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With Canada and the U.S. set to toughen fuel-economy standards for light-duty
passenger vehicles, will the energy sector be left in the dust?
BY TODD COYNE

| follow Todd Coyne on Twitter

September 22, 2015

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Its one of those annoying acronyms that the auto industry uses, seemingly to make
showrooms even less hospitable to the average consumer. But corporate average fuel economy
standards, or CAFE, will soon be too important to gloss over with a confused nod and a thought
to Google it later. Thats true not only for car buyers, but for the energy sector as well, as the
Canadian government prepares to uphold its commitment to harmonize its passenger vehicle
fuel-economy standards with the United States CAFE system in 2017. Thats when the U.S. will
enter Phase 2 of its CAFE regime and commit to halving the average fuel consumption of cars
and light trucks by 2025. The new rules will also restrict automakers to a fleet-wide average
fuel-consumption rate of 54.5 miles per gallon of gasoline for new 2025 vehicles, the largest
mandatory fuel-economy increase in North American history. Passenger vehicles in the U.S.
account for 10 per cent of the worlds oil consumption, and three-quarters of all passenger
vehicles sold around the world now meet some kind of emissions standards. With roughly
two-thirds of the refined oil products sold in Canada being used to power cars and trucks, could
CAFE spell crisis for the energy sector?
While they dont share a name, fuel-economy regulations in the U.S. and Canada are, for
practical purposes, identical. After the Obama administration announced in 2011 that tougher
CAFE standards were coming, the Harper governments response was immediate. These new
regulations improve fuel efficiency so that by 2025 new cars will consume 50 per cent less fuel

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and emit 50 per cent less GHGs than a similar 2008 model, leading to significant savings at the
pump, said then-environment minister Peter Kent, bringing Canadas future fuel-economy
goals in line with the U.S. Environmentalists were thrilled to see progress on better
fuel-efficiency standards, and Canadian automakers welcomed the continent-wide benchmarks
that many, including the association which represents Fiat Chrysler, Ford and General Motors,
had previously sought in an effort to stay competitive internationally. Every major auto market
in the world, including China, now has or is in the process of introducing fuel-economy
standards that meet or exceed those of the U.S. and Canada. But North American energy
producers felt differently about the rollout of the new standards, creating a push and pull
between the interests of two very codependent sectors.
Doubling the fuel efficiency of new vehicles to 54.5 miles per gallon is equivalent to taking
away two million barrels of oil per day, which is equivalent to half of what the U.S. imports from
all OPEC countries, says Margo Oge, the U.S. Environmental Protection Agencys recently
retired director of transportation and air quality and the chief architect of the new standards.
The oil industry was pretty quiet when we announced these because they had already spent
most of their efforts fighting corn ethanol. But then the energy sector took a position against
[the EPA] using the Clean Air Act to establish carbon pollution-based standards for cars, and
the case went all the way to the Supreme Court and they lost. So that was the involvement of the
oil industry; not arguing that we shouldnt be doing this but arguing that we used the wrong law
to do it. When the CAFE goal of 54.5 miles per gallon was announced, many automakers felt it
was meant to nudge them towards developing at least one electric car model to boost the
average mileage across their product lines. The current U.S. average is 31.5 miles per gallon,
according to an estimate from the University of Michigan Transportation Research Institute.
That estimate cant be too far off for the 21 million cars and light trucks on Canadas roads,
either. But major advances in automotive design, lighter-weight materials and engines built to
squeeze every drop of energy from a gallon of fuel mean that carmakers will be able to reach
that 2025 target with a fleet of entirely conventionally fuelled vehicles that will look and sound
very much like those on the consumer market today. The Canadian government will match the
U.S. CAFE standards post-2016, says Environment Canada spokesperson Danny Kingsberry.
Over the lifetime operation of all 2017 to 2025 model year light-duty vehicles sold in Canada,
the amended regulations are estimated to result in a cumulative reduction of 174 megatonnes
(Mt) of carbon-dioxide equivalent (CO2e) in GHG emissions, or an average incremental
reduction of 19.3 Mt of CO2e per model year.
Of course, there is a rebound effect for higher fuel efficiency, by which more efficient
vehicles are driven more often and for longer. According to a 2002 report from the U.S.
National Research Council, modern passenger cars use approximately one-third as much fuel as
they did in 1975 when CAFE standards were first introduced. However, the report found that a
10 per cent increase in fuel economy is likely to result in a one to two per cent rise in the
number of miles driven. Applying that to the estimated 44 per cent increase in on-road,
light-duty fuel economy from 1975 to 2000 would reduce the estimated annual fuel savings
from 55 billion to 43 billion gallons, equivalent to about 2.8 million barrels per day of gasoline,
the report said.
Better fuel efficiency is also driving an increase in the use of oil in one more important way.
With the lingering global oil glut holding down the cost of gasoline at the pump, North
American consumers are already reverting back to higher-consuming vehicles like pickup
trucks and large SUVs, which use far more gasoline than cars and sedans. And while the CAFE
standards adopted by the U.S. and Canada require a five per cent increase in fuel economy for
cars and light trucks each year, the same rules only require a 3.5 per cent increase in fuel
economy for pickups and heavier vehicles. Full-size pickups are used by farmers and
construction workers, says Environment Canadas Kingsberry. While fuel efficiency is
important, it is equally important that these vehicles can perform the work they are required to
do. Of course, not everyone who buys a pickup truck is doing so for work purposes. And the
fact that automakers will have to offer lighter and more fuel- efficient vehicles in their product
lines does not necessarily mean that consumers will buy them. And when it comes to CAFE
standards having a real transformative effect, thats quite literally where the rubber meets the
road. After all, the consumer is still in the drivers seat. I dont think its going to happen that
were going to use zero petroleum in 2050, Oge says. But for oil companies, in my view, the
most important thing is to start investing in alternative fuels and low-carbon energy because
the CEO of an oil company today is not going to be the CEO 50 or 60 years from now. The oil
industry has to now begin to have a vision that goes beyond oil at least in the transportation
sector.

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