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How California Could Affect Car Choices

A directive from the Obama Administration on fuel efficiency is creating alarm among automakers

President Obama's order to the Environmental Protection Agency to review whether to grant a government waiver that could allow California to pass tougher fuel economy and emission standards for automakers than the federal government could significantly change the vehicle choices consumers have in the next decade.

If the EPA grants California a waiver, the move would allow the state to require that vehicles achieve fuel economy equivalent to 35 miles per gallon by 2017, three years earlier than mandated by a federal regulation passed in 2007. The new fleet average would be 42.5 mpg by 2020.

California also would make it tougher in some ways for the auto companies to meet the state regulation than the federal one. That's because carmakers have been preparing to meet the new federal standard with future vehicle plans that include smaller engines, electric vehicles, and hybrids. But the phase-in of the California plan starting in 2011 and accelerating to 2017, they say, could force rapid price hikes on vehicles and slam automakers already hurting from the global recession. Under the rules, the auto companies would have to invest far more in new technology.

Not the Final Word

"Our nation's automakers are struggling—drastically restructuring and shedding jobs just to stay afloat," Antonia Ferrier, a spokeswoman for House Republican Leader John Boehner of Ohio, said on Jan. 26, shortly after the White House disclosed Obama's directive. "And now they are being forced to spend billions of dollars to comply with California's emissions standards instead of using that money to save American jobs."

Auto industry executives said on Monday that they didn't see the President's statement as the final word on letting California have its way. Several spoke on background only, citing the sensitivity of negotiations that are taking place between the car companies, Congress, and the White House over the new regulations, as well as the federal loans to General Motors (GM) and Chrysler. "I still think we will wind up with one national regulation that may be tougher than what we have now, but perhaps won't go as far as California wants," says one auto company lobbyist.

The Bush Administration recently approved $17.4 billion in loans to GM and Chrysler, and Ford (F) has applied to the government for a $9 billion line of credit. The precarious finances of the Detroit automakers and their need for government support have removed some of the companies' lobbying clout to fight fuel economy regulation favored not only by the Obama Administration but by Speaker of the House Nancy Pelosi (D-Calif.).

Closing a California Loophole

Besides the accelerated schedule for reaching a 35 mpg industry average, the biggest automakers—GM, Ford, Chrysler, Toyota (TM), Honda (HMC), and Nissan (NSANY)—all object to an exclusion given to automakers that sell fewer than 60,000 vehicles a year in California until 2016. That would give Volkswagen, Mercedes-Benz (DAI), BMW, Hyundai, and Subaru, as well as potential new companies from China and India, an advantage over Detroit and leading Asian automakers. Even environmentalists want that provision cut. "That is a loophole we would like to see eliminated from California's law so the playing field is level," says David Friedman, senior analyst at the Union of Concerned Scientists.

Automakers complain, too, that the law could result in GM and Ford as well as Toyota being artificially limited in how many pickup trucks they can sell in California, and the 12 states that follow the Golden State's lead, especially after the economy rebounds. "There could be almost a black market for pickups in those states," said one concerned Detroit executive.

How so? Under the California law, some companies could have to cap how many trucks and sport-utility vehicles they sell to comply with regulations. Businesses could set up out-of-state companies to buy and register trucks and SUVs, and then drive them into California and other states. Also, the law as it is written affects new cars and trucks, but not used vehicles with more than 7,000 miles on the odometer. "Detroit might have to drive the cars to California and sell them as used instead of shipping them by truck," joked one executive.

Calls for a National Approach

It's these kinds of loopholes and potential runarounds that led the industry's main lobby to call again for one national regulation. Dave McCurdy, CEO of the Alliance of Automobile Manufacturers, says the group "supports a nationwide program that bridges state and federal concerns and moves all stakeholders forward, and we are ready to work with the Administration on developing a national approach."

California and the environmental lobby argue that the new rules, if passed, wouldn't affect vehicle choice as much as critics allege. This could be true in California, where about two-thirds of all vehicles sold are passenger cars. But nationally, only 51% of all vehicles sold are cars. So tougher standards would start to make pickup trucks and SUVs more expensive as the carmakers add new technology to make them more efficient. Carmakers also could raise sticker prices on pickups and SUVs to lower sales and thus minimize the damage the gas hogs do to the company's fleet mileage performance," says Brian Johnson, an analyst with Barclays Capital (BCS).

Estimates vary on how much the new regulations are going to cost because different technology will be used for different vehicles. The National Highway Traffic Safety Administration has estimated it will cost $114 billion to implement the new fuel economy standard, with virtually all of that being passed on in higher prices to consumers.

Not Much to Do in the Beginning

Congress has approved $25 billion in loans to assist auto companies and suppliers in retooling factories to produce more fuel-efficient vehicles. But the cost per vehicle of the technology that boosts fuel economy can range from a few hundred dollars more for transmission enhancements to $8,000-$10,000 for electric batteries.

Mary Nichols, chairman of the California Air Resources Board, told Los Angeles radio station KPCC that the automakers won't have to do much in the early years of the mandate. The companies, she argues, already have the cars to meet the standard. But going into the middle of the decade it will get much tougher: California rules have a tendency to influence how cars and emissions are governed across the U.S. and even in Europe. The Golden State has long mandated cleaner air emissions such as soot from diesel fuel and smog-causing oxides of nitrogen. Automakers started with catalytic converters just for California but eventually made them national.

That's likely to happen with the new rules. The only way the carmakers will avoid it is if the industry collectively cannot deliver 26 mpg for trucks in 2016, says Eric Noble, president of the CarLab, an auto consulting firm in Orange, Calif. The state air resources board, he notes, passed electric-vehicle mandates only to pull back when no one could really deliver. "The industry can collectively pocket-veto these new rules," Noble says. "But then the industry is still left to interpret which laws can be met, and which will stay.

Big Impact on Trucks

The only way to meet the long-term truck standards, Noble says, will be to sell smaller trucks or SUVs that get very high mileage and offset the bigger pickup trucks that businesses need. "Large trucks will be undersupplied and overpriced or there will be some kind of play that has the manufacturers selling a bunch of compact trucks," says Noble.

California's rules would clearly force carmakers to make their trucks more efficient. By 2016, California and states like New York, New Jersey, and others would mandate a 26.1 mpg average for all trucks. Today, there isn't a single pickup on the market—not even Ford's four-cylinder-powered Ranger compact truck—that gets 26 mpg. General Motors' Chevrolet Silverado hybrid pickup truck gets only 20 mpg. "Nobody, not even the Japanese, has a clue how to meet the California legislation," says one Detroit executive. "It's flat-out impossible to meet 42.5 mpg with anything resembling the vehicles we drive today."

For all the gnashing of teeth about stiffer regulation, some analysts argue that it will be better for the automakers than letting the market determine what consumers want. Transportation analyst Deborah Gordon, co-author of the recently published Two Billion Cars: Driving Toward Sustainability, says "2008 showed us that the marketplace, with gas prices ranging from $4.50 to $1.50 in six months, creates havoc on their business…regulation will provide a constant environment they can plan around."

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