Practical Pieces of the Energy Puzzle: Getting More Miles per Gallon

The answer may require looking beyond CAFE standards and implementing other consumer-oriented policy options to wean drivers away from past habits.

In December 2007, concerns over energy security and human-induced climate change prompted Congress to increase Corporate Average Fuel Economy (CAFE) standards for the first time in 20 years. The new standards aim to reduce petroleum consumption and greenhouse gas (GHG) emissions in the United States by regulating the fuel economy of new cars and light trucks, including pickups, SUVs, and minivans. The standards will require these vehicles to achieve a combined average of 35 miles per gallon (mpg) by 2020, up 40% from the current new-vehicle average of 25 mpg.

Since Congress acted, the nation witnessed a dramatic rise in the prices of petroleum and gasoline, which reached record levels during the summer of 2008, increasing pressure on policymakers to reduce transportation’s dependence on petroleum. Prices have since fallen markedly with the arrival of an economic crisis. But few observers expect prices to stay low when the economy recovers, and many see a future of steadily rising prices, driven by global economic expansion. Thus, the goal of reducing the nation’s thirst for gasoline remains an important goal. And although striving to meet the CAFE standards will be an important part of the mix, other policy initiatives will be necessary to make timely progress.

Although the nation’s collective gas-pump shock has lessened, the lessons from recent experiences are telling. In June 2008, the average price of crude oil doubled from a year earlier, and gasoline prices rose by one third. High fuel costs sharpened the public’s awareness of fuel use in light-duty vehicles, causing them to seek alternatives to gas-guzzling private vehicles. Sales of light trucks during the first half of 2008 were down by 18% relative to the previous year, and total light-duty vehicle sales dropped by 10%. The total distance traveled by motor vehicles fell by 2.1% in the first quarter of 2008 relative to the same period in 2007. At the same time, ridership on public transportation systems showed rapid growth in the first quarter of 2008, with light-rail ridership increasing by 7 to 16% over 2007 in Min neapolis-St. Paul, Miami, and Denver.

These changes marked major changes from trends of the past two decades, when fuel prices were low and relatively stable. During this period, fuel economy standards remained unchanged for cars and largely constant for light trucks. Proponents of more demanding CAFE requirements argue that the standards stagnated during this period, allowing automakers to direct efficiency improvements toward off-setting increases in vehicle size, power, and performance rather than improving fuel economy. On the other hand, critics of CAFE standards contend that mandated fuel economy requirements impose costs disproportionately across manufacturers with no guarantee that consumers will be willing to pay for increased fuel economy over the longer term.

Now that renewed CAFE standards have passed and more stringent targets may be on the way, the discourse over CAFE must shift to the critical issues of the changes that will be necessary to achieve the mandated improvements in fuel economy, the costs of these changes relative to their benefits in fuel savings and reductions in GHG emissions, and the implementation of other policy options to help achieve ambitious fuel economy targets.

We have assessed the magnitude and cost of vehicle design and sales-mix changes required to double the fuel economy of new vehicles by 2035—a longer-term target similar in stringency to the new CAFE legislation. Both targets require the fuel economy of new vehicles to increase at a compounded rate of about 3% per year. We argue that the necessary shifts in vehicle technology and market response will need a concerted policy effort to alter the current trends of increasing vehicle size, weight, and performance. In addition to tougher CAFE standards, coordinated policy measures that stimulate consumer demand for fuel economy will likely be needed to pull energy-efficient technologies toward reducing the fuel consumption of vehicles. This coordinated policy approach can ease the burden on domestic auto manufacturers and improve the effectiveness of regulations designed to increase the fuel economy of cars and light trucks in the United States.

Although the term fuel economy (the number of miles traveled per gallon of fuel consumed) is widely used in the United States, it is the rate of fuel consumption (the number of gallons of fuel consumed per mile traveled) that is more useful in evaluating fuel use and GHG emissions. For example, consider improving the fuel economy of a large, gas-guzzling SUV from 10 to 15 mpg; this reduces the SUV’s fuel consumption from one gallon per 10 miles to two-thirds of a gallon per 10 miles, which saves a third of a gallon of gasoline every 10 miles. If, however, a decent gas-sipping small car that gets 30 mpg is replaced with a hybrid that achieves an impressive 45 mpg—the same proportional improvement in fuel economy as the SUV—this corresponds to a fuel savings of only about one-tenth of a gallon every 10 miles. Both improvements are important and worthwhile, but because of the inverse relationship between these two terms, a given increase in fuel economy does not translate into a fixed proportional decrease in fuel consumption. So even as most people probably will continue to talk about fuel economy, it is important to keep the distinction between fuel economy and fuel consumption in mind.

