This piece was updated on June 9, 2016, to incorporate the effect of flex-fuel vehicle (FFV) credits into the estimates of fuel economy performance and GHG savings.
Last week, Americans paid an average $2.08 a gallon to fill up their cars and trucks at the gas pump. That’s a far cry from the $3.52 a gallon paid this time in 2014, or the $3.87 a gallon paid back in 2012. The drop in prices has largely been good news for American consumers, pumping an extra $95 billion into their pockets in 2015 compared to 2014. To put that in context, the 2011 payroll tax cut netted consumers a total of about $109 billion.
But $2 gas is also having some less beneficial effects, as others have noted. For U.S. policymakers seeking to reduce oil consumption and carbon emissions, plunging fuel prices have created a real challenge as Americans pile back into relatively inefficient pick-up trucks and sport-utility vehicles in record numbers. This, in turn, has undermined the effectiveness of the federal government’s signature policy for regulating vehicle efficiency: fuel economy standards.
New federal fuel standards finalized in 2010 and 2011 were projected to nearly double the efficiency of the cars and trucks sold in the United States between 2012 and 2025, cutting U.S. gasoline demand by 3.2 million barrels per day by 2030—a roughly 33% reduction from today’s levels. This reduction has become a kind of dogma in oil and transportation discussions. It underpins everything from ideas about peak U.S. oil demand to bearish oil price forecasts from major investment banks. It is also an important part of U.S. climate policy.
As regulators kick-off their mid-term review of the standards this year, we now have enough data to evaluate their real-world impact during their initial phase, from model years 2012 to 2016. The good news is that the standards will save 53.8 billion gallons of gasoline and 577 million tons of carbon dioxide (CO2) over the lifetime of vehicles sold in this period. So, clearly the rules are an important part of U.S. climate policy. But there is also room for improvement. As Americans’ buying habits have shifted over the past two years, a significant gap has emerged between the levels of efficiency achieved and what was expected, and that gap is now running at nearly 30 percent.
Why are the standards falling short of projections? The current standards are designed to require different levels of annual improvements from vehicles of different sizes—their footprint—and performance is determined annually based on sales. Therefore, the makeup of annual sales has a big impact on performance. A fleet weighted more heavily toward cars will be more efficient than one weighted more heavily toward trucks.
When regulators made their initial projections, government forecasts suggested that oil prices would keep rising with time, averaging close to $100 per barrel through 2025. These forecasts didn’t anticipate the U.S. shale revolution or the global oil price crash that began in 2014. Regulators consequently expected American motorists to gravitate toward smaller cars and away from pick-ups and SUVs. By model year 2016, the government projected that light trucks would account for just 42.9% of new vehicles sold in America.
However, instead of a fleet weighted 60-40 in favor of cars, nearly the complete opposite is happening. Through the first six months of model year 2016, light trucks have accounted for 58.4% of U.S. vehicles sold, meaning the fleet is weighted almost 60-40 in favor of trucks. And, this is not a one-off event. In fact, the gap has widened every year since the projections were made.
With more pick-up trucks and SUVs on the road than expected, fuel economy performance has also fallen short of expectations. The gap was fairly narrow in 2015—less than half of one mile-per-gallon—but it is on pace to expand to 1.3 mpg this model year. While these figures may sound small, they actually have a large impact on fuel consumption and CO2 emissions. The figure for model year 2016, for example, implies that actual fuel economy will improve by only 70% of the projected increase over the baseline, leaving a sizeable 5.3 billion gallons of fuel and 60 million tons of lifetime CO2 reductions on the table.
This gap in projected versus realized savings has implications on everything from the outlook for U.S. oil demand and carbon emissions to global oil prices. But there are ways to get the standards back on track. My colleague Michael Greenstone recently proposed one idea that has great potential to improve fuel efficiency standards by regulating lifetime vehicle emissions instead of just efficiency. His idea would set a carbon limit for vehicles and allow automakers to trade permits, a flexible approach that is widely recognized as the most cost-effective means for reducing emissions. And, there may be other ideas.
Oil used in transportation accounted for 34% of U.S. energy-related CO2 emissions in 2015, a share almost equal to total power sector emissions. And serious analysts have stated time and again that our dependence on oil in transportation is America’s key energy security vulnerability. The upcoming midterm review provides an important opportunity to improve fuel economy standards so that we better achieve our energy security and climate goals.