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Measuring FuelEconomy andEmissions inthe Wake of theVW Diesel ScandalA Look at US and EU ApproachesHistorically, US and EU approaches to regulation have diverged, a trendthat continues as the two regions respond to Volkswagen’s high-profilerigging of emissions tests.Thomas Klier and Joshua Linn

SeongJoon Cho/Bloomberg via Getty ImagesIn September 2015, Volkswagen admittedto programming nearly 11 millionvehicles —affecting the company'sVolkswagen, Audi, and Porche dieselmodels—to cheat on tailpipe emissions tests.The fallout included a historic 15.3 billionsettlement with consumers and regulators inthe United States, affecting roughly 475,000two-liter cars; a plunge in the company’smarket capitalization; and the threat ofcriminal charges. (The US regulator recentlyrejected VW’s proposed fix for 85,000 threeliter engine cars sold in the United States.)The scandal also affected the way regulators in the United States and the EuropeanUnion approach fuel economy and vehicleemissions regulations, with differentresponses between the two regions. Inthe United States, the US EnvironmentalProtection Agency (EPA) has respondedby tightening emissions testing procedures, whereas EU regulators are providingmanufacturers more time to adjust totighter standards. More broadly, comparingthe regulatory approaches and procedures between the two markets showsnot only that regulatory requirements candiffer across markets but also that they caninfluence the choice of vehicle engines andfuels—in turn affecting the outcomes ofenvironmental policy.THOMAS KLIER is a senior economist and researchadvisor at the Federal Reserve Bank of Chicago.JOSHUA LINN is a senior fellow at RFF.

For example, the diesel engine is adistinctly European approach to reducingvehicle carbon dioxide (CO2) emissions.Compared with gasoline, diesel providesgreater fuel economy, resulting in lowergreenhouse gas and CO2 emissions. Yet,relative to gasoline engines, diesel enginesalso tend to emit more nitrogen oxides andparticulate matter, which contribute to theformation of smog. When Volkswagen’s“clean diesel” strategy meant that some ofits engines couldn’t meet the stringent UStailpipe emissions rules without sacrificingperformance, the company installed a deviceto circumvent lab tests without affectingperformance.The scandal will likely have broaderimplications for the regulation of vehiclefuel economy, greenhouse gas emissions, andemissions of other pollutants. In particular,some have suggested giving more weightto real-world testing of vehicles—that is,measuring emissions and fuel consumptionfrom vehicles while on the road, possiblyover their lifetimes and not just at the timeof certification.Background on US RegulationsWell after particulate emissions were firstaddressed in the 1950s and 1960s, vehiclefuel economy became an important subjectin the United States during the 1970s,when oil prices spiked multiple times.Congress enacted national corporate averagefuel economy (CAFE) standards in 1975,requiring manufacturers to roughly doublefuel economy by 1985, to 27.5 miles pergallon (mpg) for cars and to 19.5 mpg forlight trucks. Fuel economy standards weretightened again in 2007, to an average of35.5 mpg for cars and light trucks, to beachieved by 2016. In 2011, a new target of54.5 mpg was set, to be met by 2025 (seeFigure 1).The rules for implementing fuel economystandards changed during the secondCAFE regime, which began in 2007. Thecompliance mechanism has since beenrefined, and manufacturers now face standards that for both cars and light trucks aredefined by the footprint of their vehicles(roughly the rectangle defined by the fourwheels). Consequently, automakers thatsell larger vehicles are subject to lowerfuel economy requirements. According toresearch by RFF Fellow Benjamin Leardand colleagues, this relationship betweena vehicle’s footprint and its fuel economyrequirement, along with the recent declinein gasoline prices (which caused consumersto shift toward larger vehicles), has slightlyreduced the overall level of fuel economyrequired by the standards.Figure 1. US Fuel Economy Standards70Passenger carsLight trucksMiles per 0201520202025Model yearSource: McConville, Drew. 2012. What the New Fuel Economy Standards Mean for You. The White HouseBlog, August 30.42RESOURCES NO. 193 FALL 2016

Figure 2. European Fuel Economy StandardsCO2 emissions(grams per kilometer)180160140120100802005Passenger carsLight trucks2010Year20152020Source: International Council on Clean Transportation. 2014. EU CO2 Emission Standards forPassenger Cars and Light-Commercial Vehicles. Policy update.Background on EU RegulationsIn the European Union, the regulatorygoals of emissions and fuel economy wereaddressed in reverse order: fuel consumptioncame first. Numerous EU countriesresponded to the oil shocks of the 1970s bysubstantially raising fuel taxes to reduce fuelconsumption. To this day, EU fuel taxes aremuch higher than those in the United States.Moreover, many EU countries decided totax diesel at a lower rate than gasoline. Partlybecause of this favorable tax treatment,diesel’s share among passenger cars inwestern Europe rose substantially, from14 percent in 1990 to 52 percent in 2015,reducing fuel consumption.In 1998, the European Commissionreached an agreement with vehicle manufacturers to reduce CO2 emissions by 25 percentby 2008, to 140 grams of CO2 per kilometer (gCO2/km, or about 40 mpg, whichwas more stringent than the US CAFE standards at the time). A mandatory requirement,backed by fines for noncompliance, wasimplemented in 2009; it set a level of 130gCO2/km to be met by 2015. Further tightening of regulations took place in 2012,including standards for light commercialvehicles. Passenger cars need to meet a CO2emissions target of 95 g/km (57.9 mpg) by2021, and for light commercial vehicles it is147 g/km (43.3 mpg) by 2020 (see Figure2). Whereas the US standards depend ona vehicle’s footprint, EU standards dependon its weight; heavier vehicles are subjectto a higher CO2 emissions (and lower fueleconomy) requirement.Compared with the United States, theEuropean Union came late to regulatingvehicle emissions of local air pollutants. Itstarted with the Euro 1 requirements, whichset nitrogen oxides emissions limits to 0.78g/km in 1992. Catalytic converters wererequired in new cars in the European Unionat the beginning of the 1990s, and the saleof leaded fuel was largely prohibited acrossthe region by 2000.The United States was ahead of theEuropean Union by a decade on bothcounts. In the United States catalyticconverters were ubiquitous in new cars bythe early 1990s and leaded gasoline wasnearly phased out entirely by 1990.Currently the Euro 6 emissions rulesare being implemented in Europe. Theserequire emissions of nitrogen oxides in 2017to be 90 percent below 1992 levels. Yet thenew European emissions standards are lessstringent than current US standards.WWW.RFF.ORG/RESOURCES43

