Fed and automakers prepare to review 54.5 mpg CAFE goal

Federal regulators are quietly gathering data, running simulations and publishing report after report. This summer, a two-year, $35 million investigation by the EPA and National Highway Traffic Safety Administration will spark a long-simmering debate about the future of green cars in the U.S. 

Automakers and environmental groups are watching closely as the agencies assemble an argument for maintaining or adjusting federal fuel economy targets. This midterm review is part of the deal finalized in 2012 to double the U.S. fleet's average fuel economy from that of 2008. 

The 2025 model year goal calls for a 54.5 mpg fleetwide average -- or an adjusted real-world average of about 40 mpg on Monroney stickers. The review promises to be tense as gasoline prices remain low, consumers turn away from green cars and costs of new technology stack up. The feds' analysis will affect automakers' product strategies for a decade. 

"This is not by any means a "check-the-box' exercise," said Christopher Grund-ler, director of the EPA's Office of Transportation and Air Quality. "There's a lot at stake." 

In June, the EPA, NHTSA and the California Air Resources Board will publish a report outlining key factors for the midterm review. This will be followed by discussions, a proposed rule in 2017 and a final decision by April 1, 2018.

Automakers have a cornucopia of green options that include lightweighting, downsizing engines and electrification to boost fuel economy, so the question isn't if they can rise to the challenge, but how? And crucially for consumers, how much will it cost?

Curbing greenhouse gas emissions from cars and trucks -- which generally reflects lower fuel use -- is a cornerstone of the Obama administration's plan to tackle climate change. The stair-step approach bases mpg standards on vehicle size and gradually raises fuel economy targets. The midterm review lets regulators assess technological progress, costs and market acceptance.

Auto executives and regulators have wildly divergent viewpoints.

Auto execs see that the national average price of regular gasoline is just $2.08 per gallon. And although consumers rank mpg and range as the third-highest consideration for new-vehicle purchases, their willingness to pay for fuel efficient technologies remains low, according to a 2015 J.D. Power and Associates survey. U.S. vehicle sales have soared, yet the U.S. market share of hybrids and electric vehicles sold is in decline.

Ford Motor Co. CEO Mark Fields summed up auto execs' mood toward the midterm review in a 2015 Automotive News interview. "We want it to be very fact-based. We'll have to look at what has been the acceptance of the technology," said Fields. "It's challenging."

The EPA and its allies paint a rosier picture, citing the industry's progress on fuel economy. For 2015 models, the average sales-weighted fuel economy of light vehicles sold was 25.3 mpg, up from 22.1 mpg for 2010 models, according to the University of Michigan Transportation Research Institute.

The latest benchmark report published by the EPA, for the 2014 model year, shows that nearly all automakers beat that year's compliance standard. As a whole, the industry has been ahead of targets for three consecutive years through 2014.

The EPA's Grundler puts it simply: "So far, so good."

Cost is the crux of this debate.

"That's the biggest problem," Thomas Weber, head of Mercedes-Benz product development, said in an interview this year. "Customers will accept new technology, but in the end their budget is limited."

In a 2015 Power study on consumer interest in new tech, "fuel efficient technologies came out fairly low," said Renee Stephens, vice president of U.S. auto quality for Power. Stephens points to low gasoline prices as one factor.

Part of the problem is connecting green tech with tangible benefits. Buyers aren't interested in features such as solar glass roofs and improved aerodynamics because the consumers don't perceive the features' value.

Even the driver-friendly mpg indicator "has a very low level of interest. Forty-four percent of consumers didn't see the point," Stephens said.

If consumers don't care about green cars, goes the automakers' argument, it's foolish to build them.

To complicate matters, there are many ways to improve fuel economy, but no clear route to success. Even within major categories, such as multispeed transmissions, automakers have numerous options.

Some automakers are taking an all-of-the-above approach.

"It'll be important to prove fuel efficiency among all fronts," said Raj Nair, Ford product development chief, in an interview at the 2016 Detroit auto show.

Nair ticked off a laundry list of Ford's fuel-saving efforts, including EcoBoost engine improvements, lightweighting, fuel cells and a $4.5 billion investment in hybrids and EVs.

Ambitious investments in green tech trickle down to dealer lots as higher prices.

