FINAL REPORT
Contract 02- 310
Project No. 008545
Analysis of Auto Industry and Consumer Response to Regulations and
Technological Change, and Customization of Consumer Response Models in
Support of AB 1493 Rulemaking –
Effect of Emissions Regulation on Vehicle Attributes, Cost, and Price
Belinda Chen
bschen@ ucdavis. edu
Ethan Abeles
Andrew Burke
Principal Investigator
Dr. Daniel Sperling
dsperling@ ucdavis. edu
Prepared for the California Air Resources Board and
the California Environmental Protection Agency
Prepared by:
Institute of Transportation Studies
University of California, Davis
One Shields Avenue
Davis, CA 95616
October 18, 2004
ii
DISCLAIMER
The statements and conclusions in this Report are those of the contractor and not
necessarily those of the California Air Resources Board. The mention of commercial
products, their source, or their use in connection with material reported herein is not
to be construed as actual or implied endorsement of such products.
iii
ACKNOWLEDGEMENTS
This Report was submitted in fulfillment of Contract 02- 310, Analysis of Auto
Industry and Consumer Response to Regulations and Technological Change, and
Customization of Consumer Response Models in Support of AB 1493 Rulemaking, by
the Institute of Transportation Studies at the University of California, Davis ( ITS-Davis)
under the sponsorship of the California Air Resources Board. Work was
completed as of October 18, 2004.
iv
TABLE OF CONTENTS
LIST OF FIGURES AND TABLES............................................................................................... v
ABSTRACT....................................................................................................................... ... vi
EXECUTIVE SUMMARY........................................................................................................ vii
1. INTRODUCTION ................................................................................................................ 1
Case Study Approach...................................................................................................... 1
Background on California and Federal emission standards.......................................... 1
2. INDUSTRY RESPONSE TO EMISSIONS REGULATIONS.......................................................... 4
Public response to proposed regulations........................................................................ 4
What new or altered technologies were offered by manufacturers? .............................. 7
Did manufacturers change the volume and mix of vehicles types offered for sale?....... 9
3. COSTS ASSOCIATED WITH EMISSIONS REGULATIONS....................................................... 10
Emissions control system cost estimates....................................................................... 12
Variations in estimates by source ................................................................................. 13
Changes in compliance costs........................................................................................ 14
4. COST IMPACT OF EMISSIONS REGULATIONS ON CONSUMERS .......................................... 15
How did manufacturers reflect the cost of new or altered technologies in vehicle prices
in the short and long run?............................................................................................. 15
To what extent were manufacturers able to raise prices to cover the cost increase
associated with new or altered technologies in the short run and long run?............... 19
5. MANUFACTURER INCENTIVES DURING PERIODS OF CHANGING REGULATION ................. 19
Factors confounding sales volumes.............................................................................. 22
6. SUMMARY AND CONCLUSIONS....................................................................................... 23
REFERENCES..................................................................................................................... . 24
APPENDIX A: DESCRIPTION OF CARBITS VEHICLE ATTRIBUTE DATABASE ........................ 27
APPENDIX B: VEHICLE CLASS DEFINITIONS FOR PASSENGER CARS ...................................... 29
v
LIST OF FIGURES AND TABLES
Figure 2.1. Full page advertisement published in the New York Times by Chrysler
Corporation ( 1973)...................................................................................................... 5
Figure 2.2. Full page advertisement published in multiple national newspapers by Mobil
Corporation ( 1973)...................................................................................................... 6
Figure 2.3 Average Horsepower by Vehicle Class............................................................. 7
Figure 2.4 Average Engine Size by Vehicle Class ............................................................. 7
Table 2.1 Compliance Technologies for 1975- 1981.......................................................... 8
Figure 2.5 Distribution of Sales by Vehicle Class............................................................ 10
Figure 3.1a Gross Investment Expenditures ...................................................................... 11
Figure 3.1b Expenditures on Special Tooling................................................................... 11
Figure 3.2 Emissions Control Equipment Costs per Vehicle ........................................... 12
Figure 4.1 Average Vehicle Price by Vehicle Class......................................................... 16
Figure 4.2 Average Retail Price Increases for Quality Improvements ............................. 16
Figure 4.3 Price and Cost Comparison ............................................................................. 17
Figure 4.4 Corporate Profits ............................................................................................. 18
Figure 5.1 New Car Loan Terms ...................................................................................... 20
Figure 5.2 Monthly U. S. Auto Sales Showing Impact of 1981 Price Incentives .............. 21
Figure 5.3 Vehicle Sales and Economic Conditions......................................................... 22
vi
ABSTRACT
This report documents the automotive industry’s response to federal regulations
of light duty vehicle tailpipe emissions, with the intent of identifying lessons learned that
might be applicable to future regulation of greenhouse gas emissions. The focus is on
1975 and 1979- 1981, when new standards took effect that led directly to the adoption of
costly new emission control equipment. The costs were significant during those time
periods – with almost all automakers installing new oxidation catalyst technology in the
first time period and three- way catalytic converters in the second. However, prices of
new vehicles did not appear to reflect the full costs of emissions control. Other cost and
pricing considerations seemed to be even more important. The added compliance costs
associated with emissions reduction were just one more factor used by companies in
setting prices. Aggregate new car sales were affected only in a minor way by emissions
regulations.
vii
EXECUTIVE SUMMARY
The regulation of greenhouse gases from motor vehicles follows a long history of
state and federal automotive exhaust emission standards. The automotive industry
typically opposes such regulation citing high compliance costs, technological
infeasibility, and/ or widespread economic impacts. In most cases, the final rules are
phased in gradually or the effect on vehicle costs have proved rather modest. Indeed, an
analysis of vehicle prices over the past few decades could not detect the effect of
emissions or safety regulations ( Burke et al 2004; Abeles et al 2004). Thus, we chose to
analyze in detail two time periods when emission standards were sharply tightened and
were known to require costly new emission control technology. These two periods are
1975 and 1979- 1981. In both periods, automakers responded to stricter standards
primarily with technological solutions, as opposed to modifications in vehicle attributes
such as size or performance. Most manufacturers utilized oxidizing catalysts to meet the
1975 standards, and three- way catalytic converters to meet the latter standards. They also
made many other complementary technological changes, including the installation of fuel
injection, onboard diagnostic, and computer control technologies.
