October 28, 2004: Vehicle Fuel Efficiency

October 28, 2004


October 28, 2004

The Honourable David Emerson
Minister of Industry
The Honourable Stéphane Dion
Les Terrasses de la Chaudiere
The Honourable Jean-C. Lapierre
Minister of Transport
The Honourable R. John Efford
Minister of Natural Resources

RE: Automotive fuel efficiency standards

Dear Ministers;

I am writing to you collectively in regards to the ongoing discussions between the auto industry and your four Ministries on the issue of automotive fuel efficiency standards.

As you know, the CAW has been an energetic supporter of Canada's ratification of the Kyoto Protocol.

We recognize that there are real economic challenges as we move forward to meet our commitments under that Protocol. But reducing pollution and "greening" our economy present many economic opportunities, as well. And the economic and social costs of inaction on climate change for ourselves and future generations are too high for us to not meet this challenge.

The CAW also supports the general principle that automobile manufacturers should be required to gradually improve the fuel efficiency of the products which they sell, and we agree that a timetable to that end can play a role in our overall plan for reducing greenhouse gas emissions. Of course, time delays in designing and introducing new vehicles, and then the additional time required as the existing vehicle fleet is replaced with newer and more fuel-efficient vehicles, mean that the actual greenhouse gas reduction contribution that can be made through fuel efficiency improvements is necessarily modest in the medium-term. The 5MT reduction in greenhouse gas emissions that your government's Kyoto plan envisions attaining from automotive fuel efficiency improvements represents just 2 percent of the total 240 MT reduction we aim to achieve by 2010. This must be kept in context for those who put undue emphasis on motor vehicles as a source of greenhouse gas pollution, and hence have unrealistic expectations about the role that the auto industry can play in resolving the overall climate change problem. Nevertheless, the use of motor vehicles is an important source of greenhouse gas emissions, and the industry must play its role in addressing the climate change challenge. In the longer-run, those necessary improvements in fuel efficiency will have a much larger impact on overall greenhouse gas emissions than in the short-term, and the industry needs to move quickly to begin that progress.

I understand that the technical and economic issues associated with the effort to improve automotive fuel efficiency are complex, and that negotiations with the auto industry on these issues have been challenging. I would like to provide you with our union's views on some of the issues at stake. I would also like to request that your officials keep our union informed of the progress in your negotiations with the auto industry, and consider us an informed and interested stakeholder as this process moves forward.

Our necessary effort to attain improvements in fuel efficiency needs to take account of the importance of the automotive manufacturing industry to Canada's overall economic performance. The auto industry is our largest and most important export industry, but it has experienced challenging economic circumstances since 1999 (when our production peaked, at over 3 million assembled vehicles). Since then our production and exports have declined significantly, we have lost over 7000 well-paid jobs in auto assembly, and industry stakeholders have recognized that the Canadian industry is at a turning point in its historical evolution. The Canadian Automotive Partnership Council (CAPC, which includes auto assemblers, parts makers, the CAW, and the governments of Canada, Ontario, and Quebec) has made numerous recommendations regarding how the industry's fortunes in Canada can be improved. I want to recognize the important and constructive role that Industry Canada has played in the CAPC process. Environmental issues (including fuel efficiency standards) touch on many of the economic and investment challenges which CAPC has addressed.

It is essential, as we move to improve the fuel efficiency of the vehicles that are sold in Canada, that we do so in a manner which strengthens (not weakens) the domestic economic presence of this crucial industry. Here are some of the key principles and perspectives which, in the CAW's view, will assist us in pushing the automotive industry toward a "greener" future, but in a manner which strengthens its manufacturing presence in Canada.

Why Fuel Efficiency Regulations are Needed

Many existing technologies exist which could improve fuel efficiency of conventional internal combustion vehicles, but which add additional cost to those vehicles (such as lighter materials, displacement-on-demand engines, automatic shut-off systems, continuously variable transmissions, and others). In some cases, it can be argued that these technologies would actually provide a financial benefit to consumers over the lifetime of their vehicles, with the cost savings from reduced gasoline consumption more than offsetting the additional up-front purchase cost of more efficient equipment. In general, however, consumers tend to be myopic: they will not attach sufficient value at the time of purchase to those long-run savings (and in some cases there is no net financial benefit associated with these innovations, even in the long-run). This same myopia is also visible in other consumer choices (like improved home insulation, or energy-efficient lightbulbs) for which up-front spending can deliver long-run savings, but where consumers fail to make the "right" economic choice. It is generally recognized that consumers need a combination of financial incentives and regulatory compulsion to make more efficient decisions, and the issue of automotive fuel efficiency is no exception.

