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Scenaria Perspective #1 - 2025 CAFE Compliance Costs


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An in-depth look into the cost of compliance created by the latest round of fuel economy regulations.

An in-depth look into the cost of compliance created by the latest round of fuel economy regulations.

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  • 1. Scenaria, Perspective 1Issue 2012/10 A Member of the AVL Group. CAFE 2025: Finding Robust Alternatives to Weather Unexpected Technology Costs.
  • 2. In late August 2012, the federal government formally announced new light-duty Corporate Average Fuel Economy (CAFE) and Green- house Gas Standards for model years 2017 to 2025, culminating with an equivalent of 54.5 MPG for cars and light-duty trucks by 2025. CAFE 2025: Finding Robust Alternatives to Weather Unexpected Technology Costs. Scenaria, Perspective
  • 3. 3 Introduction    After accounting for air conditioning credits, the National Highway Traffic and Safety Administration (NHTSA) stated that the new CAFE standards create “an estimated overall fleet average required level of a range from 48.7 to 49.7 mpg in MY 2025. Considering these combined car and truck increases, the standards together represent approximately a 4.0 percent annual rate of increase, on average, relative to the MY 2016 re- quired CAFE levels.”[1]     Combined with the previously approved fuel econo- my targets for 2012-2016, CAFE targets for the U.S. ve- hicle fleet (Figure 1) will increase by 63 percent over the next 13 years [1,2]. These regulatory targets represent the most aggressive increases in the automotive indus- try’s history.    While the new standards provide certainty about fuel economy requirements, they also create new head- aches for automakers and consumers. Which technolo- gies should automakers use to meet the new standards? How much will the new standards drive up vehicle prices to consumers? Introduction The “Free Fuel” Economy: Why It Won’t Continue. 60 55 50 45 40 35 30 25 20 2005 2010 2015 2020 2025 2030 Today 15% 29% 63% 2016Fleet Requirement 2020Fleet Requirement 2025Fleet Requirement The“FreeFuel” Economy:WhyItWon’t Continue.    The cost of future technology has always been a concern for the automotive industry.    The debate over regulations has consistently high- lighted the fact that new technologies will be needed to improve fuel economy, and those technologies will be expensive. Yet recent improvements in fuel economy have come without noticeable changes in vehicle prices (Figure 2). These regulatory targets represent the most aggressive increases in the automotive industry’s history. NHTSA CAFE Targets (U.S. Vehicle Fleet) Historical Fuel Economy – US Vehicle Fleet Figure 1 Figure 2 FuelEconomy(MPG) 35 30 25 20 15 $100,000 $75,000 $50,000 $25,000 $0 2002 2004 2006 2008 2010 2012 FleetAverageFuelEconomy MSRP
  • 4. 4 How much will it Cost? The Significant Difference Between Average Vehicle Cost Increases and Those of Specific Vehicles. How Much Will it Cost? $ 1,540? $ 2,556? Or Over $ 5,000? A Caution Regar- ding Average Vehicle Increase Projections.    In the final rule, NHTSA and EPA discuss their esti- mated incremental cost increases and highlight average per vehicle cost increases in 2025 of $1,540 (Figure 3).    From NHTSA/EPA’s own estimates for average per vehicle incremental costs of meeting fuel economy/ CO2 standards of first the 2011-2016 rules and now also the 2017-2025 rules, Scenaria calculated the cumulati- ve average cost of compliance from 2011 to 2025.    Figure 3 shows NHTSA’s costs (EPA’s figures are slightly higher). As you can see, the $1,540 per vehicle average cost cited by NHTSA only refers to the addi- tional cost of the 2017-2025 rules over and above the 2011-2016 rules.    Onlywhenthecostsoftherulesareaddedtogether is it apparent that the agencies are actually expecting the per vehicle incremental cost of the rule to be $2,556, not $1,540. From 2005 to 2012, average fleet fuel economy increased 30% [3], yet the average vehicle price (MSRP) only increased 3% [4]. Unfortunately, fu- ture increases in fuel economy will not follow the same path and here’s why. Only when the costs of the two rules are added together is it apparent that NHTSA expects the average cost per vehicle to increase by $2,556, not $1,540.    