• A wide range of costs are associated with emissions regulation compliance.
The total cost of compliance can be separated into the costs initially absorbed by
the manufacturer and those passed onto the consumer. Doing so is difficult,
though. Types of costs born primarily by automakers include research and
development expenditures, capital investments in new tooling equipment, and
advertising costs to maintain vehicle sales. One study suggests that manufacturers
fully absorb the cost of emissions control equipment immediately after the
implementation of more stringent standards and then pass on two- thirds of the
costs to consumers the following year. In addition to higher vehicle costs, the
changes in the vehicles resulting from new standards may also have different
operating costs – such as higher or lower fuel and maintenance costs – and
changes in drivability. However, equipment costs comprise the predominant cost.
• Industry and regulator projections of costs often differ. When standards were
being debated and adopted, it is not surprising that cost projections by
government regulators typically turned out to be lower than actual costs, while
auto manufacturer projections tended to be higher. In general projections by
industry turned out to be more inflated than those by regulators.
• Changes in emissions control costs were not reflected in changes in vehicle
prices. Actual emission control costs were estimated by several analysts. In all
cases, emission control costs per vehicle were estimated to increase with time
until 1981, and then diminish. The per- vehicle cost estimates for 1981 vehicles
range from roughly $ 875 to $ 1350 ( US$ 2002). Average vehicle cost estimates
camouflage large variation. Costs varied based on production volume, engine size
and type, and many other characteristics. Emission control costs diminished
slightly from 1981 to 1994, a period when emission standards were static. These
cost reductions are evidence of improvements in the design and manufacturing of
emission control systems. Comparison of these emissions control costs with
changes in new vehicle price reveals that compliance costs were not passed onto
viii
consumers equally across all vehicles and models. In some years, average vehicle
price by vehicle class actually declined, suggesting that any additional costs
related to air quality regulations for that year were absorbed either by the
manufacturer or purchasers of vehicles in other classes. In other years, vehicle
price often increased by an amount greater than the estimated emissions control
cost.
• Vehicle prices depend on a variety of considerations, not just cost. Clearly
many other more important factors were affecting vehicle price. We do not
document those other factors, but note that pricing is a highly complex and highly
confidential art. We do note that a principal constraint when passing along
compliance costs is a desire to moderate price increases, especially after
production planning has been finalized. Once factories are tooled and
manufacturing processes designed, automakers aim to stick to projected sales
volumes. Lower sales volumes results in manufacturing costs— most of which are
fixed— to be spread over fewer vehicles, which reduces profits. Increases in
vehicle prices may reduce sales, which again affects profits. Automakers employ
a number of non- pricing strategies to offset or accommodate cost increases
resulting from new standards. They make previously standard equipment optional,
eliminate some features, or provide rebates.
• Changes in emissions regulation were concurrent with periods of economic
uncertainty. Another reason it was not possible for us to document the effect of
new regulations on vehicle prices was that many other external forces were at
play. Most notable were the oil price shocks that shaped consumer preference and
the subsequent regulation of vehicle fuel economy that prompted substantial
changes in vehicle design and marketing ( and pricing). In addition, there were
overlapping periods of economic recessions, high interest rates, and low consumer
confidence. In the end, even though the cost impact of emissions regulations was
significant during the two case study periods, it is not possible to document the
exact impact on prices nor consumer and industry behavior.
1
1. INTRODUCTION
The regulation of greenhouse gases from motor vehicles follows a long history of
state and federal automotive exhaust emission standards. The purpose of this report is to
analyze both the auto industry’s response to emissions regulations and the subsequent
product offered to consumers. By better understanding how auto manufacturers have
responded to vehicle regulations in the past, rulemakers will be better prepared to propose
greenhouse gas emission standards.
Case Study Approach
Two periods of federal regulation will serve as case studies for industry response
to technology- forcing emissions regulations: 1) the introduction of the oxidizing catalyst
to meet 1975 standards; and 2) the introduction of the three- way catalyst to meet
standards phased- in between 1979 and 1981. The case study approach was selected as
the significant changes in emission standards during these periods would minimize any
confounding effects, such as variations in fuel prices, vehicle safety regulations, or
foreign competition. However, these effects are never completely eliminated, especially
for the later case study period when fuel economy standards were introduced. For both of
the case studies, the following questions will be addressed:
1. What new or altered technologies were offered by manufacturers?
2. Did increased costs induce manufacturers to change the volume and mix of
vehicle types offered for sale?
3. How did manufacturers reflect the cost of new or altered technologies in vehicle
prices in the short and long run?
4. To what extent were manufacturers able to raise prices to cover the cost increase
associated with new or altered technologies in the short run and long run?
5. How did manufacturers overcome consumer resistance to price increases?
Although the California standards differ from the federal ones, the analysis of
industry response has been limited to 49- state version vehicles due to data availability.
Thus only the federal regulations will be discussed here. In addition, while light trucks
comprise a significant portion of the vehicle fleet at present, lack of data and their limited
popularity during the time periods of interest render any analysis inconclusive.
