Mitsui & Co. Global Strategic Studies Institute
Development of Fuel Economy Regulations and Impact on Automakers
Mar. 15, 2017
Kosuke Nishino Industrial Studies Department IMitsui Global Strategic Studies Institute
Ⅰ. CHANGING CIRCUMSTANCES OF AUTOMOBILES
- As a result of the shale revolution in the U.S. and the slowdown of the Chinese economy, the supply and demand of oil has relaxed and the price of gasoline has stabilized at a low level, thus boosting the trend toward bigger and heavier vehicles, such as SUVs, in the U.S. and other parts of the world.
- The COP 21 discussions and agreement have shown significant progress toward the suppression of global warming by the cooperation of most countries in the world.
Ⅱ. FUEL ECONOMY REGULATIONS BY COUNTRY AND REGION
- The introduction of fuel economy regulations has accelerated since 2010, and over 90% of the global automobile market is subject to regulations. A majority of the regulations in place are in accordance with the Corporate Average Fuel Economy (CAFE) standards.
- The European Union’s 2021 target is the strictest in the world. It is nearly 30% more severe than the 2015 target. The distance to the targets varies by company, and U.S. and Korean companies are lagging.
- A distinctive feature of U.S. federal regulations is that the targets for passenger cars and light trucks are set separately, and the target for light trucks is laxer. Progress on fuel economy improvement differs significantly by country, and European companies are having a hard time meeting the targets.
- The targets after 2022 under current legislation are provisional and under review, and they could be revised by the Trump administration.
- Zero-emissions vehicle (ZEV) regulations enacted in ten states, including California, will be tightened from the latter half of 2017, and manufacturers are required to sell a designated share of ZEV like battery electric vehicles (BEV) and plug-in hybrid vehicles (PHEV). Car manufacturers are required to respond.
- China’s fuel economy regulations have been tightened a great deal toward 2020, to the similar level of those of Japan. In particular, Chinese brands are required to reduce fuel consumption significantly.
- In line with governmental policy of promoting new energy vehicles (NEV) such as BEV and PHEV, companies that make and sell these vehicles are given special preference in calculations of corporate average fuel consumption.
Ⅲ. PROGRESS AND DIRECTION OF MEETING TIGHTENING FUEL REGULATIONS
- Improvement of fuel economy in the U. S. mainly relies on the improvement of internal combustion engine technology in combination with modest introduction of electrification. BEV, PHEV, and HEV (hybrid electric vehicle) will not be the mainstream technology, although BEV and PHEV will account for a certain share of sales among European manufacturers and HEV for some among Japanese manufacturers.
- In China, it is hard for most of companies to meet the 2020 regulations with only internal combustion engine technology. A cumulative 4 million NEVs need to be introduced by 2020 to reach the goal. The Chinese version of ZEV regulations is to be introduced in 2019 to promote improvement.
- In Europe, car manufacturers are forced to reduce dependence on diesel technology as a result of Volkswagen’s diesel-gate scandal, and they are focusing more on electric drive.
- The diffusion of electrified vehicles varies by country in Europe. Countries with a high density of electrified vehicles, such as Norway and the Netherlands, are implementing powerful policy measures. For the mass diffusion of BEVs, generous policy support will be needed across European countries.
- Fuel economy regulations, now widespread, will be strengthened in the long term, but the direction and progress differs by country, which reflects the differences in the situation of each country and region, such as the existence of consensus for better fuel economy and lower CO2 emissions and automotive industry policy.
- There are two groups of carmakers in terms of the technology of improving fuel economy. One group, which includes Toyota, is focusing on hybrid technology, and the other, made up of European companies, is now heading toward the introduction of battery electric vehicles and plug-in hybrid vehicles. Neither of group has found a clear scenario to meet fuel economy regulations after 2025.
- Fuel economy regulations could open up opportunities to re-examine the future form and function of the automobile, whose basic form has not changed since the last century. only 22.5 million in 2000. Also, the government censorship on Google or Facebook turned out to provide a boost to search engine Baidu or SNS operator Tencent.