California Rules, Detroit Quakes

Carmakers are balking at proposed regs that would cut CO2 emissions

California is scaring the daylights out of the auto industry once again. Having long led the nation in mandating everything from reduced emissions to greater protections for car buyers, regulators in the Golden State are pushing for new rules that would cut carbon dioxide emissions -- a key component of greenhouse gas -- from all cars sold there before 2015 by 30%. Since CO2 can't be filtered from auto exhaust, the only way auto makers will be able to meet that goal will be to make a big, costly leap in fuel efficiency. Effectively, the California Air Resources Board proposal forces them to boost gas mileage on cars sold locally by 30% to 40%.

Naturally, auto makers don't like the proposed rules -- especially since such populous states as New York tend to follow California's lead on auto regulations. And with the period for public comment on the new regs set to end on July 7, the auto makers are gearing up to get them watered down or killed. In all likelihood, their main attack will come in the courts: The auto makers are contemplating a lawsuit arguing that California has no jurisdiction to regulate fuel economy, since that falls under federal control. Moreover, they argue that CO2 is not a pollutant and therefore can't be regulated.

While it could be years before the legal debate plays out, for now there appears to be plenty of political momentum behind the proposed rules, from Governor Arnold Schwarzenegger on down. "Climate changes resulting from auto emissions have already had a dramatic impact on the environment of this state," says Fran Pavley, the state assemblywoman who authored the bill seeking the CO2 curbs. "We have to stop the auto companies from continuing to do it."

If California prevails, could auto makers meet the proposed rules by 2009, when their phase-in would start? CARB says they already have the technology to make big strides in fuel economy. It cites everything from high-tech transmissions and fuel controls to improved aerodynamics and using turbochargers to boost fuel efficiency rather than horsepower.


But getting to the 30% reduction may not be as easy as CARB asserts, claim auto makers. They say building the technology into a range of models would take longer and cost more than CARB assumes. Moreover, focusing on fuel economy would require a dramatic cultural change among power-loving consumers and by an industry used to building big vehicles with plenty of horsepower. Says Ford Motor Co. (F ) CEO William C. Ford Jr.: "We're in the business of giving customers what they want, and they're saying, 'We want bigger engines and bigger vehicles."'

Not surprisingly, auto makers are balking at the extra investment that would be required to boost gas mileage. CARB asserts that building a car that puts out 30% less CO2 would add $1,000 to manufacturing costs. Auto industry execs dispute that number. David E. Cole, executive director of the Center for Automotive Research, says $1,000 will deliver a fuel savings boost of just 20% to 25%. What's more, auto makers insist the CARB estimate ignores research and development costs. One Japa-nese auto exec says it would cost millions to test even existing technologies for durability and performance in a variety of vehicles.

For the Big Three, there's another fear: They could once again lose out to their surging Japanese rivals. Toyota, Honda, and Nissan may be no more eager to front the costs of adapting to the new regs, but their stronger profitability would make them better able to do so if forced. Detroit carmakers, while profitable again, aren't making enough per-car profit to cover the estimated $1,000-per-vehicle cost. Ford comes closest, at an average of $700 per vehicle; General Motors (GM ) and Chrysler (DCX ) earn much less on their vehicles. Moreover, while the Japanese already have a number of fuel-efficient vehicles, the Big Three have focused disproportionately on big SUVs and trucks, where they get most of their profits. To meet the fuel economy requirements, they might have to sell fewer of these gas-guzzling vehicles in California, if they can't make them more efficient.

It doesn't help that Detroit is behind in bringing some of the technologies to market. Honda and Toyota widely use variable valve timing, which is more efficient and cleaner than traditional fuel controls. But GM and Ford have it in only a few cars; Chrysler doesn't have it at all. It would take two to four years just to develop a new engine with the technology and years more to work it into new product plans and get plants tooled up to make the vehicles. To get the technology ready for 2009, the first year of California's proposed rules, carmakers would have to start work immediately, says Mark M. Chernoby, Chrysler Group's vice-president for advanced vehicle engineering.


The bigger challenge may be shifting focus from power and size to fuel economy and CO2 emissions. Current consumer tastes have carmakers falling over one another to sell cars with lots of horsepower, plenty of luxury amenities, and spacious cabins. Since 1981, average fuel economy has improved just 1%, to 20.8 mpg. Meanwhile, the average vehicle has 93% more horsepower and is 24% heavier, according to the U.S. Environmental Protection Agency. Even Honda Motor Co. used variable valve timing and a bigger engine in its Accord sedan to more than double its horsepower since 1989, leading to a slight drop in fuel economy. Harnessing technologies for fuel efficiency instead would require "a shift in design priorities," says John M. DeCicco, a senior fellow at the nonprofit Environmental Defense organization, "as much a cultural change to the industry as an engineering challenge."

Selling fuel economy to buyers would also require a big shift in marketing. One of CARB's suggested technologies is turbocharging, which gives a car added boost. Carmakers have long sold it as a sporty option to add horsepower. But CARB says carmakers could downsize an engine, say from a V-8 to a V-6, and add a turbocharger to improve fuel economy and emissions. That would work, but consumers see turbo and think speed, not efficiency. Says Chrysler's Chernoby: "Today, the market is telling us that it's not willing to pay for those trade-offs." If California implements its new fuel economy rules, however, auto makers and consumers may have no choice.

By David Welch, with Kathleen Kerwin, in Detroit and John Carey in Washington and Ronald Grover in Los Angeles

    Before it's here, it's on the Bloomberg Terminal.