44RESOURCES NO. 193 FALL 2016“In response to theVW diesel scandal,analysts have suggestedgiving more weight tothe testing of vehiclesunder real-world drivingconditions to makeemissions testing moremeaningful.”economy on the majority of their 2012and 2013 model year vehicles sold in theUnited States, and Ford had to restate thefuel economy of one of its hybrid vehicles in2013.The recent Volkswagen scandal dwarfsthese previous cases, both in terms of lostsales for the offending company and inpotential fines. In the 12 months priorto September 2015, diesel vehicles represented more than 13 percent of Volkswagen’sUS sales. The company has since beenprohibited from selling any diesel vehiclesin the United States. In response to the VWdiesel scandal, analysts have suggested givingmore weight to the testing of vehicles underreal-world driving conditions to make emissions testing more meaningful.Longer-Term Implications of theVolkswagen ScandalFollowing Volkswagen’s admission ofcircumventing emissions requirements,discussions have taken place on both sidesof the Atlantic regarding test improvements to address the gap between lab-basedtest values and real-world observations.The different responses by US and EUregulators to the Volkswagen case thus farhave partly arisen because of the EuropeanUnion’s greater reliance on diesel technology.In the United States, EPA has changed its Sean Gallup/Getty ImagesThe Role of Compliance TestsThe large number of vehicles on the roadmakes direct measurement of emissionsimpractical. Instead, vehicle manufacturersplay a key role in testing and reportingemissions. Each model year, new vehiclesare tested in a laboratory where they aresubjected to standardized protocols to becertified for sale. But the outcomes of thosetests do not necessarily reflect real-lifedriving conditions.In response, EPA adjusts the lab-basedfuel economy ratings of vehicles so thatthe information communicated to USconsumers better reflects actual drivingconditions. Typically, the adjustment reducesthe lab test results by about 20 percent,meaning that EPA estimates that the testingunderstates real-life fuel consumption. Inaddition, EPA conducts on-road testing ofvehicles, both at low mileage (at least 10,000miles) and at high mileage (more than50,000 miles).In the European Union, regulators pursuea similar testing approach, but EU teststend to be less restrictive and currently donot include in-use testing. There is alsoevidence that the gap between the reportedlab tests and real-world emissions has beengrowing. For example, the InternationalCouncil on Clean Transportation (ICCT)reports a remarkable increase in the divergence between real-world and official CO2emissions values in the European Unionfrom about 8 percent in 2001 to 40 percentin 2014. ICCT attributes the growing gapto manufacturers’ more widespread exploitation of tolerances and flexibilities in testprocedures to meet rising fuel economyrequirements. Another study, also based onon-road testing, finds the average level ofnitrogen oxides emissions from vehicles inthe European Union to be seven times thecertified Euro 6 emissions limit.In the United States, several manufacturers recently have been fined for reportingincorrect testing data. For example, Hyundaiand Kia were fined for overstating the fuel

emissions certification procedure, addingseveral tests and more time to the process.In contrast, EU officials weakened thetesting framework in response to widespreadnoncompliance with emissions standardsin order to provide more time for the autoindustry to adjust to the Euro 6 standardsbefore those are fully applied. Accordingly,manufacturers will be allowed to exceed thenitrogen oxides emissions standard underreal-world driving conditions by 110 percentbetween September 2017 and the start of2020, and by 50 percent afterward.Looking ahead, decisions about howto address environmental challenges willdepend on local conditions and publicsensitivities. For example, recent occurrences of smog in London and Paris maywell have shifted the policy discussion inthe European Union regarding the futurerole of diesel. In the United States, priorto the VW scandal, diesel fuel vehiclesaccounted for a small but growing share ofthe overall market. Whether more reliabletesting or reputational damage affects theprospects of diesel vehicles over the longterm, in either region, is an open question.However, if diesel’s market share were to fall,the auto industry’s reliance on other technologies, such as hybrid and plug-in electricpowertrains, would likely rise to meet theincreasingly stringent greenhouse gas emissions and fuel economy standards.FURTHER READING·Klier, Thomas, and Joshua Linn. 2016. ComparingUS and EU Approaches to Regulating AutomotiveEmissions and Fuel Economy. Policy brief 16-03.Washington, DC: RFF.Klier, Thomas, and Joshua Linn. 2013. Fuel Pricesand New Vehicle Fuel Economy—Comparing theUnited States and Western Europe. Journal ofEnvironmental Economics and Management 66:280–300.Klier, Thomas, and Joshua Linn. 2011. CorporateAverage Fuel Economy Standards and the Marketfor New Vehicles. Annual Review of ResourceEconomics 3: 445–62.Leard, Benjamin, Joshua Linn, and VirginiaMcConnell. 2016. Fuel Prices, New Vehicle FuelEconomy, and Implications for Attribute-BasedStandards. Discussion paper 16-04. Washington,DC: RFF.WWW.RFF.ORG/RESOURCES45