Leverage points

There are three primary ways in which vehicle fuel economy may be improved: ensuring that the efficiency gains from vehicle technology improvements are directed toward increasing fuel economy, rather than continuing the historical trend of emphasizing larger, heavier, and more powerful vehicles; increasing the market share of alternative power-trains that are more efficient than conventional gasoline engines; and reducing the weight and size of vehicles.

Efficiency. Even though sales-weighted average fuel economy has not improved since the mid-1980s, the efficiency (a measure of the energy output per unit of energy input) of automobiles has consistently increased, at the rate of about 1 to 2% per year. This trend of steadily increasing efficiency in conventional vehicles is expected to continue during the next few decades. Lightweight materials and new technologies such as gasoline direct injection, variable valve lift and timing, and cylinder deactivation are making inroads into today’s vehicles and individually achieve efficiency improvements of 3 to 10%. Between now and 2035, gasoline vehicles can realize a 35% efficiency gain through expected technology improvements and moderate reductions in weight.

Unfortunately, efficiency gains in the past 20 years have been used to offset improvements in the weight and power of new vehicles, rather than improving fuel economy. Compared to 1987, the average new vehicle today is 90% more powerful, 33% heavier, and 25% faster. With the help of lightweight materials and efficiency improvements, all of this improvement has been accomplished with only a 5% penalty in fuel economy. Had performance and weight instead remained at 1987 levels, however, fuel economy could have been increased by more than 20% in new 2007 light-duty vehicles.

Powertrains. In addition to steady improvements in conventional vehicle technology, alternative technologies such as turbocharged gasoline and diesel engines and gasoline hybrid-electric systems could realize a 10 to 45% reduction in fuel consumption relative to gasoline vehicles by 2035. These are proven alternatives that are already present in the light-duty vehicle fleet and do not require significant changes in the nation’s fueling infrastructure. Turbocharged gasoline and diesel-powered vehicles are already popular in Europe, and several vehicle manufacturers have plans to introduce them in a wide range of vehicle classes in the U.S. market. More than 1 million hybrid electric vehicles such as the Toyota Prius and Ford Escape have been sold cumulatively in the United States during the past 10 years.

The role that alternative powertrains can play in improving fuel economy, however, depends on how successfully they can capture a sizeable share of new vehicle sales. Currently, approximately 5% of the U.S. market is comprised of diesel and hybrid powertrains. In the past, new powertrain and other vehicle technologies have, at best, sustained average market share growth rates of around 10% per year, suggesting that aggressive penetration into the market might see alternative powertrains account for some 85% of all new vehicle sales by 2035.

Size and weight. Reducing a vehicle’s weight reduces the overall energy required to move it, thus enabling the down sizing of the powertrain and other components. These changes provide fuel efficiency gains that can be directed toward improving fuel economy. Reductions in vehicle weight can be achieved by a combination of substituting lightweight materials, such as aluminum, high-strength steel, or plastics and polymer composites, for iron and steel; redesigning and downsizing the powertrain and other components; and shifting sales away from the larger, heaviest vehicles to smaller, lighter models.

With aggressive use of aluminum, high-strength steel, and some plastics and polymer composites, a 20% reduction in vehicle weight is possible through material substitution and associated component downsizing by 2035. Additional redesign and component downsizing could account for another 10% reduction in vehicle weight. Further, reducing the size of the heaviest vehicles could achieve an additional 10% reduction in average vehicle weight. For instance, downsizing from a large SUV, such as a Ford Expedition, to a mid-sized SUV, such as a Ford Explorer, cuts weight by 15%. Combining these reductions multiplicatively indicates that a 35% reduction in the average weight of new vehicles is possible by 2035.

Increasing costs

Combining these three options to double the fuel economy of new vehicles in 2035 reveals a series of trade-offs among attributes of the light-duty vehicle fleet (see Table 1). No one or two options can reach the target on their own; doubling fuel economy in 2035 requires a major contribution from all of the available options, regardless of the strategy employed. The most sensitive options are directing efficiency improvements directly toward reducing fuel consumption and reducing vehicle weight. These changes can affect all new vehicles entering the fleet, yet during the past two decades these powerful levers for increasing fuel economy have been applied in the opposite direction.