Background on California and Federal emission standards
California has been a pioneer in the regulation of automotive emissions. The
state’s regulations have generally led to similar federal rules, in part by providing a
testing arena for new control technologies. [ 1] Positive crankcase valve systems were
voluntarily installed on all new vehicles sold in California in 1961 and then for all
vehicles throughout the country in 1963 to control for blowby emissions. Similarly,
exhaust emissions were first regulated in California beginning with model year 1966
vehicles; the standards were established by the California State Health Department at 4.3
grams per mile ( g/ mi) of unburned hydrocarbons ( HC) and 44 g/ mi of carbon monoxide
( CO) with a durability of 12,000 miles. [ 2] Federal exhaust emissions controls did not
begin until two years later with less stringent requirements. Likewise, California began
2
regulation of evaporative emissions and exhaust nitrogen oxides ( NOx) one year prior to
the remaining 49 states.
The federal regulations around which our two case studies revolve have more
complex histories. Originally, the 1975 emission standards were set at 0.41 g/ mi HC, 3.4
g/ mi CO, and 2.0 g/ mi NOx, with NOx emissions further reduced to 0.4 g/ mi the
following model year. In both cases, the durability of these standards was set at five
years or 50,000 miles ( or whichever came first). The levels were intentionally
established to exceed the capabilities of existing technologies with the goal of promoting
the development of new emissions control devices. 1 As could be expected, automakers
contended that such advances were unreasonable to achieve in a cost- effective manner
and might even put some companies out of business. [ 3] Although the original
legislation required the Environmental Protection Agency ( EPA) to analyze the cost-effectiveness
of potential control technologies, Congress explicitly set air quality
standards based on health considerations and not costs. [ 4] Nonetheless, EPA had the
authority to delay target dates for a year if the automobile industry was unable to meet the
deadline in time with good- faith efforts.
Despite concerns that Chrysler was deliberately stalling, based on evidence that it
was spending very little on emissions control research and development ( 10 to 16 percent
that of General Motors and Ford) [ 5], uncertainty about meeting production targets due to
costs prompted the original 1975 standards to be delayed [ 6]. In their place, interim
standards were established for model year 1975 vehicles, halving HC and CO levels to
1.5 g/ mi and 15 g/ mi, respectively, while NOx standards remained unchanged. Though
these were intended as temporary standards, they still represented significant reductions
in allowable emissions levels. The 1977 Clean Air Act Amendments delayed the original
standards still further. The original HC requirement of 0.41 g/ mi was delayed until 1980
and the CO requirement of 3.4 g/ mi was delayed until 1981, as was the NOx requirement
which was also loosened to 1.0 g/ mi. Again, these standards represented significant
reductions from previous levels, reducing targets by 50 percent or more. However,
waivers of the CO standard were available for individual models for the 1981 and 1982
model years of up to 7.0 g/ mi. EPA granted these waivers to roughly one- third of all
1981 and 1982 gasoline automobiles. [ 1] Waivers of the NOx requirement were also
available to small domestic manufacturers such as American Motors for these model
years of up to 2.0 g/ mi. Besides these waivers, though, the emissions standards applied
uniformly to all new vehicles and each vehicle sold that violated the standard would be
punishable by a fine of up to $ 10,000. [ 5] Despite attempts to revise the Clean Air Act to
roll back emission standards for model year 1983 vehicles and beyond, regulations
remained virtually unchanged until the 1990 Clean Air Act Amendments.
1 Note that AB 1493 does not intend for the Air Resources Board to establish standards that would exceed
the capabilities of existing technologies unlike the standards discussed in these case studies.
3
Table 1.1 California and Federal Exhaust Emission Standards for Passenger Cars ( g/ mi)
Federal California
Model Year HC CO NOx HC CO NOx
uncontrolled 8.7 90 3.4 8.7 90 3.4
1966 4.3 44
1967 4.3 44
1968 4.1 34 4.3 44
1969 4.1 34 4.3 44
1970 4.1 34 2.2 23
1971 4.1 34 2.2 23
1972 3.0 28 1.5 23 3.0
1973 3.0 28 3.1 1.5 23 3.0
1974 3.0 28 3.1 1.5 23 2.0
1975 1.5 15 3.1 0.9 9 2.0
1976 1.5 15 3.1 0.9 9 2.0
1977 1.5 15 2.0 0.41 9 1.5
1978 1.5 15 2.0 0.41 9 1.5
1979 1.5 15 2.0 0.41 9 1.5
1980 0.41 7.0 2.0 0.41 9 1.0
1981 0.41 3.4 1.0 0.41 7 1.0
1982 0.41 3.4 1.0 0.41 7 0.4
1983 0.41 3.4 1.0 0.41 7 0.4
1984 0.41 3.4 1.0 0.41 7 0.4
1985 0.41 3.4 1.0 0.41 7 0.4
1986 0.41 3.4 1.0 0.41 7 0.4
1987 0.41 3.4 1.0 0.41 7 0.4
1988 0.41 3.4 1.0 0.41 7 0.4
1989 0.41 3.4 1.0 0.41 7 0.4
1990 0.41 3.4 1.0 0.41 7 0.4
1991 0.41 3.4 1.0 0.41 7 0.4
1992 0.41 3.4 1.0 0.41 7 0.4
1993 0.41 3.4 1.0 0.41 7 0.4
1994 0.41 3.4 0.4 0.25† 1.7- 3.4‡ 0.2- 0.4‡
1995 0.41 3.4 0.4 0.231† 1.7- 3.4 0.2- 0.4
1996 0.41 3.4 0.4 0.225† 1.7- 3.4 0.2- 0.4
1997 0.41 3.4 0.4 0.202† 1.7- 3.4 0.2- 0.4
1998 0.41 3.4 0.4 0.157† 1.7- 3.4 0.2- 0.4
1999 0.41 3.4 0.4 0.113† 1.7- 3.4 0.2- 0.4
2000 0.41 3.4 0.4 0.073† 1.7- 3.4 0.2- 0.4
2001 0.075† 1.7- 3.4‡ 0.2- 0.4‡ 0.07† 1.7- 3.4 0.2- 0.4
2002 0.075† 1.7- 3.4 0.2- 0.4 0.068† 1.7- 3.4 0.2- 0.4
2003 0.075† 1.7- 3.4 0.2- 0.4 0.062† 1.7- 3.4 0.2- 0.4
† Fleet average of Non- methane Organic Gases ( not Total Hydrocarbons)
‡ Emission standard varies depending on certification levels TLEV, LEV, or ULEV
SOURCES: U. S. Environmental Protection Agency, California Air Resources Board,
California Code of Regulations
4
2. INDUSTRY RESPONSE TO EMISSIONS REGULATIONS
The auto industry’s response to emissions regulations can be divided into its
actions prior to the standards taking effect and its subsequent compliance actions.
