Takeaway From Today’s EPA Hearing: Fuel Efficiency is a Money-Maker

A major step towards more fuel-efficient U.S. vehicles is being taken today in Detroit, where the Environmental Protection Agency (EPA) and the U.S. DOT are holding their first in a series of public hearings on the new emissions standards the Obama administration released in May.

New_CEO_Fritz_Henderson_Addresses_GM_Challenges_Hu1CQuvWBA4l.jpgThese GM executives long resisted higher fuel-efficiency standards. Now a new report from one of their own says higher standards mean more profits. (Photo: Getty Images)
Domestic automakers testifying today emphasized their willingness to comply with the new rules, though not necessarily with a smile on their faces. The fine print of the EPA and DOT's final efficiency rule contains several potent loopholes long sought by car companies, and the Detroit News found General Motors vice president Michael Robinson stressing the downside of cleaner cars: "The proposal will not be easy nor will it be inexpensive, but we are up to the challenge." 

But the most compelling aspect of today's hearing has yet to show up in the mainstream media: testimony from Walter McManus, a veteran GM economist who now leads the automotive analysis division at the University of Michigan's Transportation Research Institute.

Since leaving Detroit's inner sanctum, McManus has candidly admitted that his former colleagues failed to comprehend consumers' desire to burn less fuel; in a November column for the Daily Beast, he described GM as filled with "individually brilliant people who are collectively stupid."

Today in Detroit, McManus put his data where his mouth is by testifying on a report he released last week [PDF] that shows the new fuel-efficiency rules will lead to an annual profit increase of $3 billion at the three U.S. automakers (GM, Ford, and Chrysler), compared with an $800 million annual profit gain for the so-called "Japan 3" (Toyota, Nissan, and Honda).

McManus' report found that consumers' prioritization of fuel costs over total vehicle prices, as well as the likelihood of gas price increases in future years, would turn the costs of complying with the administration's new efficiency standard by 2016 into a net upside. "Most importantly," the report states, "complying with the [35.5 mpg fuel standard by 2016] renders the vehicles in the majority of segments more cost effective for consumers; the present value of the fuel saved will be greater than the increase in purchase price associated with the new fuel saving technology."

Interestingly, McManus' research, conducted with Citigroup's investment research department, Ceres, and the Investor Network on Climate Risk, does not take into account two factors that could further boost the economic benefit of less fuel consumption:

the economic savings of reduced foreign energy dependence or the direct savings of reduced military expenditures necessary to protect that dependence.

So why have U.S. automakers fought higher fuel-efficiency standards for decades? McManus' theory about collective stupidity comes to mind.

Other witnesses at today's hearing spoke to the value and popularity of more fuel-efficient cars. Another former GM official, Dr. Rob Kleinbaum, made his opinion plain: "Based on my experience in the auto industry," he testified, "I not only support the rulemaking under consideration today but view it as critical to that long term viability.”  

Maine auto dealer Adam Lee, owner of Lee Auto Malls, echoed that sentiment, calling the higher standard "desperately" needed.

“It now appears that Detroit has given up telling us that consumers won’t buy cars that get better fuel economy," Lee said. "They are no longing saying that Americans don’t care about cleaner air.”

Today's Detroit hearing on the new fuel rules will be followed by public hearings tomorrow at New York City's LaGuardia Marriott and on Tuesday at Los Angeles' Renaissance Airport Hotel.