While the agencies estimate an average vehicle will go up by $2,556, how much do their data suggest prices for the most popular vehicles will rise? Downloading and using EPA/NHTSA’s input data publis- hed on the docket along with the final rule which served as the basis for their analyses, Scenaria leveraged its proprietary FuelEconomyVIEW simulation tool to see, according to the NHTSA/EPA figures, how much prices may go up on individual vehicles. This allowed Scenaria to evaluate the differences between the $2,556 average andseveralhigh-volumevehicletypesaswellastocom- pare them to previous estimates using the technology data published in 2010 with the 2012-2016 rules.    Usingthe2017-2025NHTSAtechnologyinputfiles, Figure 4 shows the minimum incremental price increa- ses expected over time for three high-volume vehicle classes to reach the standards. Those figures are shown in comparison to the average, per vehicle increase. For midsize cars, the increase is $1,330; for small cross over vehicles, the increase is $1,992; and for full-size light trucks, the increase is $4,542.    One can clearly see how misleading simply looking at average per vehicle costs can be. The full-size truck, for example, a major contributor to OEM profits and therefore their ability to reinvest in advanced technolo- gies costs, is projected to cost 3.4 times as much as a midsize car to comply with fuel economy standards.    While the CAFE standards apply on an OEM vehic- le fleet basis, meaning they can use over-target vehic- les to compensate for under-target vehicles, consumer priorities – not OEM compliance strategies, will dictate how many of which vehicles are sold. Planning to spread full-size truck costs over midsize car volumes is not only difficult in a competitive market but also a risky strategy to accurately forecast and confidently follow. The Significant Difference Between Average Vehicle Cost Increases and Those of Specific Vehicles. Scenaria, Perspective
  • 5. 5 Diminishing Returns from Investments    Scenaria’s FuelEconomyVIEW tool not only evalu- ates CAFE compliance costs – it also models each and every possible combination of technologies account- ing for all their synergies and mutual exclusions to see which ones do best. It also provides visualizations of the results that reveal unique insights.    Recall that earlier we showed midsize-car incre- mental costs using NHTSA’s data to equal $1,330 in contrast to the average vehicle cost of $2,556. Here we show how Scenaria used “efficient frontier” mapping from our FuelEconomyVIEW tool with NHTSA’s data to determine this.    Figure 5 shows results for a mid-sized passenger car in 2025 using the 2017-2025 NHTSA technology data. Each blue point represents a possible technology combination and the corresponding NHTSA/EPA-based incremental-price estimate and fuel economy.    The leading edge, or “efficient frontier,” shown in red, offers the best value for the dollar on fuel economy versus vehicle-price increase. If manufacturers seek to meet the standards at the lowest total cost to consum- ers and pass along cost increases to consumers, then the efficient frontier can be used to estimate minimum consumer price increases due to the standards. The green lines are the targeted fuel economy for this year foramidsizecar(53.8MPG)andthecorrespondingmini- mum incremental price ($1,330).    From inspecting the efficient frontier created from using the NHTSA/EPA data, we see that fuel economy and costs do not rise linearly. Instead, as the up-front cost of technology increases, fuel economy benefits encounter first diminishing returns and then, strangely, increasing returns. This non-linear behavior shows why one should not simply extrapolate from current price and fuel-economy increases to estimate future costs of fuel-economy gains.    