Publicly, manufacturers wanted to assure that their opposition to more stringent standards
would not damage their public image with consumers. Once the proposed standards
became required, each automaker needed to comply with the regulation while still
catering to consumer preferences.
Public response to proposed regulations
Not surprisingly, automakers were largely resistant to proposed regulations to
increase the stringency of exhaust emissions levels. Ernest Starkman, General Motors’
vice president of environmental affairs, testified during a Senate hearing in 1972, “ The
very stringent levels prescribed [ by the proposed 1975 standards]… do not appear to be
warranted, either to protect health, prevent plant damage, or to provide aesthetic quality
of the air in even the most severely stressed communities of this nation.” [ 7] In general,
though, the standards were challenged more on the basis of unreasonable compliance
costs ( including reduced fuel economy and drivability as well as reduced consumer
choice) as opposed to being technologically infeasible or inessential. [ 8] Of the Big
Three companies, Chrysler was the most outspoken against pollution standards due to its
smaller size and limited investment capabilities. Figure 2.1 clearly outlines Chrysler’s
position that such regulation would be costly with little additional direct benefit to
consumers. Mobil oil company ran advertisements the same year touting a similar
message ( Figure 2.2). Though less forthright in its protest, GM was equally concerned
that the increased manufacturing costs would do little to increase vehicle quality or a
consumer’s desire to purchase a vehicle.
An additional issue of contention was the increasing regulation of the industry per
se. Eugene Cafiero, President of Chrysler stated, “ An industry that had very few
government restrictions a dozen years ago, now finds almost every action and decision
subject to the control of some government agency.” [ 9] The need to constantly redirect
research and engineering efforts towards compliance was believed to stifle innovation
within the industry. [ 10]
GM also argued that the abrupt, revolutionary changes required by regulation
might disrupt the balance between vehicle supply and demand, and would incur high
additional costs. The disruption was relatively greater during the case study period than it
would be now because the usual product planning cycle in the industry at that time
ranged between five and seven years, depending on the extent of new technology
incorporated into the vehicle. [ 10] ( It is now about 2- 3 years.) Ford reported at the time
that its typical seven- year product cycle required between 44 and 60 months to make
significant design changes. [ 9] Given the regulatory uncertainty, companies faced the
prospect of making late changes in factories and vehicle designs, thereby incurring high
additional costs. In addition, smaller companies such as Chrysler also felt that the
uniform standard unfairly burdened companies with more limited resources and reduced
their competitiveness.
5
Figure 2.1. Full page advertisement published in the New York Times by Chrysler Corporation ( 1973)
6
Figure 2.2. Full page advertisement published in multiple national newspapers by Mobil Corporation ( 1973)
7
What new or altered technologies were offered by manufacturers?
Automakers had a number of options to comply with new air quality standards.
Arguably, one strategy for meeting emissions targets was to reduce vehicle weight, which
would inherently reduce the amount of emissions control necessary, especially NOx.
According to White ( 1982), though, “ very little downsizing occurred because of the
Average Horsepower by Vehicle Class
0
50
100
150
200
250
1973
1975
1977
1979
1981
1983
1985
Year
Horsepower
MINICOMPACT CARS
SUBCOMPACT CARS
COMPACT CARS
MIDSIZE CARS
LARGE CARS
SMALL STATION
WAGONS
MIDSIZE STATION
WAGONS
LARGE STATION
WAGONS
Figure 2.3 Average Horsepower by Vehicle Class
Average Engine Size by Vehicle Class
0
50
100
150
200
250
300
350
400
450
1973
1975
1977
1979
1981
1983
1985
Year Displacement ( CI)
MINICOMPACT CARS
SUBCOMPACT CARS
COMPACT CARS
MIDSIZE CARS
LARGE CARS
SMALL STATION
WAGONS
MIDSIZE STATION
WAGONS
LARGE STATION
WAGONS
Figure 2.4 Average Engine Size by Vehicle Class
8
regulations; the American manufacturers appeared to be quite determined to meet he
requirements through changes in technology rather than changes in size.” [ 5]
Analysis of the CARBITS vehicle attribute database also reveals minimal impacts
on performance indicators such as horsepower and engine displacement. ( See Appendix
A for description of CARBITS database.) As shown in Figure 2.3 horsepower dropped
more substantially for larger vehicles during early regulation; for smaller vehicles
horsepower remained fairly stable, perhaps aided by larger engines as seen in Figure 2.4.
Over the second period of more stringent emissions requirements, engine size dropped
uniformly while horsepower remained fairly stable, suggesting that engines became more
efficient per displacement volume.
While modifications to vehicles such as weight and size reductions were potential
strategies to help meet new emissions requirements, technological changes were also
necessary. Technologies considered for meeting the 1975 standards included: the
modified conventional gasoline engine with an oxidation catalyst, the carbureted
stratified- charge engine, the Wankel engine with an exhaust thermal reactor, and the
diesel engine. [ 11] Despite some concerns about platinum supplies, the catalytic
converter was viewed as the most promising technology as it required no major changes
in powertrain technologies and the other strategies appeared riskier since they all
increased NOx emissions, and more stringent NOx standard were forthcoming. The
decision to install catalytic converters was also partly influenced by consumer
preferences for high fuel economy following the oil embargo; vehicles could meet
emission requirements with after- treatment devices other than catalysts but only at the
expense of poor fuel economy. [ 12] Thus, by the 1975 model year, only 15% of vehicles
were not equipped with catalysts. [ 6] By model year 1977, this figure dropped to only
10% of vehicles. [ 13] The remaining vehicles complied by using rotary or stratified-charge
engines. These vehicles were typically produced by small foreign manufacturers
( Mazda, the rotary engine, and Honda the stratified charge).
