New Fuel Standards Carry Costs As Well As Benefits

The stories ran one on top of the other on the front page of last week's Detroit News: Auto sales up 24 percent, read one; new federal rules require 40 percent miles per gallon boost by 2016, declared the other.

How these two stories intertwine over the next five years will have a lot to say about the Detroit auto industry's future.

Tightened fuel economy rules may provide greater energy independence and environmental benefits, as well as fuel the public's interest — in the abstract — in greener vehicles. But they also carry risks and costs for the auto industry, even though the industry has signed off on them.

March's sales numbers were a long awaited bit of good news for automakers. Yes, they were inflated by heavy incentives. But there does seem to be some momentum of customers returning to showrooms.

Much of that has to do with the irresistible product companies such as Ford Motor Co. and General Motors Corp. are dangling before buyers. It's as strong a line-up as Detroit has offered in decades.

If sales keep surging, automakers that have made deep, deep cuts in their operating costs are poised to reap solid profits.

But that could be derailed by a lot of things, not the least of which would be a double dip into recession. Another worry is presented by the other story on that newspaper page.

The new federal fuel rules announced by the Environmental Protection Agency are the product of a compromise between the automakers, the Obama administration and states such as California that had claimed the right to impose far more stringent mandates.

Automakers endorsed the deal as the lesser of two evils.

But meeting the requirements in such a short time period is going to be an extraordinary challenge and require decisions that could impact sales growth.

The cost of developing the more fuel-efficient fleet is pegged at $52 billion. That will be paid for largely by a $1,000 increase in vehicle prices. As departing GM Vice Chairman Bob Lutz notes, price doesn't always determine sales. Quality counts too. But price is a factor.

The larger concern, however, is how the automakers will have to manipulate their sales to achieve the average 34.1 mpg. Certainly, they won't be able to sell as many big trucks and SUVs. The truck fleet will have to average more than 24 mpg. To get there, the automakers will have to limit production of the bigger vehicles and push incentives to move smaller vehicles. That will mean smaller profits as well.

Automakers also have to keep their eye on 2017, when this deal expires and California can go ahead and impose the standards it wanted in the first place.

Congress and the Obama administration should provide some certainty of the post-2017 expectations.

Automakers can't be expected to constantly chase a goal they can never reach.

Some attention, too, should be paid to the unintended consequences of the new rules. The National Highway Transportation Safety Administration estimates the higher standards will result in lighter vehicles, translating into 100 to 350 additional highway deaths a year.

How many lives are we willing to sacrifice to save the earth? That question should always be part of the discussion when setting fuel rules.

EPA Administrator Lisa Jackson calls the higher standards a "victory for the planet." Only if they are implemented with some reasonable flexibility and automakers are given clear guidance on post-2017 rules.

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