Automakers, meanwhile, will prefer to keep the initial purchase price of vehicles as low as possible in the interest of boosting sales. If they are going to add content (and hence cost) to the vehicles they sell, they will prefer to do so in the form of high-profile options which are more immediately appealing to consumers than long-run fuel efficiency.

Both consumers and automakers, therefore, need a regulatory push to attain a more efficient balance between up-front vehicle cost and long-run operating and environmental efficiency. We therefore support the principle of fuel efficiency regulation. We recognize that such regulations (if they are designed appropriately - more on this below) are likely to add modestly to the purchase price of new vehicles. Given that vehicle prices have been declining for several years, in our perspective this is not likely to measurably undermine sales volumes. In the past, automakers have been able to incorporate required content additions associated with safety or environmental requirements without interrupting the long-run tendency for vehicles to become both cheaper and higher-quality over time. We do not expect this new emphasis on fuel efficiency to be an exception to this pattern. From our perspective, of course, more content on each vehicle implies more demand for the services of auto workers. In this manner, we believe that - if they are designed and implemented appropriately - fuel efficiency regulations need not damage the employment prospects of those who work in the auto industry, and could in fact improve them.

The Need to Improve Fuel Efficiency Across All Vehicle Classes

In theory, there are two distinct ways in which the average fuel efficiency of new motor vehicles could be improved. Automakers could implement existing and future technological innovations to enhance fuel efficiency in vehicles of existing size. Alternatively, they could adjust the composition of their vehicles sales to sell more small vehicles (hence boosting their overall weighted-average fuel efficiency). The former emphasizes true innovation and efficiency; the latter relies purely on a one-time composition effect. The former constitutes a genuine improvement in technology, which could spark further efficiency-enhancing innovation; the latter is equivalent to a one-time shift in consumption patterns which cannot be repeated or possibly even sustained.

Truck-based vehicles (minivans, pickup trucks, and SUVs) now constitute half of all light vehicle sales in North America. There are concrete reasons which lead consumers to purchase these vehicles - not a general disrespect for the environment, as is sometimes implied in public discussions of these vehicles. Many are used for commercial or work purposes. A minivan is a fuel-efficient way to transport an entire family. For most purchasers, SUVs play the same functional role as the station wagon did in earlier generations. Of course, consumers should purchase vehicles which are only as large as they need to be - just as we encourage consumers to set the temperature in their homes only as warm as it needs to be. But basing our fuel efficiency strategy on pushing people to drive smaller vehicles would, in general, reduce the utility and comfort which Canadians seek from their vehicle purchases. The stated goal of your government's Kyoto implementation plan is not generally to encourage economic "sacrifice" by Canadians, but rather to make our economic activities more environmentally efficient. In this spirit, it is essential that automotive fuel efficiency regulations target ongoing improvements in genuine efficiency, for all vehicles in the showrooms. Automakers cannot continually shrink the size of the vehicles they produce, so this "composition" strategy could have at best a limited, one-time impact on fuel efficiency - unlike ongoing efficiency -enhancing innovation.

The goal of effective fuel efficiency regulations, therefore, must be to push automakers to produce (and their consumers to purchase) vehicles which are more fuel-efficient over time. This goal must be kept in mind as the fuel efficiency regulations are designed, lest they have perverse (intended or unintended) effects. In particular, U.S.-style corporate-average regulations provide an incentive for automakers to meet fuel efficiency targets simply by selling smaller vehicles. The CAFE model has not been effective in sparking environmental innovation and better fuel efficiency over time; it has been effective in sparking strategic efforts by automakers to "manage" their CAFE requirements by adjusting the composition of sales (sometimes even through unusual methods, such as efforts to have cars redefined as trucks, or mergers between automakers in which the respective CAFE obligations of the merging parties are as important as their balance sheets).