Table 2.1 Compliance Technologies for 1975- 1981
Manufacturer Compliance Technologies
AMC Oxidation catalyst, three- way catalyst
Chrysler Electronic lean- burn system, oxidation catalyst, three- way catalyst
Ford Oxidation catalyst, three- way catalyst
GM Oxidation catalyst, three- way catalyst
Toyota i.) three way catalyst (> 2000 cc engines)
ii.) lean air- fuel mixtures and oxidation catalyst ( 1500- 1800 cc
engine)
iii.) oxidation catalyst ( 1300 cc engine)
Nissan i.) three way catalyst ( large models)
ii.) fast- burn engine ( NAPS- Z) ( medium- range models)
iii.) improved oxidation catalyst (< 1500 cc engine)
Honda CVCC engine with thermal reactor
Volkswagen Oxidation catalyst, three- way catalyst, diesel engine
Sources: [ 9, 10]
9
Additional technologies were considered to comply with the later more stringent
NOx requirement. These included: the modified conventional engine with dual catalysts
and a thermal reactor, the modified conventional engine with a reduction catalyst and two
thermal reactors, the modified conventional engine with a three- way catalyst and
electronic fuel injection, and the stratified- charge engine with fuel injection and an
oxidation catalyst. [ 11] Although reports were initially pessimistic about the feasibility
and cost- effectiveness of these technologies, the three- way catalyst— which oxidizes HC
and CO while also reducing NOx— ultimately proved to be an effective and reliable
technology. [ 14]
Although the larger manufacturers could afford to explore multiple alternatives, in
the end most settled on similar compliance strategies. ( See Table 2.1) Those companies
that did diverge, though, were not terminally disadvantaged by their decision. Both
Chrysler and Honda were skeptical about the effectiveness of catalytic converters.
Chrysler initially believed them to be unreliable and a potential fire hazard from their
excessive heat buildup. Thus in 1975 and 1976 Chrysler relied on controlling the air- fuel
ratio using an electronic lean- burn system. Chrysler finally installed catalytic converters
in 1977 when the electronic lean- burn system proved insufficient to meet stricter
standards. Honda’s concern regarding catalytic converters revolved around the
uncertainty of the products from the chemical reactions, the durability of the device, and
doubt about platinum availability and reclamation. In addition, both Toyota and Nissan
scaled their strategies based on engine sizes. Larger vehicles required three- way catalysts
since the increased vehicle weight complicated the use of lean- burn engines while smaller
vehicles only required oxidation catalysts to comply with 1977 and 1978 standards. [ 10]
However, the installation of emissions control devices alone was not sufficient to
comply with both sets of new standards. In addition to engine system modifications,
strategies such as more precise carburetion and spark timing, higher compression ratios,
and exhaust gas recirculation were also necessary. [ 15] Fuel injection also appeared in a
large number of model year 1975 vehicles which had previously not been fuel- injected.
In later years, as fuel injection technology improved, it was combined with computer
controls and sensors to improve the performance and reduce the cost of emission control.
[ 13] Future developments in air meters for injection systems also contributed to
maintaining precise air- fuel ratios to control emissions. [ 2] Additionally, the installation
of the three- way catalyst depended on the development of more sophisticated electronic
control devices as well as elimination of lead in gasoline to prevent significant
deterioration of the catalyst.
It is also important to note that emissions control devices produce feedbacks in
the design of the vehicle. For example, the addition of control technologies increases the
vehicle weight as well as requires auxiliary devices, such as air pumps. These additional
parts may require other maintenance or repair costs. The reverse is also true. The
introduction of unleaded gasoline increases the life of the exhaust system and spark
plugs, thus reducing maintenance costs, while the use of computer controls allows better
combustion control and higher energy efficiency. [ 15]
Did manufacturers change the volume and mix of vehicles types offered for sale?
Although in general the attributes of the vehicles themselves may have remained
relatively stable, the mix of vehicle types shifted during the late 1970’ s. Figure 2.7
10
Distribution of Sales by Vehicle Class
0%
20%
40%
60%
80%
100%
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
Year
Percent
Two- Seaters
MiniCompact
SubCompact
Compact
Midsize
Large
Small Wagon
Midsize Wagon
Large Wagon
Figure 2.5 Distribution of Sales by Vehicle Class
SOURCE: Hellman, K. H. and R. M. Heavenrich, Light- Duty Automotive Technology and
Fuel Economy Trends: 1975 Through 2004. 2004, Office of Transportation and Air
Quality, U. S. Environmental Protection Agency. EPA420- R- 04- 001.
illustrates the number of vehicles sold within each vehicle class. There is significant
yearly variation among classes. In 1980 subcompact sales increased dramatically while
sales of large cars simultaneously plunged. Shortly after, compact sales grew and
reduced the share of subcompact vehicles. These trends demonstrate the industry’s
ability to modify production volumes within rather short time frames. In only three years
during the late 1970’ s, production of small cars rose from less than a million to
approximately 4.5 million. [ 16]
However, it is difficult to distinguish how much of this shift can be attributed to
the auto industry attempting to meet stricter regulations and how much was motivated by
fuel economy. [ 17] In addition, the introduction of CAFE standards complicated
manufacturers’ decisions about fleet mix. Small cars, while helping to achieve CAFE
requirements, were less profitable than larger cars. John Deaver, manager of Ford’s
economics department, affirmed that “ product mix decisions are now determined by the
number of large and medium- sized cars the company believes it can sell, and then by the
number of small cars it needs to produce/ sell in order to meet CAFE requirements.” [ as
cited in 10]
3. COSTS ASSOCIATED WITH EMISSIONS REGULATIONS
New technologies almost always incur additional costs. Whether these additional
costs are absorbed by the auto manufacturers or passed onto consumers is somewhat
11
Figure 3.1b
SOURCE: [ 18]
Expenditures on Special Tooling by
U. S. Automobile Producers
0
1000
2000
3000
4000
5000
6000
7000
1960 1965 1970 1975 1980 1985
Year
Million Dollars ( 2002)
Figure 3.1a
Gross Investment Expenditures by U. S.
