Auto Makers Seek Balance Between California’s Policies, Market Needs

“What no one wants to see happening is a bunch of fuel-efficient cars sitting in a lot somewhere,” says California New Car Dealers Assn.’s Bill Maas.

Erik Derr

December 20, 2010

7 Min Read
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LOS ANGELES – Auto makers may be fully committed to developing zero-emissions vehicles, but they question California regulatory standards that may be outpacing consumer demand.

“We certainly support the effort of the industry to develop fuel alternatives such as electric vehicles, ethanol, clean diesel,” says Wade Newton, a spokesman for the Alliance of Automobile Manufacturers. But the state’s regulations seem based “heavily on optimistic assumptions about market demand” for green rides.

Under terms of California’s landmark Global Warming Solutions Act, which mandates a 30% reduction of annual greenhouse-gas emissions by 2020, the largest auto manufacturers by volume must produce more and more low- or no-emissions vehicles, beginning with 11% of their sales for model years ʼ09-ʼ11.

The regulation rises to 12% for the ʼ12-ʼ14 model years, 14% for ʼ15-ʼ17 and 18% for ʼ18 and beyond.

Auto makers can meet those goals with zero-emissions units, such as battery-electric vehicles; higher numbers of low-emissions vehicles, including hybrids and plug-in hybrids; or high-mileage gasoline-powered cars.

The state cap-and-trade program allows each vehicle category a certain number of credits, which companies can “save” and “spend” to meet their emissions targets.

In other words, from 2012-2014 the major car makers must place the equivalent of about 25,000 ZEVs on California roads.

Volt denied HOV status.

If they all choose to meet that requirement entirely with hydrogen fuel-cell cars, the companies altogether would only need to sell about 7,300 units. If all the cars are plug-in hybrids similar to the next-generation Prius that Toyota expects to bring out in 2012, the auto makers would have to deliver 58,000 of those to meet the standard.

The California Air Resources Board is pushing for 1 million plug-in EVs on Golden State roads within the next nine years.

Newton, speaking on behalf of the auto alliance’s 12 auto manufacturing members, believes the auto industry in general is “eager” to introduce new alternative-fuel vehicles, but “the big question is consumer involvement.

“One of the highest-profile hybrids (Toyota’s Prius) just hit the 1 million worldwide sales mark,” Newton notes of the model that has been on the market for more than 12 years.

“What no one wants to see happening is a bunch of fuel-efficient cars sitting in a lot somewhere,” agrees Bill Maas, director-government affairs for the California New Car Dealers Assn. “We can have discussions about the need for stronger consumer demand, more aggressive vehicle-retirement programs and systematic policies,” but the market needs to find compelling ways to lure consumers.

Maas suggests buyers could be swayed toward greener autos with sales rebates, tax incentives and added privileges, such as gaining coveted permission to enter the state’s HOV lanes. The Chevy Volt extended-range EV, one of the most high-profile hybrids, was denied certification needed to qualify for a $3,000 state rebate program and HOV access with fewer than two passengers.

Auto makers could meet the California quota with 7,300 fuel-cell vehicles.

“It’s always important that new technology not move out of the consumer’s reach,” Newton says.

Maas also believes higher fuel costs could lead customers to showrooms, pointing to the jump in gasoline prices from $3 to about $5 per gallon during the summer of 2008.

“Before those prices dropped back down again, there were a lot of changes in consumer behavior,” namely, an extended trend toward more economical vehicles and greater public acceptance of emerging green technologies.

Several studies suggest the cost of California’s environmental policies will soar, amid the state’s protracted budget woes and sky-high 12.4% unemployment rate. That could put the brakes on at least some of the state’s auto emissions initiatives.

The Los Angeles Times notes how the pro-environment agenda of the state’s once and future Gov. Jerry Brown, who takes office Jan. 3, could be curtailed by the billions of dollars California’s green programs are expected to cost. Brown’s spokesman, Sterling Clifford, is quoted as saying the development of environmental strategies “is somewhat speculative at the moment.”

