with the linear schedule, will increase gasoline consumption during the early 1980s. Savings in gasoline consumption will occur after 1982. They estimate that the large t The estimates of gasolineconsumption by DOT are based upon an extrapolation of the data presented in the rulemaking paper. DOT did not provide estimates of incremental gasoline savings between the linear and current schedules.

THE 1 9 8 1 - 8 4

AUTOMOBILE FUEL ECONOMY STANDARDS

153

sales losses projected will result in consumers retaining their vehicles for a longer period of time. As a result, the average age of the automobile fleet will increase. This increased age will result in more older, less efficient cars being used under the current schedule than the proposed linear schedule. If there is consumer resistance, and the average fleet age does increase significantly, no significant incremental benefits will result from pursuing the current schedule as opposed to a linear schedule. In fact, the incremental benefit may be negative. In addition to increasing gasoline prices, employment impacts can be large. Chase estimates that peak employment losses could reach 1.3 million or a 1 o/ /o increase in unemployment. D O T developed estimates show increases of less than 0.1 ~ in unemployment.

0.3

~ ~ T

0.2

t2_~

~ ~,,0 %DecreasineSae ls

-/~Chase

0.1

/

~

~

30°/°DecreasineSae ls ~ 40%DecreaseSniae ls

-0.1

,98,

I

,982

I

,9'9o

,9;2

, '94

Year Fig. 5.

Incremental fuel savings versus time. Current schedule versus Chase base case.

Is the increase in the average age of the automobile fleet implied by Chase results feasible? As shown in Fig. 6, the average age of the automobile fleet remained essentially constant during the early 1970s. Since 1974, the average age has increased from 5.7 years to 6-3 years in 1978. It currently is at the highest level since the early 1950s. Harbridge House indicated that the increase in the average age was due primarily to consumer resistance to the cost and vehicle characteristics resulting

154

LARRY R. GSELLMAN

from government regulations. 8 Others might base the conclusion that the increase in age has resulted from the general slow growth in the economy. Also shown in Fig. 6 are the author's estimates of what may happen to the fleet average age through 1985 if the sales losses projected by D O T and Chase materialise. The estimates are based upon the assumption that registrations increase by 2 ~ per year. Because sales losses projected by D O T are small, little increase in

ii

<

7.0

Chase ~ .

6.o!

DOT

~JT--

5.0 I

1971

I

I

I

1975

I

1975

I

I

I

1977

I

1979

t

I

1981

I

I

1985

I

I

1985

Year

Fig. 6. Averageage of automobile fleet. average age is implied. Chase forecasts, however, imply that average age will increase to 6-9 years by 1985--a 9 ~o increase from 1981. This increase is feasible because it is of a similar magnitude to the 10~o increase observed from 1973 to 1978.

EPA test procedure changes EPA began collecting fuel economy data during the certification programme in 1975. Since then changes to the testing procedures have been made. These changes range from specifying the speeds at which shifts for manual transmissions shall occur to specifying the humidity level to be used in the testing laboratory. Probably the most significant change from the standpoint of impacts on fuel economy measurements is the reclassification of weight categories for specifying the inertia weight to be used for the tests.t Prior to the 1980 model year, 5001b weight t The inertia weight is used in the laboratory tests to simulate the impact of vehicle weight on fuel economy. A second major part of the first procedure is the dynamometer setting which simulates the impact of friction on fuel economy, e.g., wind resistance.

THE 1 9 8 1 - 8 4 AUTOMOBILE FUEL ECONOMY STANDARDS

155

categories were used between 3000 and 4000. Beginning with the 1980 model year, the weight categories will be reduced to 250 lb. (Other weight categories will also be reduced in size by approximately one-half). DOT estimated that the net effect of these changes on 1979 models was to increase the inertia test weight by 200-220 lb because many models had weights just above a break point using the previous intervals. Using an average weight of 3740 lb, this translates to a weight increase of 5.6 'S,. A number of studies provided estimates of the impact of these procedural changes on the sales weighted average fleet fuel economy. These are summarised in Table 3. DOT estimated that the increase in test weight would result in a reduction of only 0-2 mpg in the fleet fuel economy. However, further analysis by DOT revealed that the road load dynamometer setting used in the tests has decreased by 0-3 and 0.6 hp since 1975. DOT estimated that this decrease increased the fuel economy by 0-08 to 0.17 mpg. The net impact of both of these factors was that test procedure changes by EPA have had no impact on fuel economy test results. DOT did provide a 'conservative' estimate of a loss up to 0-5 mpg. However, Ford and General Motors both estimate that the changes will decrease the automobile efficiency by 0-6 mpg. Both Chase and Harbridge House provided estimates which were slightly higher than those of the manufacturers. The large differences among the estimates of impacts were surprising. Given the technical nature of the problem and the data available, one would expect an agreement among the estimates similar to that observed for the efficiency improvements for the new technologies. (See Table 1). TABLE 3 IMPACT OF

