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For Carmakers, a Fresh Shot of CAFE

U.S. regulators will decide by September a new target for mileage standards under the Corporate Average Fuel Economy program

Automakers are locked in an ecological arms race. Manufacturers such as General Motors (GM), maker of the Chevrolet Volt, and Nissan Motor (NSANY), whose Leaf recently went on sale, are pinning their hopes on electric vehicles. Beyond satisfying green customers, the new models are critical to car companies' goal of meeting the government's mandate that their fleets average 35.5 miles per gallon of gasoline by 2016.

The race is just starting. U.S. regulators, led by the Environmental Protection Agency, will decide by September future mileage standards under the Corporate Average Fuel Economy (CAFE) program. The higher the number, the greater the cost. The EPA is considering 62 mpg by 2025, compared with 27.3 today. "A very aggressive implementation will mean new technology," says Michael Robinet, an analyst with IHS Automotive in Northville, Mich. "It changes the way you design vehicles. It changes your power train. It changes the payback, and it changes the risk."

The CAFE revisions were the most expensive federal regulation of 2010, costing industry $10.8 billion over the next six years, according to the Washington-based Heritage Foundation. The next stage should be even costlier. Hitting a 62 mpg target would mean an average of $5 billion to $10 billion per carmaker over nine years for the largest automakers in the U.S. market, according to Jesse Toprak, an analyst with TrueCar, a Santa Monica (Calif.)-based automotive research website.

Consumers would pay $770 to $3,500 more, depending on the standard used and technologies needed, according to a September analysis by the EPA, the National Highway Traffic Safety Administration, and the California Air Resources Board. Two-thirds of U.S. cars would have to be electric or gas-electric hybrids to meet the most aggressive 2025 targets, says Gloria Bergquist, spokeswoman for the Washington-based Alliance of Automobile Manufacturers. Currently, hybrid models like the Toyota Prius make up less than 3 percent of the market. The Alliance has been pushing for a lower target.

For a company such as GM, where SUVs and pickups mean profits, the road to 62 mpg runs uphill. "We have a stated goal of not fighting change but embracing it, and achieving it as best we can," Chief Executive Officer Daniel F. Akerson told reporters on Jan. 7. "The laws of physics are not going to be suspended."

Other transportation regulation battles for 2011 will be over proposed rules requiring more rest for airline pilots and commercial truck drivers.

The analyst's take: Automakers must boost average fuel-efficiency standards to 35.5 miles per gallon by 2016. A proposal to reach 62 mpg by 2025 is similar, in percentage terms, to the target of the first standards created in 1975 in response to the oil embargo.

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Plungis is a reporter for Bloomberg News.

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