Implementing these improvements will increase the cost of manufacturing vehicles (see Table 2). By 2035, new engine and transmission technologies, a 20% reduction in weight, body streamlining, and reductions in the rolling friction of tires could increase the cost to manufacture a car by $1,400 and by $1,600 for a light truck (in current dollars relative to the same vehicles today). These costs do not take into account the costs of distributing vehicles to retailers, nor profit margins for manufacturers and auto dealers. Adding an additional 40% to these costs gives a reasonable estimate of the retail price increase that could be expected, although the price arrived at in a competitive auto market would be subject to various pricing strategies that may increase or decrease the final price tag. With a strong emphasis on reducing fuel consumption over the next 25 years, the average price of a conventional gasoline vehicle could increase by around 10% relative to today’s mid-sized sedan such as the Toyota Camry or light truck such as the Ford F-150.

Shifting from a conventional gasoline engine to an alternative powertrain would further increase the cost of manufacturing a vehicle. In 2035, the retail price of a vehicle could increase by $700 to $800 for a turbocharged gasoline engine and by $1,700 to $2,100 for a diesel engine. Future hybrid-electric powertrains could increase the manufacturing cost of a conventional gasoline vehicle by $2,500 to $3,200 in 2035. These costs correspond to a retail price increase of 5 to 15% above the price of today’s gasoline vehicle. Achieving a 35% reduction in vehicle weight by 2035 would add roughly $2 to the cost of manufacturing a vehicle for every kilogram of weight removed. This would increase the retail price of a conventional gasoline vehicle in 2035 by roughly 10% compared to today.

Not accounting for fuel savings, the total extra manufacturing cost to double fuel economy in the average vehicle by 2035 would be between $55 billion and $65 billion in constant 2007 dollars in the 2035 model year alone, or an additional 15% to 20% of the estimated baseline manufacturing cost in 2035 if fuel economy were to remain unchanged from today. Over 15 years of vehicle operation, this corresponds to a cost of $65 to $75 to reduce one ton of greenhouse gas emissions.

For the average consumer, this translates into a retail price increase of $3,400 for a car with doubled fuel economy in 2035, and an increase of $4,000 for a light truck. If the fuel savings provided by doubling fuel economy are taken into account, the undiscounted payback period (that is, the length of time required for the extra cost to pay for itself) is rroughly five years for both cars and light trucks at the Energy Information Administration’s long-term gasoline price forecast of $2.50 per gallon. At $4.50 per gallon—a price that didn’t seem out of the question in mid-2008—the undiscounted pay back period shortens to only three years.

Engaging the policy gear

Although it is technically possible to double the fuel economy of new vehicles by 2035, major changes would be required from the status quo. Tough trade-offs will need to be made among improvements in vehicle performance, cost, and fuel economy. Although CAFE is a powerful policy tool, it is also a blunt instrument for grappling with the magnitude and cost of these required changes for two reasons: It has to overcome the market forces of the past two decades that have shown a strong preference for larger, heavier, and more powerful vehicles; and in attempting to reverse this trend, CAFE places the burden of improving fuel economy solely on the auto industry.

As buyers have grown accustomed to current levels of vehicle size and performance, domestic manufacturers have profited from providing such vehicles. In contrast, increasing CAFE standards may require abrupt changes in vehicle attributes from automakers whose ability to comply is constrained by the high cost of rapid changes in technology. More consistent signals that buyers are willing to pay for improved fuel economy would justify the investments needed for compliance.

Such signals can be provided by policy measures that influence consumer behavior and purchase decisions. First, providing financial incentives for vehicles based on their fuel economy would strengthen the market forces pulling efficiency improvements toward improving fuel economy. Second, raising the cost of driving with a predictable long-term price signal would further reduce the popularity of gas-guzzlers, encouraging the adoption of fuel-sipping vehicles over time. These complementary measures can sharpen the bluntness of CAFE by providing clear incentives to consumers that directly influence market demand for fuel economy.