Both the unexpectedly low $1,330 figure and in- creasing returns phenomenon are highly unusual, lead- ing us to question the NHTSA/EPA technology values and estimated costs of compliance, as we discuss fur- ther below. Diminishing Returns from Investments Up-FrontPrice $5,000 $4,000 $3,000 $2,000 $1,000 $0 $1,540 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2022 2024 2025 2021 2023 Cost of Compliance – NHTSA StatedFigure 3 Cost of Compliance – NHTSA Stated vs. NHTSA Vehicle Class DataFigure 4 2025 Midsize Passenger CarFigure 5 Car/Truck Average (NHTSA Stated) Up-FrontPrice $5,000 $4,000 $3,000 $2,000 $1,000 $0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2022 2024 2025 2021 2023 Car/Truck Average (NHTSA Stated) Large Truck (NHTSA Data) Midsize Car (NHTSA Data) Small Cross Over (NHTSA Data) 80 70 60 50 40 30 20 FuelEconomy(MPG) $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 Up-FrontPrice
  • 6. 6    The 2017-2025 NHTSA/EPA computed costs of compliance are far lower than their previous data would have suggested. Since 2010, Scenaria has conducted multiple analyses leveraging the NHTSA technology val- ues developed in 2010 and used them to estimate 2025 costs at least two-times higher than stated in the 2017- 2025 rule. So what is causing such a difference?    Figure 6 compares some of the technology val- ues published by NHTSA/EPA with the 2017-2025 final rules to those published only two years ago with the fi- nal 2012-2016 rule. We used the values for 2012 for the same vehicle class with only some of the available tech- nologies to ensure directly comparable numbers. For that reason, these curves do not extend as far or as high as they would if all technologies were included.    As you can see in figure 6, the new technology val- ues released this August are less than half the cost and have greater fuel economy benefits than what the agen- cies released just two years ago in 2010. As can be seen by contrasting the two orange-circled items for a direct injection turbocharged and downsized engine – a tech- nology that has been on the market even prior to 2010 – the agencies have decreased the expected costs by $1,413 (54%) and increased the expected benefits by 7%. Another example using the blue circles for an ad- vanced engine (with technologies included in cooled- EGR engine) with a dual clutch transmission (DCT) shows that the agencies now estimate decreased costs by $1,650 (53%) and increased benefits of 18%.    Digging deeper into the technology packages to see what the agencies are using for individual technolo- gies, Figure 7 plots several engine technology costs that do not appear to be logical. For example, turbocharging and downsizing (including direct injection), major com- ponents of how automakers are expected to improve LookingIntoUnexpected TechnologyCostsandCosts ofCompliance. fuel economy, have nearly zero cost for level 2 small and level 1 medium displacement engines. Previous agency estimatesforthistechnologywerenearly$400.Another example is cooled exhaust gas recirculation (EGR) – level 2 for large displacement engines which has negative in- cremental costs of about -$325 over the time period. This is especially strange since other level 2 cooled EGR costs for small- and medium-displacement engines in the agency files are +$531. Finally, the cost over time, as shown for diesel engines, goes both up and down for the same technology.    Taken in combination, anomalies in the technology cost and benefit values being used by NHTSA/EPA show why neither the estimated total costs, nor the shape of the curves, are likely to be as stated by the agencies. Reverting to the technology values used two years ago wouldleadtoanaverageincrementalpriceimpactofap- proximately two times $2,556, or $5,112 per vehicle.    So what is our perspective on why the agencies made such drastic changes to the technology values? Did the industry make that much progress in only two short years? We may never know. It is a fact however, that the NHTSA values published in 2010 – commensu- rate with the 2012-2016 final rule – were the result of vigorous industry debate and engineering analysis con- ducted throughout the rule-making period. In contrast, we believe that with the recession, the need to maintain unified standards and less industry involvement during the 2017-2025 rulemaking period, resulted in the new technology values not having anywhere near the same level of debate before being published. Looking Into Unexpected Technology Costs and Costs of Compliance. Scenaria, Perspective