Department of Transportation Department of Transportation Department of Transportation Ford General Motors Chase Harbridge House (September 1979) Author's estimate

EPA

TEST PROCEDURE CHANGES

Loss in mpg

Comment

0.2

Based upon effective increase in test weight Based upon decrease in average dynamometer setting 'Conservative" estimate Based on tests of vehicles which represent 50 % of 1979 Fleet Test procedure changes considered not specified Only inertia weight change considered

(0.8 0q7) 0.5 0.6 0.6 0.9 0.6-0.9 0.44).5

I

Because data were available, an independent estimate of the impact of one change, i.e., the reclassification of inertia weight intervals, was made. The procedure followed in developing the estimate is as follows. EPA test data on fuel economy by weight class for 1978 and 1979 model years were collected and estimates of incremental changes from 3000 lb weights to 4000 lb weights were developed. (See Table 4). Because the fuel economy is determined by both the dynamometer setting

156

LARRY R. GSELLMAN

and the inertial weight setting, and as both change with the weight of the automobile, an estimate of the impact the dynamometer setting had on fuel economy results was developed using sensitivity data presented by Murrell, 9 and the EPA 'cook book' road load values which related dynamometer setting to inertia weight. These provided the basis for correcting for changes in fuel economy due to the dynamometer setting as a function of weight using the following equation:

S /MPG\/ARL \ where:

AMPGRL is the change in fuel efficiency due to changes in road load dynamometer setting. S is the sensitivity of fuel economy due to changes in road load. S is defined as

AMPG/MPG and is equal to O.15 ARL/RL ARL

is the change in road load (RL) per unit change in inertia weight A WT(wT) and is based upon EPA's 'cook book' procedure. 1.8 hp/10001b was used in analysis. The estimate of the impact of inertia weight on fuel economy was then determined by subtracting the impact of road load from the total change in fuel economy. TABLE 4 ESTIMATE OF IMPACT OF CHANGES IN INERTIA WEIGHT

Model year 1979 1978

AMPG (mpg/1000 3.62 4.35

lb)

AM PGRL

AM PGwv

AM PGwT

(mpg/lO00 lb)

(mpg/lO00 Ib)

for 210 lb

0.50 0.52

3-12 3-83

0.66 0.80

The data presented in Table 3 differ from those presented in the last column of Table 4. The data presented in Table 3 are adjusted because the 200 lb increase in inertia weight applies to only a portion (65 %) of the fleet. The remaining fleet inertia weight will increase by approximately 100lb. Data presented in the Murrell paper raise some interesting questions about a second aspect of this issue. As mentioned earlier, DOT stated that the average dynamometer setting on 1979 models decreased by between 2 and 5 % from 1975 to 1980. Murrell presented data that showed that the dynamometer setting per 1000 lb of inertia weight increased by 8.6 % from 1978 models to 1979 models. The increase was attributed to tighter control on the approval of requests by manufacturers to use alternative settings, i.e., settings different to those specified by the 'cook book'

THE 1981

84

AUTOMOBILE FUEL ECONOMY STANDARDS

157

procedure. Because the data presented above are not for the same time period or same models of automobiles, direct comparison cannot be made. Additional information is needed to resolve the apparent conflict. One explanation of the reason for the different estimates shown in Table 3 can be traced to possible different interpretations of the law. The law states that fuel economy should be measured using procedures ... utilised by the EPA Administrator for model year 1975 .... or procedures which yield comparable results . . . . EPA interprets ~comparable results' as meaning that the changes do not affect the results obtained for the 1975 model.10 The alternative interpretation implied in the other discussions relating to the issue imply an interpretation that the comparable result criteria applies to the model year when the change becomes effective. For example, the impact of the decrease in size of the inertia weight categories should be based upon comparing test results on 1980 models with the 1975 procedures and the 1980 procedures.

Concluding remarks The review of the studies did not clarify the issue as to which fuel economy schedule is most appropriate. However, as described in the following section, assumptions used in the studies are no longer valid-- particularly the assumption of no shift in vehicle mix. Shifts have occurred as a result of the 1979 gasoline shortage and related increases in the price of gasoline. Several weaknesses were identified and should be expanded upon in any continuing review of the current schedule and any analysis in support of post-1985 standards. These include: (1) (2) (3) (4)

the treatment of technical and financial risk; sensitivity analyses; impact on productivity; impact on various income and social groups.

Risk was one of the major issues raised in many of the studies, including several of the studies identified in the Appendix. However, only Chase attempted to consider risk as as integral part of their assessment methodology and they addressed only technical risk. There are other components of the risk issue which are as important, DOC, emphasised risk as a major concern, and stated that: The program moves the industry and its customers into an uncertain future with imperfect planning. 6 Increased emphasis should be placed upon sensitivity analyses--particularly sensitivity to other Federal policies. For example, one critical issue, i.e., the impact of a recession which may occur as a result of the US's attempts to control inflation, could not be determined.