Feebates are one such reinforcing policy that would reward buyers for choosing improved fuel economy when they purchase a new vehicle. Under a feebate system, cars or trucks that achieve better than average fuel economy would receive a rebate against their retail price. Cars or trucks that achieve worse than average fuel economy would pay an extra fee. Effectively, sales of gas-guzzling vehicles subsidize the purchases of models with high fuel economy.

Feebates have several advantages. They can be designed in a revenue-neutral manner so that the amount paid in rebates is equal to the revenue collected from fines. They do not discriminate between vehicles that employ different technologies but focus on improving fuel economy in a technology-neutral manner. And they provide a consistent price incentive that encourages manufacturers to adopt technologies in ways that improve vehicle fuel economy. A drawback is that feebates require administrative oversight in defining how the fees and rebates will be calculated and in setting an increasingly stringent schedule in order to balance revenue against disbursements.

Feebates have been proposed in France and Canada. France’s scheme is aimed at achieving the European Commission’s objective of reducing new vehicle carbon dioxide emissions. Canada introduced a national feebate system in the spring of 2007, but the government has since decided to phase out the system in 2009 because of complaints about how the fees and rebates were structured and a lack of consultation with industry.

Measures that influence the cost of driving are another reinforcing lever for improving fuel economy. As petroleum prices rise, which many observers expect over the longer term, politicians and consumers alike typically show increased interest in improving fuel economy. In a similar way, increasing the federal fuel tax over a number of years would encourage consumers to adopt vehicles that get more miles to the gallon, even if fuel prices themselves do not go back up dramatically.

Historical data indicate that over the short term, the immediate response to high gasoline prices is small. If higher prices are sustained for several years, however, the reduction in demand for gasoline is estimated by econometric studies to be four to seven times larger as consumers retire existing vehicles and replace them with newer fuel-sipping models. Although the actual response to changes in price is uncertain, recent studies suggest that a 10% increase in gasoline prices would reduce consumption by 2 to 4% over 10 to 15 years. This consumer-driven reduction would be achieved almost entirely through the purchase of vehicles with improved fuel economy.

Although higher fuel taxes would stimulate demand for fuel economy over the long term, substantial increases have proven politically infeasible to date. Gasoline taxes affect all consumers, and some observers argue that higher taxes will hit people with low incomes the hardest. Fuel tax increases are also met with cynicism because they generate significant revenue for the government. Any policy proposal advocating an increase in federal or state fuel taxes must clearly outline how the revenues generated from tax increases will be used to benefit consumers or rebated.

One compelling rationale for substantial increases in fuel taxes is the need for greater investment in the nation’s surface transportation infrastructure. In January 2008, the National Surface Transportation Policy and Revenue Study Commission, a blue ribbon panel that examined the future needs of national surface transportation, supported as much as a 40 cent increase in the federal fuel tax over five years. In justifying the increase, the commission noted that the Highway Account of the Highway Trust Fund will have a negative balance of $4 billion to $5 billion by the end of the 2009 fiscal year and is in desperate need of the revenue that would be generated from increased taxes on transportation fuel.

Alternatively, various revenue-neutral arrangements have been proposed that would see the funds collected from tax increases returned to consumers in the form of income or payroll tax rebates. A “pay at the pump” system would offer a separate revenue-neutral approach. This system would roll registration, licensing, and insurance charges into the price of gasoline paid at the pump. Annual or semiannual costs of vehicle ownership would become a variable cost per gallon of fuel consumed, encouraging the purchase of vehicles with higher fuel economy without requiring the average driver to pay more. California is considering similar “pay as you drive” legislation that would allow insurers to offer premiums based on the actual annual mileage driven by an individual. A study by the Brookings Institution found that this measure could result in an 8% reduction in light-duty vehicle travel and $10 billion to $20 billion in benefits, primarily among low-income drivers.

Boosting miles per gallon

To see the possible benefits of such policy actions, it is useful to consider the combined effect of two of these policies alongside the mandated 35 mpg CAFE target by 2020. The two policies are a feebate system that provides a $1,000 incentive against the retail price of a vehicle for every one-hundredth of a gallon shaved off the amount of fuel consumed per-mile (roughly ranging from a maximum rebate of $1,200 to a maximum fee of $3,000 dollars per vehicle), and an annual 10 cent per gallon increase in federal fuel taxes, sustained for 5 to 10 years.