The corporate-average approach is also highly uneven in its effects on different companies, and this also violates a principle of your overall Kyoto plan (namely, that Kyoto measures should be neutral with respect to the structure of competition within any given industry; the goal is to establish environmental benchmarks, which companies will then compete to meet in individual and presumably efficient ways). By accident of history and geography (and certainly not because of any deliberate environmental "choice"), some automakers - especially those based in Asia and Europe - tend to sell a smaller range of vehicles, and would thus receive a significant competitive advantage from any regulation which establishes a common industry standard in corporate average vehicle fuel efficiency. Ironically, in their North American operations, these offshore automakers have been strongly emphasizing larger vehicles (including pickups and SUVs) in their manufacturing and marketing in recent years. This disproves any notion that they are somehow more "committed" to the environment than other automakers. CAFE-style regulations would provide an unfair and economically perverse competitive advantage to those automakers which have made the smallest industrial commitments to Canada. They would do nothing to encourage automakers to genuinely improve fuel efficiency.

A more balanced and effective approach would establish benchmarks which would push all automakers to improve the fuel efficiency of all the vehicles they produce. This approach would recognize that there is diversity in the range of vehicles which different automakers produce, and that regulations must be even-handed across companies which have developed over time differing presences in different vehicle categories. One method would be to establish uniform fuel efficiency standards, ratcheted upward over time, based on the weight or size of the vehicles being produced. (Such a regulation could specify a continuous relationship between required fuel efficiency and vehicle weight, or it could specify different requirements for different classes of vehicle - as is done in Japan.) An alternative approach would be to require each existing automaker to make equivalent proportional improvements in the fuel efficiency of the vehicles which they currently produce (akin to the requirement, in your government's large emitters program, for industrial polluters to bear equivalent emissions-reduction burdens based on their existing levels of pollution).

Improvements in the fuel efficiency of large vehicles (like minivans, pickups, and SUVs) can make a very large contribution to our overall goal of a more fuel-efficient motor vehicle fleet, by virtue of the simple fact that they consume more fuel in the first place. The hybrid or ethanol-powered pickups and SUVs which have recently been launched by companies such as General Motors, Ford, and DaimlerChrysler offer as much or more potential for reducing greenhouse gas emissions as the higher-profile compact passenger hybrid cars marketed by Toyota and Honda. If Canadians are told that buying a "green" vehicle is akin to buying a "small" vehicle, then our progress in this important challenge will be inherently limited. Most consumers will reject this effort to effectively constrain their consumption opportunities (instead of sparking genuine innovation and efficiency).

This is a crucial design choice which your government faces in imagining ways in which automakers can be encouraged to improve the fuel efficiency of their vehicles. The CAW supports Canada's Kyoto program, the goal of improved automotive fuel efficiency, and the principle of fuel efficiency regulations. But we will energetically oppose any measure (like U.S.-style CAFE rules) which undermines the competitive position of those automakers which have invested the most in the Canadian economy, and which have demonstrated no long-run effectiveness in sparking genuine improvements in fuel efficiency.

Flexibility in the Fuel Efficiency Timeline

We support the principle of appropriately-designed and even-handed fuel efficiency regulations playing a role in Canada's Kyoto implementation plan. We are increasingly concerned about the timeline, however, that would be required for those regulations to contribute to our 2010 target. The ultimate goal of these regulations is to encourage automotive manufacturers to incorporate fuel-saving innovations into future vehicles. Even applying existing technologies to vehicles requires a long process of planning, engineering, design, and manufacturing adjustments; the process of developing and commercializing new innovations, of course, will take even longer. As you know, automakers are currently designing and engineering vehicles that will make their debut in the 2008, 2009, and 2010 model years. Given the several years it has taken for Canada to ratify Kyoto and develop an implementation plan (details of which are still being discussed), it is increasingly challenging to imagine that automakers could change their vehicle development plans in time for the 2010 Kyoto timeline. As your government continues to negotiate with the automakers, you will need to recognize the need for some flexibility in the timetable for improved fuel efficiency.

Remember, the largest ultimate gains from fuel efficiency gains are captured in the long-run, well beyond 2010, as the existing vehicle fleet is replaced with newer models. That is when the greenhouse gas reductions resulting from fuel efficiency improvements will dwarf the 5MT target in Canada's existing Kyoto plan, as more modern fuel-efficient vehicles come to constitute an ever-larger share of the on-road fleet. The crucial thing is to start the longer-run process of improving fuel efficiency. Doing this sensibly and effectively is more important than worrying whether we meet the 5MT target in 2010, or at some point shortly after that.

Another issue related to the design of fuel efficiency regulations is their treatment of ethanol-capable vehicles (such as the E85-capable vehicles recently unveiled by North American manufacturers). Strictly speaking, these vehicles do not get better gas mileage than conventional vehicles, although their greenhouse emissions are much smaller (by virtue of the combustion efficiency of the fuel). Presumably your fuel efficiency regulations will reflect this (either by basing your standards directly on CO2 emissions rather than fuel efficiency, or by offering credits to manufacturers to reflect their sales of ethanol-powered vehicles), to ensure that the incentive to introduce ethanol-powered vehicles is maximized.