158

LARRY

R. GSELLMAN

No estimates of the impact of the schedule on productivity and the distribution of benefits and costs among income groups were made. These are important issues and should be considered in any future .analyses. Requirements to consider these issues are specified in OMB's guidelines for performing Regulatory Analyses (the requirement to perform Regulatory Analyses was initiated after the 1977 rulemaking was complete). 11 Although the comparison, at the level performed for this paper, did not provide a basis for identifying the best schedule, related issues did become apparent, i.e., is the regulatory system functioning properly and in the public interest? In an attempt to answer the question, each of the differences described earlier were classified on a relative basis as to whether the difference favoured the current schedule ( + ) , favoured a relaxed schedule ( - ) , or were neutral (0). The results are presented in Table 5. Except for the technical data, all data or results from the Department of Transportation studies were favourable to the current schedule. The other studies were favourable to a relaxed schedule. The above leads one to the possible conclusion that the objectivity of the assessments may be lacking and therefore the regulatory process may not produce results in the best interest of the nation. However, the problem is broader than the process which relates differences in opinion between the regulated industry and the regulator. The legislative process must accept an equal part of the blame. Difficulties resulting from poor definitions of criteria, or in the case described here, the lack of a definition, are major contributors to the problem. TABLE 5 SUMMARY OF STUDY DIFFERENCES

Study

Criteria

Technical data

Cost data

EPA procedures

Consumer response

Department of Transportation Industry

+ -

0 0

+ -

+ -

+ -

Key:

to t h e c u r r e n t s t a n d a r d ;

+ = Favourable

-

= favourable to the relaxed standard;

0 = neutral.

It is apparent that President Carter was also concerned about the effectiveness of the regulatory process. Executive Order 12044 required the conduct of a Regulatory Analysis of significant regulations to ensure 'the least costly approach to achieving our regulatory goals' is selected. 11 The same order established the Regulatory Analysis Review Group. Although the group has several functions, one of its major functions is to conduct inter-agency reviews of 10-20 major Regulatory Analyses each year. Given the potential impacts of the fuel economy standards and the significantly different opinions among participants, a review of the fuel economy standards is warranted. Charles Schultze indicated before the March 1979 Subcommittee on Energy and Power hearings on motor vehicle fuel economy that an examination of alternative schedules was being pursued by the Regulatory

THE 1 9 8 1 - 8 4 AUTOMOBILE FUEL ECONOMY STANDARDS

159

Review Analysis Group.# However, no public report on the results of the review has been published.

IMPACT OF RECENT EVENTS

All the studies reviewed under 'Assessment of Differences' were completed or were essentially completed by the time the gasoline shortage of 1979 occurred, As a result, the events subsequent to the shortage and the implications of these events with respect to the feasibility of achieving the current schedule are not discussed in any of the studies. The purpose of this section is to analyse the changes which have occurred since the gasoline shortage in light of the findings presented in the previous section and determine if a basis exists for estimating the feasibility of achieving the current schedule.

Nature of changes In the spring of 1979 spot gasoline shortages began to appear and the price of gasoline began to increase. By the early summer the shortages were widespread and the price of gasoline had increased from $0.67 per gallon in January to approximately $1.00 per gallon. On a real price basis, the changes in gasoline prices were similar in magnitude to those observed during the 1973-1974 gasoline shortage. However, the rate of increase in 1979 was slightly faster. Consumers responded to these events by increasing their purchases of smaller, more efficient cars and decreasing their purchases of the larger cars. These shifts were so significant that Chevrolet, which introduced the Citation in the spring, could not satisfy the demand and lead times greater than six months resulted. Based upon these observations, several questions are raised with respect to analysing their impact upon the feasibility of achieving the fuel economy standards specified in the current schedule. (1) (2)

How significant is the apparent shift in consumer demands? Is this shift significantly different in character than that observed as a result of the 1973-1974 prices?

In an attempt to answer these questions, data were collected on the real price of gasoline, an index reflecting the vehicle mix preference of consumers was developed, calculated data on fleet average mpg were collected, and an index to reflect the responses in the used car market was formulated. These are plotted on a yearly basis from 1971 to 1979 and on a monthly basis during the period October 1978 to # Subcommittee on Energy and Power, March 1979. The Regulatory Analysis Review Group(RARG) is not mentioned in the testimony. However, because Schultze is the Chairman of the RARG and the major participants identified in the testimony are members of the RARG and the examination is clearly its responsibility, one can conclude that the activity was to be conducted by the RARG.

