Fuel efficiency standards: Driving emission reductions in transport

The release of the Federal Government’s preferred option for an Australian fuel efficiency standard has quickly fallen into another version of the so-called climate wars while also being firmly couched as a ‘cost of living’ and ‘loss of vehicle choice’ issue.

The Government’s proposal is for an “ambitious but achievable” New Vehicle Efficiency Standard (NVES) which would allow Australia to catch up to comparable markets like the United States by around 2028. The preferred model is expected to apply to all new passenger and light commercial vehicles (LCVs) from 1 January 2025.

Below, we take a look at what is being proposed and consider the US approach to fuel efficiency and carbon emissions standards for its light duty vehicle fleet, first introduced in 1975.

The preferred option

The government’s preferred option – one of three that put forward targets for the five-year period 2025-2029 – was included in its consultation impact analysis report. The nominated model for the NVES is currently subject to consultation before legislation is introduced.

It is part of efforts to reduce transport emissions for a sector that accounted for 98 million tonnes (Mt) of carbon emissions in 2023 or 21 per cent of Australia’s total emissions[i], making the sector the third largest emitter of carbon. Transport includes road, domestic aviation, rail, domestic shipping, off-road recreational vehicle activity, and gas pipeline transport. Road transport includes cars, light commercial vehicles (LCVs), articulated trucks, rigid trucks, buses, and motorcycles. Passenger cars are the biggest contributor to greenhouse gas emissions in the transport sector and accounted for around 41Mt or 42 per cent of all transport emissions in 2023, while light commercial vehicles accounted for a further 18 Mt Co_2, or 18 per cent of the transport sector’s total[ii]. The trends for transport categories since 1990 are shown in figure 1.

Figure 1 Transport emission trends and forecast

Source: Australia’s emissions projections 2023, DCCEEW

Projections for transport emissions between 2023 and 2035 (and prior to the introduction of a fuel efficiency standard) estimated they would account for 102 Mt Co₂ in 2024 and peak at 103 Mt Co₂ in 2027, before falling to 95 Mt Co₂ in 2035. Of those transport emissions, car emissions are forecast to reach 45 Mt in 2025, 42 Mt in 2030 and 37 Mt in 2035.

The three options (A, B and C) put forward in the Government’s report include five years of targets (2025-2029). There will also be a review of targets in the preferred option in 2026. The Government’s nominated NVES (Option B) expects a 12.2 per cent annual reduction in carbon emissions from passenger vehicles (from 141g/km to 58g/km) and a 12.4 per cent reduction for light commercial vehicles (199g/km to 81g/km) from 2025 to 2029 (see figure 2 below). In 2022 the average carbon intensity for new Australian cars and LCVs was 179g/km – 161.9g/km for cars and 230.3g/km for LCVs. This compares to an average of 169g/km in the US for equivalent vehicles.

Figure 2 Federal Government’s Preferred Option

Source: Cleaner, Cheaper to Run Cars: The Australian New Vehicle Efficiency Standard

Under the scheme, suppliers who beat the targets receive credits that can then be traded. The passenger vehicle class includes cars, light and heavier SUVs and 4WDs and are given a weight break point of 1500kg-2000kg – all cars below 1500kg would have a target of 126g/km and those over 2000kg would have a target of 159g/km. Light Commercial Vehicles (LCVs) have a 2200kg break point with those over that figure needing to meet a target of 200g/km.

Under its preferred option the Federal Government expects to achieve carbon emission reductions of 25.77 Mt by 2030, 97.13 Mt by 2035 and 369.18 Mt by 2050.

The expected total reduction in carbon intensity of passenger vehicles in Australia is 61 per cent and 62 per cent for LCVs – the US EPA’s latest assessment of the US light duty fleet reports a 27 per cent reduction in carbon emissions (123g/mile) since 2004, while fuel economy has increased by 35 per cent.

Car manufacturers will need to offset higher emissions vehicles with lower emissions vehicles or purchase credits.

Costs

The current debate is Australia has been on the speed of the transition being proposed as well as any potential impact on vehicle costs and availability. The Federal Chamber of Automotive Industries, for example, has argued the speed of change is too quick and will increase the cost of new vehicles.

The FCAI has also said the new rules will push up the cost of Australian cars. Last year SUVs accounted for 55.5 per cent of sales in Australia, while LCVs were 22.9 per cent and passenger vehicles made up 18.3 per cent of sales[iii].  The top selling models were the Ford Ranger, Toyota HiLux, Toyota LandCruiser, Isuzu D-Max and Toyota Rav4.

The FCAI calculated the costs of the new rules by analysing the emissions released by all 1.2 million cars sold last year, and calculated the “penalty” based on the same sales in 2025. It assumed no behavioural changes. As a result it claimed the cost of meeting the regulations in 2025 would start at $2.21 billion and rise to $4.99 billion in 2026. It’s been reported that the FCAI has also calculates a Toyota LandCruiser would cost up to $13,250 more, while a Ford Ranger could be up to $6150 more expensive.