Fuel Efficiency Standards and the North American Vehicle Market

As you are aware, the market for new vehicles has been integrated across North America since the 1965 Canada-U.S. Auto Pact. Most of the vehicles we produce in Canada are exported, and most of the vehicles we purchase are imported.

This complicates the process of designing and implementing made-in-Canada fuel efficiency guidelines. Unlike some industry lobbyists, we do not believe that this continental integration makes distinct Canadian fuel efficiency regulations impossible. Nevertheless, the integrated nature of the vehicle market is a reality that the Kyoto implementation strategy has to accept and deal with.

Automakers will look unfavourably on the notion of designing and engineering more fuel-efficient vehicles solely for the Canadian market. On the other hand, it is important to remember that automakers often market different models, features, and brands in Canada than in the U.S. Indeed, with the advent of flexible manufacturing techniques it is increasingly common for automakers to produce numerous specialized versions of a product (with different combinations of options, powertrain, etc.) for different niches of the overall market. As we move ahead with our own regulations, Canada should work with more progressive jurisdictions in the U.S. (such as California and the northeastern states) to consider joint regulatory measures and a common timetable that would allow the combined market strength of these jurisdictions to influence a greater pull on the auto industry's overall engineering strategies. (Together, Canada, California, New York, and New England constitute one-third of the total North American new vehicle market.) Canada could play an important role in these efforts, since we are the only one of those jurisdictions which itself possesses a significant auto manufacturing industry. That should make us more sensitive to ensuring that fuel efficiency regulations are even-handed across vehicle manufacturers, and aimed at enhancing true innovation and efficiency (rather than enforcing a one-time vehicle downsizing).

And if we are asking automakers to do something in Canada that they are not required to do elsewhere in North America, then it will be incumbent on us to provide appropriate incentives and supports which will allow them to meet Canada-specific fuel efficiency targets - with a minimum of dislocation, and maximizing the economic and industrial opportunities to Canada that can be created by the evolution toward a more environmentally sustainable automotive industry. We must provide fiscal support to Canadian consumers purchasing advanced technology vehicles; we must unroll investment incentives which encourage automakers to produce greener vehicles and components here; we must take complementary measures (like increases in gasoline taxes) which will validate the decisions of consumers to invest in more fuel efficient variants within whatever vehicle class they are considering a purchase.

We must also be extremely careful that our efforts to promote greater fuel efficiency across the industry (including all automakers, and all classes of vehicle) do not impact disproportionately on vehicles that are produced in Canada - including the pickups, minivans, and SUVs which currently constitute a majority of our total vehicle output. As discussed above, our goal is to improve the efficiency of those (and other) vehicles, not to vilify them or constrain their market.

You are aware that Canadian affiliates of automakers must fight fiercely every day of the year to win product mandates for new models for Canadian assembly plants. Their efforts would be hampered significantly if the Canadian government was seen to be implementing regulatory measures which undermined the relative competitive position of those same models. Sure, most of what we produce in Canada is exported - but some is purchased here. And the notion that our domestic assembly industry could somehow continue to produce vehicles for the non-Kyoto-compliant U.S. market, while our own government adopted measures which tilted the playing field against those same vehicles, is unconvincing and unsustainable.

All of these factors complicate our effort to regulate improved fuel efficiency in Canada, but do not make those efforts impossible - so long as our regulations are designed in an equitable manner, without penalizing any particular manufacturer or vehicle class, and are supported by complementary measures to reinforce the efforts of automakers to meet Canada-specific targets (from both the demand side, through incentives for consumers to purchase high-tech energy-saving vehicles, and the supply side, through fiscal and other supports for companies investing in the made-in-Canada provision of environmentally advanced vehicles and components).

The Relative Burden on the Automotive Industry

The automotive industry is far from the worst source of greenhouse gas pollution in Canada. The use of light vehicles accounts for slightly over 10 percent of our total CO2 emissions, and the manufacture of motor vehicles for almost none of them. As we rightly push the auto industry to do its bit to reduce greenhouse gas emissions, we must keep its role in perspective, and ensure that the economic burden which is placed on the industry is in line with its contribution to the problem.