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LARRY R. GSELLMAN

December 1979. The reason for analysing the monthly data is to determine whether the significant changes that have occurred during this time can be explained and related to observations. The data are plotted in Fig. 7. Before describing the time phased relationships presented in Fig. 7, it is necessary to define two of the terms used in the figure. The first, the auto size index, was developed so that a single index number could be used as a basis for measuring any shifts in the vehicle mix being purchased. Four categories of vehicles were used in developing the index--subcompact, compact, intermediate and standard. Integer weights were assigned to the categories with the subcompact being assigned a weight of one and a standard car being assigned a weight of four. Using this scheme, an 0 50

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THE 1 9 8 1 - 8 4 AUTOMOBILE FUEL ECONOMY STANDARDS

161

index of 4.0 would result if all sales were standard cars. If all sales were subcompacts, the index would be 1.0. All of the studies reviewed under 'Assessment of Differences' were based on the interpretation of Congressional intent that the standard should not require a shift in the vehicle mix through 1985. Based upon sales figures at the time the law was passed, an auto size index in 1985 of 2-4 to 2-5 is implied.t The new car market cannot adjust rapidly to major shifts in the demand for different types of automobiles. This is evidenced by the long lead time for small cars and the large inventory build-up on standard models observed during 1979. Because of this, it was concluded that indexes based upon new car sales may not adequately reflect the true consumer preference. The used-car market is closely related to the new-car market and does not have these limitations. Although the supply curve for used cars is fixed at any given point in time, shifts in the demand curve are rapidly reflected in changes in prices. As a result, an assessment of used-car prices during both the 1973, 1974 and 1979 shortages was performed. The used car index shown in Fig. 7 is based on the percentage change in price from the expected price for both small efficient automobiles and large low efficiency automobiles (expected price is an estimate of what the price would have been had the shortage not occurred). The index is simply the sum of the changes. For example, if small automobiles increased in price by 10 ~0 and large cars decreased by 15 ~o, the resulting used car index would be 25O/o. As shown in Fig. 7, the auto size index prior to the 1973 embargo was approximately 2-8. After the embargo and the recession of 1974-1975, which appears to have depressed the auto size index, the index stabilised at approximately 2.5. For model year 1979, the index dropped to 2.3 reflecting the change which occurred as a result of the gasoline shortage. However, this does not explain the magnitude of the shift because the shortage did not occur until halfway through the model year. The month-by-month plot of the index shown to the right indicates that the index dropped to a minimum of less than 2.2 in May. The index began to rise after May. Similar observations are made when one looks at the fleet average fuel economy data. Like the size index, the fuel economy of new cars starts to deteriorate after May 1979. Of interest on the fleet average miles per gallon plot is the difference between the estimated 1979 fleet fuel economy indicated by E and the actual fuel economy observed in 1979. The estimate is based upon corporate plans prior to the start of a model year (August 1978). The actual figure, of course, is a result of sales during the year. It is clear that a shift in consumer preferences has occurred and that a resultant improvement in the fleet average fuel economy has resulted. A major issue now is to what degree does the increase in the auto size index and the decrease in fuel economy during the past five months indicate about where the new equilibrium will occur. t Sensitivityanalyses were performed on vehicle mix assumptions. However,the analyses played no major role in the decisions presented.

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With the limited data available, this point is impossible to determine with any degree of confidence. It is the author's opinion that it probably will lie somewhere between 2.2 and 2-3 if the real price of gasoline does not change significantly. The opinion is based upon the following reasoning. The increases in the size index are in a large part due to attempts by the auto industry to clear its inventory of larger cars through sales programmes and discounts. In effect, the trends observed are the normal expected response of a large system with a long time constraint to a step function, i.e., a rapid shift in consumer preferences. This conclusion is supported by an assessment of the used car index. In 1973, the index increased to 28 ~o but returned to zero after the shortage disappeared. The complete cycle was completed in less than six months. In response to the 1979 shortage, the index responded in a significantly different manner, First, the magnitude of the response was much larger with the index rising to 37 ~o- Secondly, as of October, more than six months after the shortage, the index exhibits no signs of decreasing let alone returning to zero. In an attempt to get a better understanding of the significance of the used car index, an attempt was made to determine whether the differences in prices indicated by the index could be explained using life cycle cost methodologies. It was felt that this might provide interesting results since the changes occurred over such a short period of time that one would reasonably assume that other factors which influence the relative prices of different types of cars remained constant during the period. For purposes of the comparison, two 1978 automobiles were selected, the General Motors' Chevette and Caprice models. Using EPA fuel economy figures of 34 miles per gallon for the Chevette and 19 miles per gallon for the Caprice, an estimate of the change in life cycle gasoline costs was calculated for the two automobiles assuming a $0-30 per gallon change in the price of gasoline and a use rate of i 0,000 miles per year for nine years. Using a discount rate of 4 ~o, the present value of the savings is $503. This is significantly lower than the difference in the change in prices of the two automobiles--S1560. Even if one assumes that the consumer expects a 2 ~o per year increase in the real price of gasoline, the present value of the savings is only $641. Because the expected savings explains only 40 ~o of the change in prices, other factors must be involved. Several possible explanations include: (1)

(2) (3)

significantly higher expectations for real price increases in gasoline prices than that used in analysis, e.g., the $0.50 per gallon tax which was recently proposed; social pressure to operate efficient automobiles; and security of supply as it may be reflected in expectations that rationing may occur or gas lines will return.

