Fuel Consumption Standards for Heavy Duty Vehicles

The Environmental Protection Agency and the National Highway Traffic Safety Administration have recently introduced regulations for fuel economy and carbon dioxide emissions from heavy duty vehicles. This marks the first time the federal government has regulated fuel economy and carbon dioxide emissions from these vehicles and, in fact, it is one of the first such regulations in the world. How will the regulations work? And how did the agencies try to address the challenges of regulating this highly complex industry?

In August 2011, the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) jointly published new federal regulations mandating improvements in fuel economy and reductions in carbon dioxide (CO2) emissions by heavy-duty commercial vehicles (HDVs)—of particular note because it is unusual for two federal agencies to issue joint regulations. NHTSA has regulated since 1979 the fuel economy of light-duty vehicles (LDVs)—cars and pickup trucks up to 8,500 lbs in gross vehicle weight (GVW). More recently, the agency was directed to produce fuel consumption regulations for HDVs by the Energy Security and Information Act (EISA) of 2008. EPA’s authority to regulate greenhouse gases under the Clean Air Act began with the Supreme Court decision in Massachusetts v. EPA in 2008. While this industry is no stranger to government regulation—NHTSA has for many years regulated vehicles for safety, for example, and EPA regulates emissions of conventional air pollutants—this is the first federal attempt to use regulation to improve fuel economy in heavy duty vehicles.

Of all federal agencies with health and safety responsibilities, it is possible that these two try hardest to produce regulations that are both effective in meeting the goals of the underlying legislation while also embodying principles of economic efficiency. And so it is with these regulations: they are arguably models of their kind. Nonetheless, questions remain about the overall effectiveness and efficiency of even the best such regulations.

Categories of Heavy-Duty Vehicles (HDVs)

Motor vehicles are classified by the Federal Highway Administration in eight weight classes. HDVs range from Class 2b HD Pickups (8,500–10,000 lb GVW) to Class 8 Combination Truck-Trailers, which have a GVW rating of up to 80,000 lbs. For regulatory purposes, the agencies developed a simpler, three-way classification that aligns more closely with how vehicles are manufactured and used, and thus, with the technological opportunities for fuel savings. Overall, HDVs account for about 17 percent of total GHG emissions from all transport sources, while the much more numerous LDVs account for 58 percent.

The first HDV category is Class 2b-3 Heavy Pickups and Vans, used for moving relatively small loads of people and goods for relatively short distances. These vehicles are typically manufactured as integrated vehicles, principally by the same manufacturers that produce LDVs. Not only are these vehicles manufactured like LDVs, they are also regulated that way. That is, the standards are written on a per-mile rather than per-ton-mile basis, with the permissible rate or standard depending on an “attribute” score. In this case, the vehicle attribute is defined primarily by its maximum payload and towing capacity. As shown in the table below, vehicles in this category account for about 60 percent of all HDVs and 20 percent of CO2 emissions from HDVs.

Vehicles in the second category, Class 7-8 Combination Trailers, are used in intercity freight hauling. These vehicles are estimated to account for 65 percent of fuel use and CO2 emissions from HDVs, even though they comprise only about 20 percent of all HDVs. Their use characteristics include large loads and high, relatively constant speeds, making them suitable for certain engine technologies and improved aerodynamics that may not work in other categories.

The third category, Class 2b-8 Vocational Vehicles, is defined as all vehicles that are not in the other two categories. This category is enormously varied by size, use, and body design, and includes fire trucks, cement mixers, dump trucks, bucket trucks, and school buses, among others. These vehicles range in size from 8,500 to 80,000 lbs. In general, achieving reductions in fuel intensity is more difficult and expensive in this category. The predominant use of these vehicles at low speeds in urban and off-road settings makes aerodynamic improvements a wasted effort. And, the great variety of designs implies low volumes and thus small rewards for fuel-saving innovations.

The Regulations

For Class 7-8 Combination Vehicles and Class 2b-8 Vocational Vehicles, standards are set for both engines and vehicles. Within each category, engines are further categorized and standards set for model years 2014 and 2018 and for vehicles by payload, fuel type, and cab height, with later vehicles having more stringent standards.

This table shows the range of standards and percentage improvements over the baseline for the vehicle standards for 2018. The improvement is greatest by far for combination vehicles and least for vocational vehicles, reflecting the range of cost-effective technological opportunities available in the categories.