For example, the starting sticker price for a 2015 Honda Civic is $19,325, but for the 2015 Civic Hybrid it's $25,525. Prices include shipping. The annual fuel cost, according to fueleconomy.gov, is $800 for the gasoline Civic and $600 for the hybrid. Honda discontinued the Civic Hybrid after the 2015 model.

The case is similar for diesel powertrain options. The 2016 Ford F-250 XL with a gasoline engine starts at $33,580. The same truck with a diesel engine jumps to $42,060. Prices include shipping.

The EPA insists 54.5 mpg by the 2025 model year can be achieved affordably through improving the gasoline engine and implementing nonpowertrain strategies such as lightweighting and improving aerodynamics.

Estimating the cost of these changes is difficult. In 2015, a National Research Council expert panel used EPA, NHTSA and automaker data to calculate direct manufacturing costs of different tech combinations. (See graphic, Page 3.) The panel did not consider retail markups, so its calculations were below the expected sticker prices. Nor did the panel take into account automaker strategies to reach fuel economy targets, such as trading compliance credits or averaging vehicles' mpg across the fleet.

For a midsize car with a gasoline engine, the panel estimated new fuel-saving improvements could cost between $1,181 and $1,658 per car by 2025, in 2010 dollars and before credits are applied. How do automakers get there? Through a mix of engine friction improvements, an eight-speed automatic transmission, drag reduction, 10 percent weight loss, low-rolling-resistance tires and more.

When will the industry need to go all-in on hybrids and EVs? This question hangs over the midterm review.

"Incrementally, we can refine today's gasoline engine, we can downsize it, we can boost it, we can [use] direct injection, we can add a nine-speed transmission -- but you're only going to go so far," said Jay Baron, CEO of the Center for Automotive Research and a co-author of the National Research Council study.

The researchers concluded that engine improvements could get halfway to the 54.5 mpg goal -- topping out around 45 mpg for a midsize car.

To go all the way, "the answer is, of course, electrification," said Baron.

Rolling out an array of electrified vehicles is a dicey proposition if consumers aren't buying. U.S. sales of hybrids and EVs peaked in 2013 at 3.8 percent of industry sales, according to the Automotive News Data Center, HybridCars.com and National Renewable Energy Laboratory.

Analysts, automakers and regulators are divided over when -- or even if -- hybrids and EVs will be necessary to hit fuel economy targets. The EPA and environmental groups point to the pace of innovation in gasoline engines.

"If you look at what's happened the last 10 years, there was no gasoline direct injection. Turbocharger vehicles were 3 percent of the market," said John German, a researcher at the International Council on Clean Transportation. "We're really confident that the technology in 2025 is going to be very much improved."

One key, German says, is computers.

For instance, General Motors, Delphi and startup Tula Technology are developing an improved cylinder deactivation system that uses sophisticated algorithms to boost mpg 15 percent. The technology, dubbed Dynamic Skip Fire, uses software to monitor and selectively fire the engine's spark plugs based on demand. Once perfected, the system is to appear in GM vehicles within five years.

The debate over electrification might be moot, considering state regulations.

California, the largest car market in the country, is requiring 15 percent of vehicles sold in the state to be zero emission by 2025. Seven other states are pushing for 15 percent of sales to be zero emission by the same year.

Xavier Mosquet, senior automotive partner at Boston Consulting Group, believes automakers can get to 54.5 mpg by the 2025 model year without much electrification. But the states are another matter.

"The [corporate average fuel economy] standards don't require" zero emissions, Mosquet said. "The consumer is not increasing purchase of electric vehicles today. That's going to create some tension."

That tension further complicates the midterm review.

"You have four parties -- federal, state, the consumer and the OEMs -- trying to sit in the middle," Mosquet said. "I hope they will be able to sit around the same table and try to put together a common picture of what the future should look like."

Hovering over discussion of the review is the 2016 U.S. presidential election.

The final fuel economy standards will be determined in 2018 by the EPA administrator, meaning whoever wins in November will likely appoint the individual who makes the decision. In 2012, then-Republican nominee Mitt Romney opposed standards and promised to repeal them if he won.

At the EPA, Grundler remains focused on his mission for the midterm review: gathering facts.

"I've got a serious job to do," he said. "This is not about presidential elections. This is about what can technology do to make a contribution to protecting the planet."