Motor Vehicle and Equipment Producers
0
5000
10000
15000
1960 1965 1970 1975 1980 1985
Year
Million Dollars ( 2002)
unclear. First, it is important to
distinguish between cost and price.
Price is what consumers pay. The
actual cost is usually less, since a
company needs to make a profit.
Determining the costs of emissions
control can be a fairly complex
process as more than just material
costs are involved.
A thorough calculation of
costs incurred by manufacturers
would include the costs of tooling
new machinery to accommodate the
new control devices, as well as the
research and development
expenditures invested to develop the
devices and to reengineer vehicles to
comply with more stringent
regulations. Note in Figures 3.1a
and b that the larger expenditures
tend to occur prior to new
regulations taking effect. Both Ford
and GM exceeded their typical R& D
expenditures of 3 percent of total
corporate revenues in 1973 and 1974
to comply with new regulations. [ 9]
However, R& D expenditures cannot
be solely attributed to emissions
controls. For example, rise in
investment spending in 1977 and
1978 is largely due to the reengineering of smaller vehicles with front- wheel drive to
meet new fuel economy standards. [ 18]
In addition to the difficulties of accounting for all costs, further complexities arise
as vehicles are designed as integrated systems and a single vehicle part may serve
multiple functions. Thus, accurately apportioning the costs of emissions control systems
to only actual emissions control can be difficult. For example, Bresnahan and Yao found
that increases in capital costs resulting from regulation were partially offset by
corresponding increases in quality related to developments in emissions technology.
Technologies such as electronic controls and fuel injection significantly increase vehicle
quality while simultaneously contributing to emissions reductions. [ 13]
Costs are also difficult to calculate as they vary depending on vehicle weight,
engine design, and engine calibration. [ 6] Furthermore, costs will differ by
manufacturer. For example, American Motor Company’s ( AMC) fleet was heavily
dominated by smaller vehicles, thus reducing the need to make significant modifications
to meet emission standards. In addition, as a smaller firm AMC tended to depend on
outside suppliers for new technologies, allowing them to forego major research and
12
development investments. With mandatory technology, though, AMC lost some of its
negotiating powers and usually had to accept whatever price suppliers requested. In
contrast, GM as the largest manufacturer enjoyed much more control in its product
development.
Emissions control system cost estimates
A number of cost estimates were made prior to and during the regulatory process
to assess the feasibility and cost- effectiveness of more stringent emissions standards.
These estimates are difficult to compare, though, as they reflect different vehicle
configurations and may also include costs besides just hardware ( such as maintenance
costs or fuel penalties). In addition, many estimates are presented as incremental costs
from previous ( or sometimes ambiguous) years, which make comparisons impossible
unless the baseline years are identical. For example, Grad et al. estimated the cost of
compliance with the 1975 interim standards using various engine configurations with and
without catalysts ranging from $ 207 to $ 352 ( 2002 dollars), presenting the costs as the
increase in sticker price over the 1974 model equivalent. [ 19] Automotive News Annual
1978 calculated $ 435 ( 2002 dollars) as the price increase since 1968 for emissions
control equipment in 1978 cars. [ as cited in 10] One widely cited estimate of $ 860 ( not
specified if this is real or current dollars) reflects the cost to consumers for vehicles
complying with the original 1976 standard over the 1970 vehicle cost at a durability of
85,000 miles. This estimate includes the cost of dual HC/ CO, NOx catalytic converters, a
low- grade rich thermal reactor, and exhaust gas recirculation. [ 15] Other studies simply
Figure 3.2 Emissions Control Equipment Costs per Vehicle
13
report costs per new vehicle for control hardware without reference to a base year. These
types of isolated cost estimates are less informative than longitudinal analyses of
compliance costs.
There are a few studies with estimates of equipment costs to consumers through
time, though. ( Figure 3.2) These assessments, while somewhat varied also show
remarkable similarities, especially until 1981. The earliest two studies projected
compliance costs before the regulations took effect. [ 20, 21] The remaining studies all
performed their analyses retrospectively. [ 12, 13, 18, 22- 24] All of these estimates peak
in 1975 and then again in 1981. During this second peak, Kappler and Rutledge
estimated that consumer spending on catalytic devices increased by 21 percent in 1980
( constant dollars) and then by 18 percent the next year, mostly attributable to the
popularity of three- way catalysts. Meanwhile spending on noncatalytic equipment rose
by 23 percent in 1980 and then by 51 percent the following year, largely due to the
installation of expensive electronic controls. [ 12]
One potential drawback of these estimates is that they reflect the average for all
vehicles and do not make any distinctions for the various vehicle models or producers.
Wang et al. used a parts- pricing approach on model year 1990 vehicles to calculate
emissions control costs. They found that compliance costs do indeed vary widely
depending on vehicle size and manufacturer ($ 254-$ 1684 adjusted to 2002 dollars). [ 24]
The higher costs were for luxury vehicles from Europe. The differences among size
classes were not as extreme, with emission control costs averaging $ 504 for compact cars
( 2002 dollars) and $ 586 for large cars ( 2002 dollars), not weighted by sales.
Whether a similar distribution in costs across vehicle sizes exists for earlier model years,
particularly when technologies were still maturing, is unclear. Overall, Wang et al.
estimated the average cost to consumers for 1990 vehicles to be $ 862 ( 2002 dollars).