Implications Jor fuel economy schedule The changes observed during 1979 can have a significant bearing upon the feasibility of achieving the current automobile fuel economy standards. Although vehicle mix shifts were not used as a basis for determining feasible standards, they do

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contribute to increases in average fleet fuel economy. Therefore, any voluntary shifts similar to those observed last year can have an impact on the feasibility of achieving the standards. In Fig. 8, the plot of the current standards along with the plot of what industry has achieved in 1977, 1978 and 1979 are presented. Also presented is the month-to-month plot of the fuel economy achieved during the 1979 model year. Using the 1979 results as a point of departure and assuming that the improvements necessary to achieve a linear schedule are not influenced by the shift, a conservative estimate using the average for 1979 is shown for the industry proposed schedule and the schedule proposed by Chase Manhattan Bank. As one can see, the industry

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linear schedule can be achieved with no problem; in fact, there is a significant amount of slack in the system. Even with the shift, the Chase schedule cannot be achieved if one assumes that the average for 1979 is the point of departure. This, of course, is quite conservative. A second plot using the peak fuel economy observed in 1979 was used. In this case, there is only a slight overlap and given the accuracy of the analysis is probably relatively insignificant. Even the most pessimistic case analysis, i.e. the Chase estimates using the average 1979 value, can result in no net penalty to industry if the currently proposed three year carry forward (or backward) for credits and penalties is approved.

164

L A R R Y R. G S E L L M A N CONCLUSIONS

Alternative 1981-1984 fuel economy schedules There is a high probability that the industry can achieve the current schedule if the auto size index remains near 2.2, and sufficient capital can be raised to increase the production of smaller cars indicated by such a mix. The shift, however, has not decreased the magnitude of the risk--in fact, risk may have increased. Current industry strategies are based upon an expected mix in 1979 of 2.5. The industry is now faced with resource allocation uncertainties, not only about technologies and their potential, but also about what vehicle mix they should incorporate in their strategy. Diverting resources to increasing the production of small cars will have an impact on other fuel economy programmes. Any reallocation could have advance impacts on the industry if the shift in vehicle mix returns to the one observed prior to the 1979 gasoline shortage. Obviously, more data are needed before decisions to make major shifts in production can be made with a reasonable level of risk. Developing the data will take time. However, time is short given the lead time required to implement any decision made.

Post-1985 standard Post-1985 standards (or any revisions to the current schedule, if future events warrant) should be based upon a rulemaking procedure which is expanded in scope. At the very least, analyses should consider the impacts on productivity and the distribution of impact among income groups in addition to the issues addressed in previous assessments. Also, greater emphasis should be placed on analysing risk and uncertainty. In addition, the Regulatory Review Analysis Group should play a major role assisting in the resolution of any major differences of opinion which are identified.

Programme changes requiring congressional approval The three carry forward/backward on credits and penalties proposed by D O T should be approved. In addition, the programme should be changed so that penalties are not violations of the law. These changes would give industry greater flexibility in developing strategies. Given the uncertainties involved and the dynamic nature of our economic system, only industry is capable of making the necessary decision in a timely and efficient manner. As a result, national goals can potentially be achieved at a lower cost. In addition, incentives to encourage firms to exceed the standards should be considered. The issue of the definition of 'economic practicability' and the interpretations of 'compatible results' as it relates to EPA test procedure changes, should be clarified by Congress. As mentioned earlier, the definition was a major issue in the specification of the 1981-1984 schedule and can be expected to continue as an issue in the establishment of post-1985 standards. Achieving these standards will be more

THE

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expensive and have smaller impact than achieving the current schedules. It is important that decisions are based upon economic criteria, i.e. maximising net benefits. It is realised that changing the definition will not resolve all differences and result in agreement among all parties on the 'correct' standards no analysis can accomplish this. However, it will at least focus the debate on the appropriate issue. APPENDIX

Summary of studies reviewed The studies and their characteristics are presented in Table A 1. In addition, a brief description of the studies was also prepared. These descriptions, which are presented below, include the following: (1) (2) (3)

purpose; study approach; relevant conclusions and recommendations.

US Department of Transportation--Rulemaking support paper concerning the 1981 1984 passenger auto average fuel economy standards This paper 3 was the basis for the promulgation of the current fuel economy standards. The study completed in June 1977 reviews the statutory requirements to be used in establishing fuel economy standards and clarifies DOT's interpretation of the requirements. A major portion of the paper addresses the potential improvements to be achieved by the available technologies. A thorough review of the technologies is provided and used as a basis for determining the feasible average economy which may be obtained. Alternative schedules are also formulated and compared with the one developed based upon the assessment of the technologies. Estimates of the impact of the schedule on energy consumption and industry capital requirements are presented. Economic impacts of the schedule on the consumer, industry and nation are also assessed. To estimate the impact of the price changes on automobile demand, the study used an econometric model developed by Wharton. The Wharton Demand Model is a long run model concerned with the existence and movement toward long run equilibrium levels of auto demand. Another important part of the paper was the discussion and interpretation of 'economic practicability' (see Appendix A of the report). As a result of the discussion presented, a fairly strict definition of economic practicability was used. DOT stated that a requirement for a benefit/cost analysis, although being useful, was determined to be contrary to the mandate of the act. Although the paper assessed alternative schedules, a thorough comparison of the schedules and their impacts on consumers, the automobile industry and the national

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economy was not made. Based upon DOT's interpretation of the statutory criteria, the absence of such a comparison is not surprising.