We noted with interest your government's decision to "backstop" the Kyoto requirements being placed on petroleum producers with a promise that these firms could "buy" Kyoto credits for no more than $15 per tonne of CO2. If this principle were applied to the issue of automotive fuel efficiency improvements, it would result in an annual "tax" imposed on automakers selling into Canada's market of some $75 million (the 5MT target for fuel efficiency savings, times the $15 "backstop" price). That works out to a cost of less than $50 per vehicle sold in Canada each year - a tiny fraction of one percent of average new vehicle prices.

Now I am not for a moment suggesting that automakers should be allowed to "buy" their way out of their Kyoto requirements, in the manner that you have allowed petroleum producers to do so. The genuine efficiency-enhancing innovations described above will add significantly more than $50 to the price of a new vehicle (in any vehicle class), and this is appropriate. Nevertheless, the auto industry cannot be expected to shoulder an economic burden that is totally out of proportion to its contribution to the climate change problem. As your government moves forward with its fuel efficiency strategy, you must be careful to conduct economic studies to estimate and understand the various economic costs and benefits to the auto industry, and to design your regulatory measures with a clear focus on maximizing the economic benefits while reducing the costs.

There is another context in which this surprising contrast between the expectations that are being placed on the auto industry, compared to other industries (like the petroleum sector), becomes relevant. Our ability to facilitate a genuine and lasting reduction in greenhouse gas emissions from motor vehicle use depends in large part on an integrated strategy that will require commitments from those other industries. For example, continuing problems with gasoline quality (in both conventional gasoline and diesel fuel) undermine the efforts of automakers to reduce particulate emissions while enhancing fuel efficiency. And the development of alternative fuel strategies (such as ethanol and hydrogen) will require heavy investments in new refueling infrastructure in Canada.

You must be prepared to mandate the petroleum industry to improve its fuel quality, and invest appropriately in supplying new fuels, as a necessary complement to the mandated efforts of the auto manufacturing industry to improve the efficiency of its products. It is clear that the petroleum industry has already gotten off rather "lightly" in terms of the Kyoto-related costs it must bear under your plan, relative to its substantial contribution to the overall climate change problem. Whether or not you reconsider the $15 backstop promise for petroleum producers, your government must be prepared to mandate the petroleum industry to take appropriate measures to reinforce the overall effort to reduce motor vehicle greenhouse gas emissions.

The Need for an Integrated Strategy

As mentioned earlier, the effort to reduce greenhouse gas emissions from motor vehicle use cannot be limited to requirements that automakers improve the fuel efficiency of their new vehicles. In fact, those necessary fuel efficiency improvements will at first make only a small, slow contribution to the overall Kyoto effort. There are several other factors influencing greenhouse gas pollution from motor vehicles, and a successful effort to reduce that pollution will require a systematic, integrated strategy that encompasses those other factors. Targeted fuel efficiency improvements should be designed as one element of that overall strategy. Other elements, which are essential if the overall strategy is to be successful, include:

  • Improvements in fuel quality.
  • Early investments in alternative refuelling infrastructure for ethanol and hydrogen.
  • Ongoing driver education about "green" driving habits.
  • Mandated vehicle maintenance requirements (akin to Ontario's "Drive Clean" program), which will enhance the fuel efficiency of the on-road fleet.
  • Tax incentives for purchasers of leading-edge alternative technology vehicles (such as hybrids, E-85 vehicles, future fuel cell vehicles, and others).
  • Higher gasoline taxes to reinforce the incentive to purchase fuel-efficient vehicles. (Current high gasoline prices would allow your government to raise taxes in future during periods of weaker gasoline prices with no impact on consumer prices; European governments followed a similar strategy in the mid-1980s with great success.)
  • Generous incentives to encourage automakers to locate the development, early commercialization, and ultimate manufacture of environmentally advanced motor vehicles and components in Canada, thus proving to Canadians that protecting the environment can be good for the economy.

The CAW and its members are supportive of the general goal of reducing greenhouse gas pollution from motor vehicles, and we believe that - if this effort is balanced and well-designed - it could strengthen the automotive industry's presence in Canada, not weaken it. But a successful strategy will require careful design and consultation, and an integrated approach that requires commitment from many players (including your government), not just the auto industry.

Thank you in advance for your consideration of our views on this subject, and we look forward to further discussions as your negotiations with the auto industry continue to unfold.

Yours sincerely,

Buzz Hargrove

Basil "Buzz" Hargrove
PRESIDENT


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