Fuel Economy Standards Are Supersizing Our Vehicles. Ford Scrapping Small Cars Is An Alarm Bell.

Source: By Forbes • Posted: Tuesday, May 15, 2018

If you have been paying attention to trends in the automotive industry, you probably know that U.S. passenger vehicles have been getting bigger lately. Back in 2010, light trucks accounted for 50% of the new vehicles sold in the United States. But in the current model year, that figure is 68%. And for many major auto companies, trucks are even more central to their business. Last month, Ford Motor Company announced that it will phase out sales of all but two passenger car models in the coming years.

Yet, while this shift from cars to trucks has captured significant attention, another trend is gaining steam that many observers have missed. As one recent Wall Street Journal analysis explained, individual vehicle models are getting bigger. The 2018 Ford Explorer XLT is 4.9 inches longer and 5.2 inches wider than the 2015 model.  Subaru introduced a new model called Ascent for the 2019-model year, which is about 5 inches longer than Toyota Highlander and has 153.5 cubic feet of space and 19 cup-holders.

The reason for this growth is the subject of some debate. The auto industry often cites “consumer demand” for larger vehicles as the key driver. They say most buyers want larger vehicles, and so they have to up-size their offerings to remain competitive.

But what if the trend is actually being driven by the very regulations designed to make our cars more efficient? The Wall Street Journal analysis points to the fact that, in 2011, the standards became “footprint based,” meaning vehicles are regulated based on the product of their length and width. Vehicles with larger footprints are subject to more moderate efficiency targets. It suggests that this feature may have incentivized automakers to super-size their cars to comply with the fuel economy regulation without actually improving fuel economy.

How can we disentangle these two possible drivers—consumers versus regulations? Before footprint-based standards were introduced in the United States, my colleague James Sallee and I decided to explore whether such size-based regulations were actually effective. After years of analysis, our results are in—and they provide important lessons for the Trump administration as it weighs how to revise fuel standards. Namely, not only are size-based standards less effective than other approaches, they are also more costly.

Let’s take a look at how we got these results.

Having started our analysis before there were size-based fuel economy regulations in the United States, we looked at Japan, which introduced similar regulations back in the 1970s, allowing us to collect decades of data. Similar to U.S. regulations, Japanese fuel economy standards are size-based (Figure 1). A minor difference is that the Japanese regulation is based on weight rather than “footprint.” Another interesting feature of the Japanese regulation is that the fuel economy target has declining “steps.”