Recent announcements make it clear that domestic and international progress towards mandatory reductions in global warming pollution is accelerating. Just last week, the President announced he would attend the Copenhagen Climate talks where the world leaders will attempt to hammer out a path forward on an international global warming agreement. The President also put a stake in the ground for his administration's support for specific US climate reduction targets, 17% below 2005 levels by 2020 and 83% by 2050. The very next day China's Premier, Wen Jiaboa, announced ground breaking carbon intensity reduction targets of 40% to 45% below 2005 levels by 2020, an action that holds that promise to break the stalemate in international negotiations. With the recent announcement by Senators John Kerry (D-MA) and Lindsey Graham (R-SC) that they are working on a bipartisan agreement to pass a clean energy and climate bill, it is now clear that the US and the world are moving into high gear on adopting policies to protect the climate.
What will these new climate protective policies mean for the auto industry? Recently, the Detroit News reported that President Obama will "target" autos in a domestic climate action plan he will bring to Copenhagen on December 9th. While Detroit may feel like they are being singled out, the truth of the matter is that stronger standards are good for the auto industry. Automakers that wish to thrive over the next decade must embrace global warming regulations as a defining opportunity for their business and shift their clean car plans into high gear.
Smart auto makers must actively support more stringent, longer-term fuel economy and CO2 standards as well as passage of an economy-wide clean energy and climate bill. Of course, embracing regulation is not in the DNA of the auto industry, but companies that do such are the ones that will thrive in an extremely competitive market industry that faces pressure from overcapacity and shifting consumer preferences to smaller and more fuel-efficient vehicles.
Automakers, like power companies that publicly support President Obama's climate targets, must learn to recognize that stronger standards are a critical element of their ability to a have predictable, stable environment for investing in clean technologies. According to a recent Citigroup analysis, companies that learn to make competitive, fuel-efficient automobiles will see their profits grow, primarily because with high and volatile oil prices, these are the vehicles that consumers will be increasingly demanding. In a world of volatile, unpredictable oil prices that lead to rapid shifts in consumer preferences, support for long-term, aggressive standards allow automakers to control their own fate by solidifying their internal case for investing in new, advanced technologies that otherwise might be viewed as risky.
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There is little doubt in my mind that President Obama's National Program fuel efficiency and CO2 standards will continue to get more stringent beyond the 35.5 mpg level by 2016; the only question is how much more stringent? The smart money is on the equivalent of at least 42 mpg by 2020 but it could be as high as 45 mpg. 42 mpg by 2020 is consistent with simply extending the National Program's 2012 through 2016 trajectory of about 4% per year reduction for another 4 years. 45 mpg is consistent with an annual improvement rate of 6%, which EPA's analysis for the National Program shows is feasible to do in the 2012 through 2016 period.
Critically, an extended National Program is probably the single largest step the Administration could take to meet the President's 2020 reduction target of 17% and therefore could be an important step in demonstrating the Administration's commitment at Copenhagen. We estimate an extended National Program would contribute over 100 million metric tons towards the roughly 520 million metric tons of CO2 reductions from fossil fuel use that our analysis shows is necessary to meet a 17% reduction target. Furthermore, technologies to meet 42 mpg are well known and cost-effective, and would simply require continued adoption of technologies that automakers are already commercializing to meet the 2016 standard equivalent to 35.5 mpg.
For the last decade, the auto industry has viewed global warming controls as a threat. It must be ironic for them with market and policy pressure on them to continue to make their products cleaner, rapid action on economy climate legislation is a key to their industry becoming more competitive. We estimate that the passage of the Senate Kerry-Boxer bill (S. 1733) would provide the automakers access to a total of $20 billion in grants (equivalent to about $67 billion if provided in the form of guaranteed loans) to retool their factories to meet federal fuel economy and CO2 standards. Without a climate bill, EPA will likely forge ahead with CO2 standards for stationary sources under its Clean Air Act authority, but would not have the authority to provide funds for automakers to retool.
Strong fuel economy and CO2 standards will make automakers more competitive, help the US meet its climate targets, and enhance our energy security. Though it may have sound like a Dr. Strangelove moment for Detroit, learning to stop worrying and embrace regulations is the key to their survival.