• by Karl Greenberg , March 30, 2011

New Corporate Average Fuel Economy (CAFE) and greenhouse gas (GHG) rules may well require automakers to achieve fleet fuel economy of at least 42 miles per gallon (mpg) by 2020, although automakers are pushing back on that, emboldened as Congress has taken a sharp right turn. Automakers have become more vocal in arguing that they need more time.

But a panel discussion on Wednesday, sponsored by Ceres -- a coalition of investors and environmental groups directing an investor network on climate risk totaling about $9.5 trillion -- said automakers don't need extra time and can achieve these goals and the technology by then -- and that higher CAFE standards will actually be a boon for automaker profits.

Carol Lee Rawn, senior manager, transportation programs at Ceres, explained that the new data is compiled in two studies -- one showing that the auto industry will see higher profits under the 42-mpg goal. The second report on the electric vehicle industry shows how that segment will advance under the proposed CAFE standards.

"The two new ports project that U.S. operators will be more profitable," she said. "Forty-two miles per gallon by 2020 -- the strictest standard now proposed -- would mean that by 2015, 1 in 20 cars will be hybrid, plug-in or full electric." She said it would give Detroit automakers a 50% gain in profit.

Said Lily Donge, manager, Environment and Climate Change, Calvert Asset Management Company, Inc.: "In this case, it allows us to seize opportunities in the auto industry space overall. Frankly, to us, stronger CAFE standards lift all boats," she said, adding that automakers that resist will ultimately lose anyway. "We see the standards becoming ever more stringent globally. Companies not able to embrace them will have higher risks. And at the end of the day, U.S. auto companies have to sell across all markets."

Rawn said the 42-mg standard is consistent with a 6% annual improvement in mpg starting in 2017 that would boost mileage to 62 mpg by 2025, and that the increases shouldn't be a problem. "The technology exists or is in the pipeline," she says. "This analysis shows it is both feasible and profitable."

Walter McManus, economist, University of Michigan Transportation Research Institute and director of the Automotive Analysis Group, said the potential CAFE limits for 2020 would actually result in an increase of automakers' variable profit of $9.1 billion dollars, or 8%, and that the Detroit three could garner $5.1 billion of that or 56%. "The 42-mpg standard for 2020 is consistent with a path of 6% improvement per year that the [U.S. Department of Transportation] has proposed. What this does is narrow the gap that has existed in fuel economy between Detroit and competitors. Second, light trucks and larger cars have a greater potential to add consumer value by improving fuel economy than small cars," he said, noting that the Detroit automakers' profit and volume is still weighted toward bigger vehicles.

Alan Baum, principal at Baum Associates, which has produced an annual forecast since 1990, said improvements from meeting proposed standards will come from "all of the above." Electric vehicles, better internal combustion engines and hybrids will all raise CAFE. "Hybrids will continue to grow but plug-ins and full electrics will increase to a big portion of the market." He said these vehicles will be especially important to corporations like GM and Nissan whose Volt and Leaf are central icons in their efforts to offer the next big thing. "Toyota is the hybrid king, and Chrysler is behind the curve in electrics, but has new engine and transmission technology."