The Federal Government has rejected the suggestions of price increases and pointed to a report from the US Consumer Reports group that considered price impacts from the US standards. The statistical analysis by Consumer Reports of prices from 2003 to 2021 found “no systemic, statistically significant increase in inflation-adjusted vehicle prices” during two decades in which standards were tightened and fuel economy improved. The Consumer Reports Vehicle Price Trends report says it has a “robust” dataset and notes[iv]:

Among seven vehicle classes, five showed no statistically significant change in price, one (Large SUVs) showed a statistically significant increase in price, and one (Midsized Cars) showed a statistically significant decrease in price.

In the instances where we did find a statistically significant change in vehicle price over time, there are other explanatory variables. For the Large SUVs class, it is posited that the observed increase in prices is likely due to more costly aesthetic and technological improvements.

US Standards

Vehicles in the US have been required to meet a Corporate Average Fuel Economy (CAFE) standard since 1975 (introduced during the 1970s Oil Crisis) which establishes how far passenger vehicles and light trucks (defined as light duty vehicles) should travel on a gallon of fuel (equivalent to around 3.8 litres). The vehicle standards were expanded in 2009 to include greenhouse gas (GHG) emissions[v] limits for model years (MY) 2012-2016. In 2010, the US Environmental Protection Agency (EPA) and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) finalised a joint rule change.

Under the NHTSA’s CAFE standards manufacturers must exceed an applicable fleet standard and if they overachieve they can carry credits up to 5 model years into the future, apply them to three previous models, transfer credits between fleets or trade the credits. Where they don’t meet the standards, penalties apply. The US allows the banking of credits and also has concessions for low carbon air conditioning and tyre pressure monitors.

In 2021 the US EPA finalised federal greenhouse gas (GHG) emissions standards for passenger cars and light trucks for model years (MY) 2023-2026. The standards which were revised in 2022 and for MY 2026 were projected to be 181 g/mile for an overall fleet and around 49 mpg in fuel economy.

In April last year, the US EPA proposed revised light-duty GHG standards beginning in model year 2027, and in July 2023, the NHTSA proposed revised CAFE standards for that year. For light-duty vehicles, the EPA is proposing standards that would increase in stringency each year over a six-year period, from MYs 2027-2032. The proposed standards are projected to result in an industry-wide average target for the light-duty fleet of 82 g/mile of CO₂ in MY 2032, representing approximately a 55 percent reduction in projected fleet average greenhouse gas emissions target levels relative to the existing 2026 standards. There has been push back from car manufacturers on the US’s next proposed step change, with many expecting to incur financial penalties as a result.

Vehicle Fleet Changes

The US has seen a dramatic shift in vehicle efficiency in the last five years (considered a vehicle redesign cycle), according to the US EPA. (See figure 3)

“Over the last five years, eight of the fourteen largest manufacturers selling vehicles in the U.S. decreased new vehicle estimated real-world CO2 emission rates. Tesla was unchanged because their all-electric fleet produces no tailpipe CO2 emissions. Between model years 2017 and 2022, Toyota achieved the largest reduction in CO2 emissions, at 32 g/mi. Toyota decreased emissions across all vehicle types and decreased overall emissions even as their truck SUV share increased from 27% to 38%. Kia achieved the second largest reduction in overall CO2 tailpipe emissions, at 21 g/mi, and Mercedes had the third largest reduction in overall CO2 tailpipe emissions at 14 g/mi. Hyundai, Ford, Nissan, Stellantis[vi] and VW also achieved overall emission reductions.”

Figure 3: Changes in fuel economy and carbon emissions

Source: US EPA Automotive Trends Report

The US EPA reports that the vehicle trend since 1975 has seen the new vehicle market shift away from the sedans and station wagons towards a combination of truck SUVs and car SUVs “for many years”. In 1975 more than 80 per cent of vehicles produced were sedans and station wagons, and this had fallen to 27 per cent of the market in 2022. It notes that vehicles that could be classified as a car SUV or truck SUV were a very small part of the market in 1975, but now account for more than half of all new vehicles produced.

Truck SUVs were at near a record high 44 per cent production share in model year 2022, while car SUVs accounted for 10 per cent of production.  The production trends and changes in emissions for vehicle types is shown in figure 4.

Figure 4: Production share and estimated real world emissions

Source: US EPA Automotive Trends Report

While any major policy change will bring challenges, particularly when implemented on a relatively tight timeframe, it’s clear from the US experience that fuel efficiency standards are an effective means to reducing transport emissions. Equally, it’s clear car manufacturers have demonstrated an ability to adjust to meet both consumer needs and the policy demands.

[i] https://www.dcceew.gov.au/sites/default/files/documents/australias-emissions-projections-2023.pdf

[ii] https://www.infrastructure.gov.au/sites/default/files/documents/cleaner-cheaper-to-run-cars-the-australian-new-vehicle-efficiency-standard-consultation-impact-analysis-february2024.pdf

[iii] https://www.fcai.com.au/news/index/view/news/820

[iv] https://advocacy.consumerreports.org/wp-content/uploads/2023/02/CR-Vehicle-Price-Trends-Feb-21-2023.pdf, see page 5.

[v] California has an exemption from the Clean Air Act and is able to set its own air emissions standards for motor vehicles.

[vi] Its car brands include RAM, Dodge and Jeep.