However, this value includes an apportionment of all components for emissions control,
even those that serve multiple functions, such as fuel injection and electronic controls
( e. g., one- fourth of the cost of fuel injection was apportioned to emission control).
Accounting for only equipment dedicated fully to emissions control, the cost was $ 627
per vehicle ( 2002 dollars).
One note of caution when analyzing compliance costs is that some estimates
include both the hardware costs as well as the additional operating costs. Consumers
may be expected to incur costs through increased fuel consumption, fuel prices ( for
unleaded gasoline) or maintenance and repair requirements. Thus, total costs associated
with emissions regulation can significantly exceed the cost of equipment alone. In some
cases, though, consumers may experience cost savings through secondary benefits that
reduce maintenance needs or fuel consumption. For instance, the installation of the
catalytic converter to comply with interim 1975 standards resulted in a net consumer
savings of $ 65 [ 14] to $ 310 [ 13] depending on the source of the estimate.
Variations in estimates by source
Cost estimates of emissions controls prior to the regulation taking effect often
vary depending on the source of the projection. Government agencies assigned the
responsibility of evaluating the cost- effectiveness of a standard may feel pressured to
project optimistic estimates while industry sources have an incentive to project
14
pessimistic estimates in hopes of derailing the regulation. For example, EPA estimated
that compliance with the 1981 emission standards would cost $ 388 ( in 2002 dollars)
more than the 1979 vehicle. In contrast, Ford projected a cost of $ 596 while GM
estimated $ 529 ( both 2002 dollars) [ 1] As another examples, cumulative costs through
1976 were estimated by EPA to be $ 837 ( in 2002 dollars) while industry estimates ranged
from $ 761 (- 9 percent different from EPA’s) to $ 1093 (+ 31 percent). [ 11] Even a
committee of the National Academy of Sciences estimated cumulative costs for
emissions controls through 1974 to be 39 percent higher than EPA projections. [ 11]
However, few studies have been conducted to assess the accuracy of projected
emissions costs to actual costs, and even fewer of those have been specifically on vehicle
exhaust emissions standards. [ 25] In part, these types of analyses are difficult to conduct
not just because of the complicated nature of estimating costs as discussed in previous
sections, but also because actual compliance costs are generally regarded as proprietary
information by auto manufacturers and therefore not publicly available for comparison.
One study does exist by Anderson and Sherwood ( 2002) that compares projected and
actual costs of reformulated gasoline programs. According to their findings, industry
projections of fuel price changes prior to the program taking effect substantially exceeded
the actual price increase, in some cases two to four times higher. [ 25] The only other
comparison was performed by EPA, specifically assessing vehicle emissions control
costs. This study showed that EPA’s estimates tended to range between plus or minus 20
percent of actual costs, while estimates from manufacturers ranged from minus 50
percent to as much as 140 percent above the actual costs. [ 1] Thus, industry estimates
tend to have much wider error ranges.
Changes in compliance costs over time
When any technology matures, costs can be expected to fall as manufacturers
learn to design and manufacture the product better, and as increased production volumes
create economies of scale. Failure to consider these manufacturing improvements would
lead to overestimates of emissions compliance costs. Bresnahan and Yao found
compliance costs to be extremely high immediately following the initial regulation as
manufacturers are given limited time to come into compliance. During this period,
control costs are high because tooling costs for transitional technologies are spread over a
short time span. The costs then fall with the introduction of new improved and longer-lasting
technology. [ 13] Costs may also fall with time because a change in vehicle
design only needs to be developed once but can be used again in following years at no
additional cost. [ 10]
Quantifying the changes in compliance costs due to these factors is complicated.
The Office of Science and Technology’s report on cumulative regulatory effects on
automotive transportation costs uses the following equation to calculate learning curves
for vehicle production, defined as “ increased production efficiency, which will reduce the
initial investment costs as experience is gained in production”:
C = investment cost/ vehicle = 350 – 110 ( 1— e— 0.33t) ( in 1970 dollars),
where t represents the time elapsed since 1976 and 350 represents the initial per vehicle
investment cost. Based on this formula, production costs would stabilize at $ 633 ( 2002
dollars) after 1985. [ 26] Comparison with Figure 3.2 shows that this value is slightly
below the actual costs, though costs per vehicle do appear to have stabilized.
15
The effects of economies of scale on costs are difficult to determine for the entire
emissions control system as the configuration of these systems is frequently changing.
Ideally, analysis could be performed on individual components of emissions control
systems, such as catalytic converters or exhaust gas recirculation systems. However, cost
estimates of these components are limited and therefore cannot provide any definitive
evidence. Also, in the case of catalytic converters, their cost may vary depending on the
price of precious metals which would be unrelated to any developments in the
technology.
4. COST IMPACT OF EMISSIONS REGULATIONS ON CONSUMERS
The nature of business is to make a profit. Thus, the goal of any company would
be to pass any new costs, such as those incurred in complying with regulations, along to
consumers. Eventually, one would expect most or all compliance costs to be passed
along, otherwise a business would fail. However, there are many reasons related to
strategic planning, market competition, cost management, and external market
circumstances that might lead to absorbing the additional cost temporarily and across
certain products.
How did manufacturers reflect the cost of new or altered technologies in vehicle prices in
the short and long run?
Additional costs resulting from emissions regulations can either be absorbed by
auto manufacturers, passed onto consumers through increased prices, or both. Real
vehicle prices have historically increased sharply during periods of engine innovation.
[ 27] Although the manufacturer’s suggested retail price does not generally reflect the
price paid by the consumer, this is typically the only information available and is a good
indicator. Analysis of the CARBITS database reveals that vehicle retail prices have
varied significantly over time and across vehicle classes. While the averages presented
in Figure 4.1 represent the average price of vehicles offered, and are therefore not
weighted for vehicle sales, they illustrate the variation between vehicle classes over time.