Based on our cost assessment, the feebate measure would be strong enough to neutralize the retail price increase of enhancements of conventional gasoline engines that improve fuel economy and most of the increased price from purchasing a more fuel-efficient turbocharged gasoline engine. It would offset roughly half of the price increase of a diesel engine and more than a third of the price of a hybrid-electric powertrain. By effectively subsidizing manufacturers to adopt technologies in ways that improve fuel economy, such feebates would ease the internal pricing strategies of automakers while sending consumers a clear price signal at the time of vehicle purchase.

The second measure, increased fuel taxes, would send a continuous signal to consumers each time they fill up at the pump. Under our suggested policy package, the federal government would increase its fuel tax by roughly 10 cents a gallon annually over five or more years. This would provide a moderate but consistent signal to consumers over the longer term. Such a policy alone could stimulate a 4 to 8% reduction in annual gasoline consumption over 10 to 15 years, given recent estimates of the sensitivity of gasoline demand to changes in price. Alongside CAFE, sustained fuel tax increases could match the public’s desire for more miles per gallon to fuel economy regulations that the public might not otherwise prefer.

The combined effect of these two policies is consistent and reinforcing: Consumers respond to feebates and fuel prices in a way that aligns their desire for fuel economy with requirements placed on manufacturers. These demand-side measures would encourage consumers to choose vehicles that achieve more gallons per mile, an approach that harnesses market forces to pull efficiency gains in vehicles toward improved fuel economy alongside the regulatory push provided by CAFE. A sustained demand for better fuel economy from consumers would also assuage the fears of automakers that they will be stuck with CAFE’s price tag.

Just as there is no silver bullet in the various technology options now available or just over the horizon, controversy over CAFE that has persisted for two decades suggests that one dominant strategy is unlikely to satisfy the necessary political and economic constraints while sustaining long-term reductions in petroleum consumption and GHG emissions. Broadening the policy debate to include measures such as feebates and fuel taxes that stimulate consumer demand for fuel economy through price signals will enhance the prospects of achieving CAFE’s goal of 35 mpg by 2020 and further targets beyond. A coordinated set of fiscal and regulatory measures offers a promising way to align the interests of government, consumers, and industry. Achieving Congress’s aggressive target will not be easy, but overcoming these barriers is essential if the nation is to deliver on the worthy goal of reducing the fuel use and emissions of greenhouse gases from cars and light trucks.

Recommended reading

J. Bordoff, P. J. Noel, “The Impact of Pay As You Drive Auto Insurance in California”, The Hamilton Project, The Brookings Institution, 2008. http://www.brookings.edu/papers/2008/07_payd_california_bordoffnoel.aspx.

Congressional Budget Office, “Effects of Gasoline Prices on Driving Behavior and Vehicle Markets”, Congress of the United States, January 2008, .

U.S. Environmental Protection Agency, “Light-Duty Automotive Technology and Fuel Economy Trends: 1995 through 2007,” Office of Transportation and Air Quality, U.S. Environmental Protection Agency, 2007, http://www.epa.gov/otaq/fetrends.htm.

G. E. Metcalfe, “A Green Employment Tax Swap: Using a Carbon Tax to Finance Payroll Tax Relief”, The Brookings Institution and World Resources Institute Policy Brief, June 2007, http://pdf.wri.org/Brookings-WRI_GreenTaxSwap.pdf.

U.S. Government Accountability Office, “Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards,” U.S. Government Accountability Office, GAO-07-921, 2007, http://www.gao.gov/new.items/d07921.pdf.

K. A. Small, K. Van Dender, “If Cars Were More Efficient, Would We Use Less Fuel?,” Access, Issue 31, University of California Transportation Center, 2007, .

L. Cheah, C. Evans, A. Bandivadekar, J. Heywood, “Factor of Two: Halving the Fuel Consumption of New U.S. Automobiles by 2035,” Laboratory for Energy and Environment report, 2007, http://web.mit.edu/sloan-auto-lab/research/beforeh2/files/cheah_factorTwo.pdf.

National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow: Report of the National Surface Transportation Policy and Revenue Study Commission”, 2008, http://www. transportationfortomorrow.org/final_report/.

Christopher Evans ([email protected]) is a recent masters graduate, Lynette Cheah is a Ph.D. student, Anup Ban divadekar is a recent Ph.D. graduate, and John Heywood is Sun Jae Professor of Mechanical Engineering at the Massachusetts Institute of Technology.