  • 7. 7 The new technology values released this August are less than half the cost and have greater fuel economy benefits than what the agencies released just two years ago in 2010. 90.0 % 80.0 % 70.0 % 60.0 % 50.0 % 40.0 % 30.0 % 20.0 % 10.0 % 0.0 % $0 $2,000 $4,000 $6,000 $8,000 IncrementalFuelEconomy Improvement(%MPG) Incremental Price ($ / Vehicle) $12,000$10,000 Advanced Engine + Dual Clutch Transmission Estimated in 2012 Price: -53 %, FE: +18 % DI Turbo Downsized Engine Estimated in 2012 Pice: -54 %, FE: +7 % DI Turbo Downsized Engine Estimated in 2012 Advanced Engine + Dual Clutch Transmission Estimated in 2010 NHTSA Estimated 2012 NHTSA Estimated 2010 Cross Over Vehicle Costs – 2010 vs. 2012 NHTSA Data ComparisonFigure 6 NHTSA Incremental Technology Costs/ Vehicle - 2017-2025 FinalFigure 7 $ 2,000 $ 1,500 $ 1,000 $ 500 $ 0 $ (500) 20102005 2015 2020 2025 Turbocharging and Downsizing – Level 2 (24 bar BMEP) – Medium Displacement Turbocharging and Downsizing – Level 2 (24 bar BMEP) – Small Displacement Turbocharging and Downsizing – Level 1 (18 bar BMEP) – Medium Displacement Cooled Exhaust Gas Recirculation (EGR) - Level 2 (27bar BMEP) - Large Displacement Advanced Diesel – Large Displayment Advanced Diesel –Small Displayment Advanced Diesel – Medium Displayment Cooled Exhaust Gas Recirculation (EGR) – Level 2 (27bar BmEP) –Medium Displacement Cooled Exhaust Gas Recirculation (EGR) – Level 2(27bar BmEP) –Medium Displacement Turbocaching and Downsizing – Level 1 (18 bar BMEP) –Small Displacement
  • 8. 8    In the past, commentators stated that rising fuel prices would drive the adoption of hybrid vehicles [9]. A common assumption was that after a certain point, fuel prices and hybrid sales would be correlated. In this new paradigm, fuel prices would become the driving force for advanced technology vehicle-purchase decisions.    Suspendingjudgmentonthevalidityofcertaintech- nologycosts,ScenariaagainleveragedNHTSAestimates for technology fuel-economy benefits and price impacts in its FuelEconomyVIEW simulation tool to evaluate the expected payback to consumers and the effect of energy prices.    For OEMs, predicting consumer behavior is a signifi- cant factor in determining their ultimate success. Using the wrong assumptions about fuel-price tipping points that would change consumer behavior could lead to sunk costs, stranded capital, lost market share, and possibly bankruptcy.    Rather than try to “crystal ball” gas prices, a more robust approach is to deploy technologies that are not only on the efficient frontier for incremental cost, but also aligned with consumer payback across a wide range of fuel-price scenarios. That way, no matter what the fuel price, the business case for technologies is robust.    As Figure 8 shows, the light blue points represent technologycombinationsthatprovidea returnoninvest- menttoaconsumer(i.e.,payback).Thegreendotsdonot provide this return.    When gas is $3.00 per gallon, less than half of the technology packages (each one represented by a dot) are colored blue, with a number of scenarios not providing a payback. When gas is $6.00 per gallon, however, all the technology packages are blue and therefore are calcu- lated as paying back.    What About Consumer Payback? 80 70 60 50 40 30 20 FuelEconomy 2025 Midsize Passenger Car Gas Price @ $6.00 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 80 70 60 50 40 30 20 FuelEconomy(MPG) Up-Front Price 2025 Midsize Passenger Car Gas Price @ $3.00 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000    The reader is once again cautioned to remember thattheseplotsareusingNHTSA’snewtechnologyinput. Nevertheless, it is clear to see that fuel prices can have a major impact on the cost effectiveness of technology. This relationship directly impacts the time required for technology to “payback” to the consumer and can heav- ily influence demand. NHTSA/EPA assumed fuel price will be $3.63 per gallon in 2017 rising to $3.87 in 2025. That assumption, especially if lower than predicted, will have a major impact on what consumers choose. Effective Costs at $3.00 and $6.00 per gallon – 2025 Midsize Passenger CarRuleFigure 8 Up-Front Price What About Consumer Payback?Scenaria, Perspective