US Department of Transportation--Final impact of the automobile fuel economy standards for model year 1981-1984 passenger cars This paper 2 completed in June 1977 provided much of the information used in the rulemaking paper. The same issues as addressed in the rulemaking paper were addressed in this paper. The major difference between the two is in the alternative schedules considered and the level of detail provided on the cost of the alternative schedules. The estimated price increase for the current schedule was $195 per automobile in the final impact statement. In the rulemaking paper, the estimated cost increases to achieve the current standards were estimated at between $50 and $150. A review of the two papers revealed no specific reason for the differences in the estimates.

Ford Motor Company--State of the US automotive industry This document 12 is a letter report submitted by the Ford Motor Company to the White House. In essence, it is a compilation of data and an assessment which focused on the relationship between inflation and regulation. The impact of fuel economy on the automotive industry was one of the regulations addressed. The report presents data on the industry's economic health, productivity, and the regulatory burden on the industry. Risk as a factor which increases the cost of regulation is also discussed. The report presents data on how risk associated with achieving fuel economy standards affects corporate planning. Several recommendations for overcoming problems identified are presented in the letter transmitting the data. One recommendation is directly related to the fuel economy standards. Ford recommended that the 'front-loaded' current standards be modified to either a linear schedule or some schedule which has slower increases than the linear schedule. During the spring of 1979, Ford also submitted to D O T data on the costs of achieving the current schedule and a more relaxed linear schedule. Because these data were classified as confidential, they were not available for review. However, some of the data provided by Ford were presented in the June 1979 D O T report.

Harbridge House--Corporate strategies of the automotive manuJctcturers This paper 13 prepared under contract to the Department of Transportation was completed in November 1979. The study focused on the economic sensitivity of major automotive regulatory programmes and their relationship to or impact upon corporate strategies. One of the purposes of this study was to identify the character, magnitude and likelihood of the risks associated with the economic sensitivities. The approach taken in the study was to perform a detailed historical review of strategies followed by automobile manufacturers and to conduct in-depth interviews with automobile manufacturing executives.

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169

A number of conclusions are drawn as a result of the study. No recommendations related to the fuel economy schedule are presented. However, two conclusions drawn in the study do relate to the issues discussed in this paper. The first is that major resistance by consumers to price changes and product characteristics resulting from the fuel economy standards may result in a shrinking of profit margins, and with this a shrinking of internal investment flows. The second conclusion relates to the potential impact of a recession. The conclusion states that a minor recession is likely to destroy the ability of Chrysler and American Motors to maintain their investment programmes. In addition, a major recession would lead General Motors and Ford having to raise a significantly larger amount of capital from the capital market.

Futures group~Corporate strategies of automotive manujacturers The study 14 was completed in November 1977 and was performed under contract to the Department of Transportation. The purpose of the study was to gain an understanding of the likely strategic actions of automobile manufacturers in the light of government regulations on passenger automobile fuel economy. In performing the study, a series of quantitative and judgmental models were used. Alternative strategies for each manufacturer to satisfy the requirements of fuel economy regulations were formulated and assessed. Major emphasis was placed on determining the long-term impact on financial and other characteristics of each firm as a result of their pursuing the strategies identified. As part of the study, estimates of domestic sales of automobiles through the year 1985 in response to automobile product change were made. These estimates were developed using a revised systems dynamic model developed by the Futures Group. These estimates reflected a dip in sales to 8 million automobiles in 1979 and growing to 10 million by 1985. The estimates were based upon several assumptions--gasoline prices in 1980 would be $0.70 a gallon and no recession would occur. In addition, the business cycle typical of the automobile industry was not addressed.