One analysis released last March by Charles River Associates shows California’s implementation of the Global Warming Solutions Act, also known as AB-32, would cost taxpayers upwards of $100 billion annually, or $1,400 per household, through 2020. The study finds the state’s renewable energy targets and low-carbon fuel standards add the largest costs to the overall program.

Another report issued by J.D. Power and Associates, “Drive Green 2020: More Hope than Reality,” suggests sales and operating costs, as well as overall dissatisfaction with product appearance, will keep consumer interest in battery EVs relatively low nationally.

The company finds combined global sales of hybrids and EVs will reach an estimated 5.2 million units in 2020, just 7.3% of the 70.9 million passenger vehicles expected to be sold worldwide.

“Many consumers say they are concerned about the environment, but when they find out how much a green vehicle is going to cost, their altruistic inclination declines considerably,” says John Humphrey, the research outfit’s senior vice president-automotive operations. “Barring significant changes to public policy, including tax incentives and higher fuel-economy standards, we don’t anticipate a mass migration to green vehicles in the coming decade.”

Critics further assail California’s green tech programs for stifling traditional job growth and accuse program supporters of exaggerating the green market’s economic viability.

However, Tesla Motors Inc. CEO Elon Musk says three of the companies he leads prove the alternative-tech market is healthy and expanding.

“I haven’t studied the statistics, but I can just tell you that SolarCity has grown like kelp. I mean, it’s like super crazy growth in employees and revenue,” Musk says. “Tesla’s more than doubled over the past 12 months in size, SpaceX is maybe 70%, 80% growth in employees. SolarCity, I think they might have tripled.”

Tesla, maker of the all-electric Roadster coupe, has 900 employees. SpaceX, the first commercial company in history to re-enter a spacecraft from low-Earth orbit, boasts 1,200 employees and Solar City, purveyor of solar-energy panels, claims approximately 800 people on its payroll.

“All of them are growing rapidly,” Musk says. “They’re basically hiring people as fast as they can find good people, train them and get them employed.”

John Mendel, executive vice president at American Honda Motor Co. Inc., believes the first years of the new electric-car age might be bumpy and without immediate answers.

“Challenging the creativity is one thing, mandating a solution is another,” he says.

Nevertheless, Mendel asserts his job is to find a way to sell cars, no matter the regulatory landscape.

“We’ve long said give us one national standard. Pick whatever it is, but it shouldn’t be jostled between, ‘OK, you say 30 mpg, we’re going to say 35; you’re going to say 35, we’re going to say 40,” he says.

“I don’t think anyone argues with chaining us to a high standard, but let’s make it one standard nationally and not keep playing the game back and forth that what’s good for the nation isn’t good for California or vice versa.”

Toyota Motor Sales U.S.A. Inc. President and CEO Jim Lentz is confident auto makers will be able to meet the national emissions guidelines for ʼ12-ʼ16 set in place by the Obama Administration last year. But, “what happens between 2017 and 2025?”

Having a defined national emissions standard will be “most important” for auto makers going forward, he says. Otherwise, “we’re not going to be able to offer consumers in every market what they need. It’ll be chaos for the manufacturer and it’ll add to cost.”

Lentz welcomes the wave of new technology that’s introduced hybrids, plug-in hybrids, EVs and high-efficiency gasoline-powered models to the marketplace, but he knows there’s a fine line between “helping lead the consumer to try new technologies and going against the wishes of the consumer.”

If vehicle regulatory standards ever “become so high” that they effectively eliminate certain vehicle classes from the market, “there will be a revolt by the American consumer,” he warns.

But Lentz doesn’t believe that scenario is likely.

“There will be a good balance between regulations and needs of the consumer, because I don’t think the federal government or the state government wants to go against the will of the consumers today,” he says.

Mendel says new technology and clean-air initiatives can’t result in a “compromise for the consumer.

“I think that’s the worry, that as we push technology or solutions onto customers, who’s going to buy them. Will they buy them?” he says.

“That is the $64,000 question.”

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