  • 9. 9    Scenaria analysis shows that the costs of compli- ance to the 2017-2025 standards will be far higher than highlighted by NHTSA/EPA. Instead of $1,540 per ve- hicle, it is more reasonable to expect the average per vehicle increases to reach $5,112. Some vehicle classes will experience higher or lower costs of compliance and it is up to each manufacturer to balance their portfolio accordingly. The ability to pass along these costs to con- sumers will depend heavily upon the competitive lands- capeofothervehiclechoicesavailableandtheprevailing price of fuel. Just below the NHTSA/EPA assumed gas price of $ 3.87 per gallon, less than half of the technolo- gy combinations have a positive payback to consumers – and that’s based on using the more aggressive 2017- 2025 NHTSA/EPA technology values.    Building robust product portfolios in a changing environment has always been a key business challenge. In order to profitably meet the accelerating fuel econo- my standards, new technologies will need to be applied, proven, and then built upon. This can be a big opportu- nity or a major threat for manufacturers and suppliers.    Manufacturers will need to be very strategic about credit banking, technology selections, and portfolio op- timization decisions or else face the diminishing abili- ty to invest in future sources of competitive products. Suppliers, now competing for their OEM customers’ investments in technology against not just their direct competition but rather against the whole field of fuel economy improving technologies, must invest in the right technologies or face certain commoditization and obsolescence.    One thing is clear: tomorrow’s winners must trans- form their technology market-research and decision- making systems today to be in place with the right tech- nologies. Whether their efforts are in-house, or with the help of a company like Scenaria, leaders must identify and build robust portfolios that can survive and thrive amid rapid and continual change. Summary    There is no question that the industry will be able to bring to market the technologies required to meet the 2012-2025 fuel economy standards. There is a major question, however, about the costs and economic viabil- ity at which they will be met.    The wrong investments today may make your com- pany“kingofthehill”tomorrow,butputyouonthewrong mountain in 2025. Given the level of investment dollars needed to bring new products to market, who can afford to pick the wrong mountain?    Rapid change, particularly in the technology space, has created a “new normal” where certainty can change to uncertainty in a moment’s notice. How can automak- ers and suppliers “read the tea leaves” and plan future technology strategies? How can they balance the risks andopportunitieswhenrelevantfactorssuchaschanging fuel prices, consumer priorities, and material commodity prices can change seemingly overnight? What systems should be “green lighted” and rolled out in large volume? And above all else…how do OEMs roll out new technolo- gies without eroding profits?    Leading companies of the future will generate a war chest of capital from vehicle profits to sustain their abil- ity to invest billions of dollars into new technology invest- ments. They will streamline and transform their technol- ogy capital-allocation decision processes to be immune to uncertainty, aligned with core capabilities that can en- able robust, rapid, and efficient technology related deci- sions.    Scenaria is leading the way with new-model based market research and planning methods to support objec- tive and informed decisions of technology, product, and capacity. We help companies evaluate different technol- ogy investments not from the context of right or wrong, but from the viewpoint of finding robust alternatives that are preferred against any scenario. The uncertainty over technology costs, benefits and fuel prices discussed in this analysis are great examples of why it is so important to approach decision making in this new way. Finding Robust Alternatives to Minimize Risk Finding Robust Alternatives to Minimize Risk Summary