Note, as shown in the table, that the estimated cost of the regulations on a per-vehicle basis is much greater for combination vehicles, and yet, when expressed on a cost-per-ton-CO2 basis, exactly the same. At first glance, this looks like an attempt to equalize marginal or incremental costs across categories to maximize the cost-effectiveness of the regulations. (If incremental costs of reducing CO2 in two categories were not the same, it would be possible to get more emissions reductions with the same total expenditure by requiring more CO2 reductions from vehicles in the lower-cost category and allowing more emissions from vehicles in the higher-cost category.) However, it’s not clear that this is what’s happening, as the regulatory impact analysis published by the agencies does not give enough information to allow this reader, at any rate, to reproduce the results. In any case, this apparent attempt to equate marginal costs is limited by the accuracy of the cost estimates. But as one of the few federal regulations that tries to equate marginal costs across regulatory categories, kudos to EPA and NHTSA for writing standards with microeconomic principles in mind.

Moreover, when fuel savings are taken into account, it is claimed that the regulations reduce overall costs by $230 per ton CO2 emitted—a huge savings. This outcome is a manifestation of the so-called “energy paradox,” the apparent fact that vehicle buyers are not willing to pay for, and therefore manufacturers are not willing to supply, fuel-saving technologies that are clearly justified by their cost and the current price of fuel. Several factors are said to contribute to the energy paradox, including imperfect information, high buyer discount rates, short periods of initial ownership and skepticism about the future value of energy-saving technology, and uncertainty about future fuel prices, among others. Most of the evidence for the energy paradox phenomenon is anecdotal, however. There are very few empirical studies of the HDV market that can shed light on this issue—which is complicated by the fact that buyers care about many other attributes besides fuel economy in their purchase decisions.

Some Concerns

The work done by the agencies in developing these standards is admirable. However, I am less enamored of the standards themselves. The basic problem with these standards, like the CAFE (corporate average fuel economy) standards for LDVs, is that they regulate the design and initial performance of vehicles rather than their use. To be sure, the agencies have classified vehicles and set standards after paying close attention to how they are customarily used, but once they leave the showroom floor, the regulations have no further influence on the vehicles themselves. This focus on a single margin misses opportunities on other margins, affecting fuel use only by improving fuel intensity in new vehicles and, with appropriate design, the availability of fuels and engines that use fossil fuels less intensively. The current standards do nothing for fuel consumption rates in existing vehicles, vehicle miles traveled, fleet mix, or fleet turnover rates. Worse, they can affect these other margins perversely. For example:

The rebound effect

Better fuel use will lower cost per mile or ton-mile, potentially increasing the demand for transport and attracting traffic from more energy-efficient modes such as barges and railroads. This is a mixed blessing; more transport increases wealth, but it also increases externalities of vehicle use (accidents and congestion, for example) and is counterproductive with respect to the policy goal.  

Fleet turnover effect

While the price per mile traveled is going down, the initial price of the vehicle is going up, and that is, of course, the essential tradeoff of investments in fuel consumption. But the effects do not stop with the increase in new vehicle prices. Potential buyers will have second thoughts and may decide to postpone new vehicle purchases. This effect could be stronger in HDVs than LDVs, simply because their expected lifetimes are longer. Accordingly, fuel intensity improvements will be delayed.

Class shifting

As noted, costs per vehicle can vary considerably, creating incentives for buyers to substitute a vehicle in another category for their first choice. Use of vehicles in other categories may produce cost savings for users, but could raise CO2 emissions substantially. And, what if manufacturers respond by designing and building vehicles that do not now exist but that could, with relatively minor alterations, have multiple uses? Arguably this happened with the CAFE standards, when manufacturers began to design a variety of vehicles—small pickups, SUVs, and minivans—that for regulatory purposes were classified as trucks but which had appeal as household vehicles.

Each of these perverse effects is well understood by the agencies, and in their discussion of the rule, the significance of the effects is minimized. NHTSA and EPA could be right, or not. Policies such as emissions taxes, focusing directly on vehicle use rather than vehicle design, are likely to be at least as efficient without suffering from the unintended consequences described here.

Finally, it should be remembered that the percentage improvement in CO2 emissions reductions is modest compared to what is thought to be technologically possible. In 2010 the National Academy of Sciences published a report on technological opportunities for reducing fuel consumption of HDVs, finding that overall emissions reductions of 50 percent are technologically feasible by 2020. This suggests we are now at the very beginning of a long regulatory process. It makes sense to try to keep all options on the table, including emissions fees and fuel taxes.