10 Principles to Guide Automobile Policy
Auto manufacturing is capital intensive with huge fixed costs, requiring massive investments in plants, processes and people 5-10 years before new products roll off assembly lines. Constantly shifting government rules create manufacturing chaos, ultimately raising costs to consumers. That’s why we need a single long-term road map for a range of policies. One case in point is the fuel economy/greenhouse gas regulation to be finalized by fall. The centerpiece of this regulation is the “single national standard” that marries the effective requirements of NHTSA, EPA and California. Without this core structure of a single, predictable framework, the industry risks losing its previous investments, while incurring new costs and dislocation or loss of jobs. Such instability further plays into a number of decisions, such as siting new plants to meet global demand. By avoiding piecemeal, ever-changing standards from multiple government bodies, this industry can make real progress towards meeting the needs of mobility.
Automakers in the United States have invested almost $200 billion over the last decade in research and development to increase fuel efficiency, for safety innovations, for environmental gains and for improved communications. Roughly 99% of that research has been privately funded. Each company is pursuing research strategies consistent with its own vision of what will motivate its future customers. Ultimately, the market will determine which of these corporate bets were wise … and which were something else. And many of these bets, of course, are driven by public policy requirements and considerations, especially approaches to alternative powertrains and other techniques to achieve more efficient vehicles. Given the absence of a crystal ball, and the reality that consumers will manifest their choices over a long window of time, we believe it is imperative that government not get in the business of picking technology winners and losers. Government should set performance-based standards and let auto engineers decide how best to meet them. Consumers should choose winners through their collective purchasing patterns. That said, once government determines that society should move to diversify powertrains, that triggers some public responsibility to invest in supporting infrastructure.
We are all secretly armchair engineers, and sometimes it seems like everyone has an idea on how to build cars. Meanwhile, real auto engineers – more than 50,000 of them in the U.S. – are creating many new technologies to improve mobility. Yet periodically we hear calls for mandates of all kinds. The motivation is clear and the benefits can be seductive. Moreover, the politics can be compelling. For example, we've heard calls to paint cars only light colors to reduce greenhouse gases from air conditioning use. And some have suggested that if we built only flex fuel vehicles, more consumers might choose ethanol. Every new technology could be a new mandate, and every mandate is a new cost to consumers. Today, the average cost of a new vehicle is $30,300, more than half the median household income in the U.S. In the last decade, automakers have been subjected to four rules that will create costs of $55.5 billion, and another two rules under development will pose an additional burden of $160 billion. What does this mean? It is vital that the policymaking process avoids being predicated on optics or politics. Policy must be based on meaningful, data-driven analysis of both societal and consumer costs and benefits.
The issue of distracted driving provides a perfect illustration for the point that policy should reflect a real-world understanding of consumer behavior. Over the last decade, the nature of communications has changed dramatically. Ten years ago, smartphones were rare; today about 234 million Americans ages 13 and older use mobile devices. Social networks were in their infancy a decade ago; today about 160 million Americans are on Facebook, including 74% of young adults. Only five years ago, 35% of American adults used their phones for texting; today that number has more than doubled to 73%. And 10 years ago, virtually no new cars came with integrated voice-driven communications. Today, that functionality is becoming common, helping drivers keep their eyes on the road and their hands on the wheel. The implication of this ongoing communications and technology revolution is that connectivity has forever changed our way of life – whether we are at home, in the office, at school, on the school bus or in our cars. The question isn't whether people will be connected; rather it's how. Thus, regulation and policies regarding distracted driving should not seek to eliminate behavior but rather should bias behavior to integrated, voice-driven systems designed with safety in mind to move consumers away from relying on unsafe hand-held devices.
Looking through a microscope, everything seems bigger … but you can still miss the big picture. Regulation promulgated under a microscope biases policy choices toward higher costs, which ultimately come out of consumers’ pocketbooks. Automakers don’t build cars according to one isolated regulation or a single generic customer. Today’s automobile is a complex, sophisticated system of 3,000 parts all working in unison, often at highway speeds. To meet the frequently competing demands of affordability, technological feasibility, consumer demands and more, a holistic view is necessary. The regulatory process for each government agency should look beyond the rule at hand and consider the rule’s context, including the agency’s regulatory action over at least the five previous years, as well as regulatory actions of states and other agencies during the same timeframe. In its clearance process for every new regulation, OMB could serve the public well by providing a statement that outlines the aggregate cost of regulation in the average new car, along with the contribution of the regulation in question to that cost.