  • 10. But one thing is clear; tomorrow’s winners must transform their decision- making systems today. Whether their efforts are in house, or with the help of a company like Scenaria, leaders must create pro- cesses that can survive and thrive amid rapid and continual change. Scenaria, Perspective
  • 11. 11    Scenaria Inc., a leader in analytics-based strategic consulting in the automotive industry and a member of theAVLGroup,hasexpertswhohavebeenatthecenter of the CAFE debate for years. We advise several OEMs and large global auto suppliers on the subject.    We’ve harnessed subject matter experts, peer-re- viewed data, NHTSA & EPA information, and complexity science to provide insight into the technology choices OEMs will face as they seek to meet both consumer needs and regulations.    For this analysis, we developed correlated, base- line market models and applied NHTSA technology data within our proprietary FuelEconomyVIEW tool. After re- moving assumptions (unknowns) about fuel prices, ve- hicle usage, and market size, we simulated the full range of potential outcomes and scenarios. We then explored the data for tipping points, efficient frontiers, and sensi- tivities. Finally, we calculated demand for technologies based on the most cost-effective, system-level perfor- mance. Proprietary data was excluded from this white paper. Authors    Sandy Stojkovski is President of Scenaria, where she is responsible for setting the company’s strategic direction and driving profitable growth. She can be con- tacted at    Joel Wenger is a Senior Consultant with Scenaria, where he manages projects associated with the Sce- naria FuelEconomyVIEW toolset. He can be contacted at Contributors Maxim Gorelkin, Scenaria, Inc. Acknowledgements Frederic Jacquelin, Manager, Scenaria, Inc. Christopher Mollo, Scenaria, Inc. References 1) LaHood, R., & Jackson, L. P. Department of Transportation, National Highway Traffic Safety Administration. (2012). 2017 and later model year light- duty vehicle greenhouse gas emissions and corporate average fuel economy standards; final rule (RIN 2060–AQ54; RIN 2127–AK79) Environmental Protec- tion Agency (EPA 2) LaHood, R., & Jackson, L. P. Department of Transportation, National Highway Traffic Safety Administration. (2010). Light-duty vehicle greenhouse gas emission standards and corporate average fuel economy standards; final rule (RIN 2060-AP58; RIN 2127-AK50) Environmental Protection Agency (EPA). 3) Anderson, T. Department of Transportation, National Highway Traffic Safety Administration. (2012). Summary of fuel economy performance (NVS- 220 1200) Environmental Protection Agency (EPA). 4) United States. Bureau of Labor Statistics. Consumer Price Index | - All Urban Consumers. 2012. Web. <>. 5) United States. Department of Energy. EV Everywhere: A Grand Chal- lenge in Plug-In Electric Vehicles | Initial Framing Document. Department of Energy, 2012. 6) WardsAuto Group, Penton Media Inc. (2012): U.S. Vehicle Sales, 1931- 2011. Database. 14 Aug 2012. < UsaSa01summary>. 7) Scenaria, Inc. Understanding the 2017-2025 Light Duty CAFE Regulati- ons and the Impact on Consumer Choices. Ed. Sandy Stojkovski. Plymouth, MI: 2012 8) Pellet, Jennifer. „Leading Transformative Growth.“ Chief Executive Magazine. 16 July 2012: 7. Web. 15 Aug. 2012. < leading-transformative-growth>. 9) Gallagher, Kelly Sims and Erich Muehlegger. „Giving Green to Get Green: Incentives and Consumer Adoption of Hybrid Vehicle Technology.“ Working Paper, John F. Kennedy School of Government, Harvard University. February 2008. About ourResearch About our Research References
  • 12. © 2012 Scenaria, Incorporated. All rights reserved. Scenaria, Inc. 47603 Halyard Drive Plymouth, MI 48170 USA Leaders in analytic based strategic planning. Produced in the United States of America. September 2012. All Rights Reserved. Other company, product, and service names may be trademarks or service marks of others. References in this publication to Scenaria products and services do no imply that Scenaria intends to make them available in all countries in which Scenaria operates. For more information about this study, you may visit our website: www.