Chase--A cost-benefit analysis of the 1979-1985 fuel economy standards This study 5 completed in December 1978 was sponsored by Chase Manhattan Bank and a number of unidentified organisations. The purpose of the study was to perform a comprehensive benefit/cost analysis of the current fuel economy standards for passenger automobiles. The costs and benefits were calculated for two schedules, the current schedule and a base schedule which linearly increased from 20mpg in 1980 to 26mpg in 1985. A major component of the study was a special market research effort designed to forecast consumer response to automobiles produced as a result of the standards. The consumer response study in conjunction with a new-car buyers model indicated that domestic auto sales losses of 20-40 ~ over the 5 years associated with the schedule may occur. Similar results were obtained using a second approach based upon Chase's Car Market Model. These projected sales losses were then used as a

170

LARRY R. GSELLMAN

basis for estimating oil consumption and national and regional economic impacts by Chase Econometric Associates, Data Resources, Incorporated, and Wharton Econometric Forecasting Associates. Based upon the assessment, results are presented which indicate that a strong possibility exists that oil consumption will increase during the early 1980s, if the current schedule is pursued relative to the linear schedule, and that major economic impacts will result. The study concludes that the current schedule should be modified to a slower, more relaxed schedule as depicted by their base case schedule.

General Motor Company During the spring of 1979 General Motors submitted to the Department of Transportation information in support of a request to relax the current schedule. Because the data were classified as corporate confidential, they were not available for review. All reference to the submissions is based upon data presented in the June 1979 DOT report. ~ Wainwright and Company--The impact of government regulations on competition in the US automobile industry This paper, ~5 sponsored by the Chrysler Corporation, was completed in May 1979. The purpose of the paper was to examine the impact of all government regulations on competition in the American automobile iindustry. The analysis is based upon the classical 'wedge' model. Emphasis is placed upon estimating the impact of the regulation on individual firms' economic rates of return. A key parameter in the assessment is the relationship among regulations and the cost associated with satisfying the regulations as a function of the firm's size. The study concludes that, because of the size differences, the impact of government regulation on Chrysler is significantly larger than the impacts on Ford and General Motors and, as a result, an increase in the concentration in the US automobile manufacturing industry will occur by 1985. To overcome the projected concentration, the study provides a number of recommendations. One such recommendation was to modify the 'front-loaded' current schedule for fuel efficiency standards to one which is either end-loaded or linear. The study suggests that these alternatives would reduce the regressive bias of the regulations against Chrysler and thereby reduce the probability of decreased competition by 1985. The paper addressed the impact of all government regulations. However, this was done in aggregate. Therefore, very little data directly associated with estimates of the costs of the fuel efficiency regulations are provided. The report does provide some interesting data on the relative prices of new and used automobiles. The data reveal that the price of used cars, relative to new cars, has increased significantly during the 1970s and concludes that the data indicate strongly that consumers prefer automobiles without the features incorporated in automobiles in response to Federal regulations.

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Department of Commerce--A utomotive fuel economy standards./br 1981-1985," A review and recommendations This paper 6 was completed in May 1979. Its purpose was to review the current fuel economy standards to determine whether they were consistent with requirements set out in the law and other administration regulatory reform initiatives. The study recommends that the current schedule be replaced by a linear schedule. The bases for this recommendation are as follows: (!)

(2) (3) (4) (5)

Using industry data on the impact of alternative schedules on the price of automobiles, the study concludes that the current schedule is not cost effective when compared with a straight line alternative. The assessment looks only at the direct benefits. Risks and uncertainties associated with achieving the current schedule have not been adequately addressed. DOT's interpretation of the legislative criteria is unnecessarily severe in light of other goals of the nation. Energy conservation effects of the front-loaded standard when compared with the linear standard are only slightly greater. Competition in the industry may be adversely affected as a result of the current front-loaded schedule relative to the linear schedule.

Department of Transportation--Report on requests by General Motors and Ford to reduce fuel economy standards for 1981-1985 passenger automobiles, DO T The report 7 was completed in June 1979. The report was prepared in response to submissions from Ford Motor Company and General Motors during the spring of 1979 which requested that DOT modify the current schedule to a linear schedule. The study is based upon analyses performed in the rulemaking paper and the final impact paper. Using these papers as a point of departure, the study proceeds to estimate the costs and direct impacts of the two schedules. Primary emphasis in the assessment is a quantification of the incremental benefits and costs of the two schedules. DOT concludes that the net benefits of the current schedule are greater than the net benefits of the industry-proposed linear schedule. Therefore, DOT rejected any change in the current schedule. Harbridge House--Energy conservation and the passenger car." An assessment of existing public policy The study completed in September of 1979 assessed the Federal Automotive Fuel Economy Program as a mechanism for dealing with public policy needs. 8 The study addressed alternative policies for achieving national goals; however, no discussion of alternative schedules within the fuel economy programme was presented. Major emphasis in the study was directed towards a detailed assessment of the technologies available to achieve the fuel economy goals, capital requirements associated with implementing these technologies, and the impact the technologies

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LARRY R. GSELLMAN

and their subsequent costs may have on consumers. Alternative Federal policies are identified and discussed. Several conclusions are drawn which have a relationship to this paper. They are (1) (2) (3) (4)

technologies under development will not meet expectations: the standards are decreasing competition within the industry: estimates of capital requirements necessary to implement the schedule are increasing; and there appears to be a strong consumer resistance to the sort of product mix needed to satisfy future fuel economy standards. REFERENCES