When you sell consumer products for a living, you learn quickly that consumers are always in the driver’s seat. Yes, certainly automakers build cars to respond to national priorities, expressed in regulation, to increase energy security and preserve the environment. For the individual consumer, however, these national priorities may not be front and center. At a minimum, fuel economy and clean-car technology compete in a complex mix of vehicle attributes including utility, safety, styling, performance and affordability. So to meet national priorities successfully, the public sector needs to be consumer-oriented too, motivating consumers to embrace alternative powertrains – technologies that may cost more upfront and come with infrastructure-related disadvantages. Consumer motivation may come from reducing effective costs through tax policy … or from facilitating access to fueling and charging capacity … or from policies like HOV and parking incentives and support for residential charging. There are lots of ideas. But it boils down to one single point: when government sets priorities that transcend consumer choices, government assumes an obligation to induce changes in purchasing behavior deemed desirable for society.
Regulations typically are built on a host of assumptions. And, as we all know, they are called “assumptions” because no one knows what will happen, especially the further into the future that we look. We assume, for instance, consumers will buy a certain number of electric cars, but we just don’t know. Regulation should not be predicated merely on the fragility of assumptions or its relatives: guess-estimates, predictions and scenarios. Regulation should be reality-based so that the costs and benefits are properly assessed. Simply put, policy should be evaluated on analysis that is revisited at periodic intervals. The proposed 2017-2025 fuel economy/greenhouse gas rule does include a midterm review. As the rule is finalized, that reality check should be strengthened and protected. Given a) the long lead-time of product development; b) the magnitude of regulatory burden/cost; and c) the uncertainty of consumer adoption well into the future, it is vital that all consequential regulatory actions have mechanisms for midpoint adjustments. Such lookback mechanisms would be government best practices.
Today, the auto industry complies with roughly 2,000 regulations. Autos are heavily regulated for a range of valid purposes. The typical rulemaking takes 30-36 months, with a phase-in period of 3-4 years. Rulemakings have their place, but so do voluntary programs initiated by automakers. A case in point is side airbags. There was no regulation requiring them a decade ago when automakers began putting them in their vehicles. Then automakers, working with government and other stakeholders, voluntarily developed guidelines for their use. This was done more quickly than a regulation could have been promulgated. Voluntary guidelines also have been adopted for vehicle crash compatibility, productively responding to safety concerns. And, in February 2012, NHTSA based its proposed distracted driving guidelines for vehicle technology on voluntary guidelines developed by automakers a decade ago. Where possible, especially given the rapid pace of technological change and the special expertise demanded by new technologies, voluntary guidelines are an effective, and often more nimble, mechanism for achieving policy objectives. The cooperative approach ensures that expert engineers are directly engaged in formulating workable solutions. This approach also minimizes costs to automakers, and thus consumers, while providing the quickest path to addressing real-world priorities.
Just like horses and carriages used to go together, today fuel and auto standards work in tandem. Clean cars need clean fuels. The concept of regulating fuels and cars in a single standard was established in 1999, when the landmark Tier II standards were finalized. EPA’s Tier II reduced smog-forming emissions dramatically, so today's vehicles run 99% cleaner than in 1975. And, as part of Tier II, automakers commend the oil industry for stepping up and reducing sulfur in gasoline from 300 ppm to 30 ppm. Cleaner fuel requires refineries to be retrofitted and thus may increase the cost of gas. Accordingly, the enthusiasm for higher fuel quality is not always shared by petroleum producers. The environmental burden associated with driving is not their core mission, and in their minds, not their responsibility. To further environmental goals, we need to recognize that all industries need a value proposition. But, if we as a society want to maximize the functionality of auto emissions control and fuel-efficiency technologies, high grade fuel is essential. Therefore, as regulations require greater fuel efficiency and even cleaner cars, automakers are keen to see improvements in fuel quality through integrated rulemakings that address cars and fuels together.
Cars are produced in about 40 countries and exported around the globe. In the U.S., 22% of sales come from imports. In 2010, we exported 1.5 million vehicles for purchase abroad to about 150 countries – the value of these vehicles totaled over $40 billion. These figures are likely to climb as worldwide consumption rises sharply over this next decade. Auto manufacturing is a particularly bright spot in the economy. At the same time, one significant impediment to the free flow of cars is the lack of harmonization of safety, engineering and environmental standards in different countries and regions. The issue admittedly is quite tricky. In the U.S. for instance, there is an understandable reticence on the part of policymakers to cede judgments either to the U.N., voluntary bodies or other countries. At the same time, the ideal of harmonization has obvious and concrete value in terms of facilitating our ability to export cars and thereby create jobs in this country. Anything policymakers can do to reconcile the value of harmonization with the legitimate desire to protect sovereign rulemaking would be tremendously helpful. In the absence of U.S. engagement, policymakers in other countries will make decisions that affect us and could cost U.S. jobs.