1. Energy Policy and Conservation Act, Public Law 94~163, December 22, 1975. 2. US Department of Transportation, Final Impact Assessment of the Automotive Fuel Economy Standards for Model Year 1981 1984 Passenger Cars, June 30, 1977. 3. US Department of Transportation, National Highway Traffic Safety Administration (N.H.T.S.A.) Rulemaking Support Paper Concerning the 1981 1984 Passenger Auto Average Fuel Economy Standards, July 1977. 4. US Department of Transportation, N.H.T.S.A., Q[fice of Automotive Fuel Economy, Automotive Fuel Economy Program Second Annual Report to the Congress, January 1978. 5. Chase Manhattan Bank, Chase Automotive Division, and Energy Economics Corporate Banking Department, Joint study, A cost-benefit ana(vsis of the 1979 to 1985[uel economy standards major study findings, December 1978. 6. US Department of Commerce, Assistant Secretary for Policy, Automotive Fuel Economy Standards ]'or 1981-1985." A Review and Recommendations, May 3, 1979. 7. US Department of Transportation, N.H.T.S.A., Office of Rule Making, Report on Requests by General Motors and Ford to Reduce Fuel Economy Standards for M Y 1981 1985 Passenger Automobiles, June 1979. 8. Harbridge H~use~ Energy c~nservati~n and ~he~assenger car: an assessment ~existing ~ublic ~licy~ Boston, Mass., September 1979. 9. J. D. MURI~LL, Light duty automotive fuel economy.., trends through 1979, US Environmental Protection Agency, SAE Technical Paper Series 790225, Congress and Exposition, Cobo Hall, Detroit, Michigan, February 26-March 2, 1979. 10. US Environmental Protection Agency, An Analysis of Test Procedure Changes Made During 1975-1979 with Respect to Measured Fuel Economy Effects, March 1979. 11. WAYNE G. GRANQU1ST, Associate Director for Management and Regulatory Policy, Office of Management and Budget, Memo to Heads of Departments and Agencies, Regulatory analysis, November 21, 1978. 12. PHILIP CALDWELL, Ford Motor Company, Letter to Jack Watson, Jr., White House, transmitting Ford Motor Company report State of the U.S. automotive industry, June 13, 1978. 13. Harbridge House, Corporate strategies of the automotive manufacturers, 1 : Executive summary; 2: Strategic histories, Boston, Mass., prepared for US Department of Transportation, N.H.T.S.A., November 1978. 14. The Futures Group, Corporate strategies of automotive manufacturers, Vols.. F1V, Glastonbury, Conn.. November 1978. 15. H.C. WAINWRIGHTand Company, The impact of government regulations on competition in the U.S. automotive industry, Boston, Mass., May 4, 1979. BIBLIOGRAPHY J. HAYDENBOYD, Market effects of CA FE-induced changes in automotive attributes--a hedonic demand analysis, Charles River Associates, Inc., Boston, November 1, 1979.

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RICARDO DOBSOY, Factors affecting motor vehicle sales and fuel economy standards, Chase Automotive Division, Bala Cynwyd, Pa., October 1979. LARRY R. GSELLMAN, Direct benefits and costs of regulating automobile gas mileage, The MITRE Corporation, McLean, Virginia, MP-79W00001, January 1979. JAMEST. HElSLER, Consumer reaction to vehicle fuel economy, Market Facts, Inc., Washington, D.C., November 1979. MARTIN F. HUNT, Consumer attitudes toward fuel shortage and vehicle purchase intentions, J.D. Power and Associates, Los Angeles, California, October 1979. HELEN KAHN, Makers clash with DOT over fuel economy report, Automotive News, January 29, 1979, p.l. HELEN KAHN, Bank terms CAFE an all out disaster for U.S. economy, Automotive News, March 19, 1979, p. 2. ROBERTKERNISH, The climate of opinion: consumer belief~ and automotive innovation, National Analysts Division of Booz-Allen and Hamilton, Inc., Bethesda, Maryland, November il979. Motor vehicle fuel efficiency, Hearings before the Subcommittee on Energy and Power, 96th Congress, Washington, D.C., March 13 and 14, 1979. Council on Wage and Price Stability, Passenger automobile average fuel economy standards', comments given before the National Highway Traffic Safety Administration, Washington, D.C., January 7, 1977. ANDY PASZTOR, Many who ordered G.M. compacts find they're in the slow lane, The WallStreet Journal, November 7, 1979. Personal Communication, Bill Welsh, Lakefront Oldsmobile, Gaithersburg, Maryland, November 1979. US Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey Series. Interview Survey, 1972-73 Inventories o f Vehicles and Selected Household Equipment, 1978. US Department of Transportation, N.H.T.S.A., Office of Passenger Vehicle Research, Automotive l-'uel Evonomy Contractors" Coordination Meeting, Summary Report, December 11-13, 1978. US Department of Transportation, N.H.T.S.A., Automotive Fuel Economy Program Third Annual Report to the Congress, January 1979.