Also, unweighted averages better reflect the response of the manufacturer while sales-weighted
averages would be more representative of consumer response. Note during
some years that the average vehicle price declined for one class but increased for another.
For example, between 1979 and 1980, the average price of a subcompact car increased by
$ 465 while midsize car prices decreased by over $ 2000 ( 2002 dollars).
The Bureau of Labor Statistics ( BLS) annually calculates the amount of retail
price increases attributable to quality improvements. Average retail price increases
resulting from emissions improvements are shown in Figure 4.2. Marked spikes occurred
in 1975 and 1980- 1981, corresponding to the changes in emissions regulations. From
1981 to 1984, though, the emissions value includes both fuel economy and emissions
control changes, which overstates the cost of compliance with emissions regulations.
Another important aspect of these estimates is that they reflect only the price increases
for changes made during that model year and therefore do not account for any reductions
associated with learning or scale economies of changes that had been implemented in
previous years. Thus, simply aggregating these price changes over time would also
overestimate emissions control costs.
16
Average Vehicle Price by Vehicle Class
0
5000
10000
15000
20000
25000
1973
1975
1977
1979
1981
1983
1985
Year
Real dollars ( 2002)
MINICOMPACT CARS
SUBCOMPACT CARS
COMPACT CARS
MIDSIZE CARS
LARGE CARS
SMALL STATION
WAGONS
MIDSIZE STATION
WAGONS
LARGE STATION
WAGONS
Figure 4.1 Average Vehicle Price by Vehicle Class
Average Retail Price Increases for New Car Quality
Improvements - Emissions
0
100
200
300
400
500
600
700
800
1970 1972 1974 1976 1978 1980 1982 1984
Year
US$( 2002)
Figure 4.2 Average Retail Price Increases for Quality Improvements
17
Price and Cost Comparison
- 1000
- 500
0
500
1000
1500
2000
1970
1972
1974
1976
1978
1980
1982
1984 Year
Dollars ( 2002)
Vehicle Price Change ( TEDB v. 22)
Vehicle Price Change ( CARBITS)
Change in Emissions Cost ( Kap/ Rut)
Change in Emissions Cost ( Crandall)
Figure 4.3 Price and Cost Comparison
However, price changes for emissions do not necessarily reflect changes in
vehicle price, which would be what the consumer sees. Figure 4.3 shows these changes
in vehicle prices and compares them to emission control costs. Compared to a sales-weighted
average of passenger car prices ( TEDB), the change in compliance cost
exceeded the change in vehicle price for four years. However, compared to an
unweighted average of prices for all passenger cars offered during the model year
( CARBITS), the change in cost exceeded the change in price for only two years, though
possibly three years if data for 1973 were available. The difference in 1979 could be
attributed to the weighting, so that although the change in prices for vehicles offered by
automakers increased, consumers heavily favored the less expensive models which
lowered the weighted averaged. The fact that vehicle prices decreased during periods
when emission control costs were estimated to have increased suggests that
manufacturers were either absorbing the costs of compliance or reducing the cost of
vehicles using other strategies. Whether these costs were fully passed on to consumers in
the remaining years depends on what other changes were made to the vehicles for
competitive purposes.
According to a recursive two- equation model of vehicle prices and profits by
Crandall et al., manufacturers fully absorb the additional regulatory costs for the first year
and then pass on approximately two- thirds of the costs to consumers the following year.
They note that the full costs of regulation may eventually be included in the price of the
vehicle. [ 18] Figure 4.4 shows that corporate profits fell dramatically during our case
study periods but rebounded afterwards, suggesting that manufacturers are only
18
Corporate Profits - Motor Vehicles and
Equipment Manufacturing
- 10
- 8
- 6
- 4
- 2
0 2 4 6 8
10
1970
1972
1974
1976
1978
1980
1982
1984
Year
Dollars ( Billions)
Figure 4.4 Corporate Profits
SOURCE: Bureau of Economic Analysis, Corporate Profits National Income and Product
Accounts ( NIPA) Tables
temporarily absorbing some of the costs. In his report on corporate strategies of
automakers, Schnapp writes, “[ t] here will be an inevitable tendency to pass through
regulatory cost increases despite automaker concerns about possible adverse consumer
behavior.” [ 10] Economists view compliance costs as analogous to a unit sales tax on the
industry. Thus, competitive firms will attempt to pass on as much of this tax as possible
since subsidizing consumers indefinitely would reduce profit margins.
Another reason to expect that full costs will be passed on is that the costs fall with
time as discussed in Section 3. Thus, a smaller amount— and presumably more tolerable
to consumers, particularly if the increases are gradual— would be passed on. However,
each manufacturer differs in their ability to absorb costs, which in turn influences what
share of the costs are passed onto consumers. Larger automakers have more resources to
absorb costs and consequently lower vehicle prices, allowing them to increase market
share and outcompete the smaller manufacturers. [ 10] Passing on costs does not
necessarily imply increased vehicle prices, though. More subtle strategies include
converting standard equipment into optional equipment while simultaneously increasing
the price of options, replacing materials ( tires, fabric, carpet, etc.) with inferior
substitutes, or eliminating some features all together such as vent windows or arm rests.
[ 28]
19
To what extent were manufacturers able to raise prices to cover the cost increase
associated with new or altered technologies in the short run and long run?
Although manufacturers tend to pass on regulatory costs to consumers, their
ability to pass them on in the form of vehicle price increases is constrained by a number
of factors. Most importantly, automakers preferred to keep vehicle price increases below
the rate of inflation for fear that consumers would delay their purchases or downgrade to
less luxurious ( and less expensive) models. Especially during our case study periods,
manufacturers were skeptical that consumers would not value the costs associated with
emissions regulation; thus, any subsequent price increases could reduce both consumer
demand and vehicle sales. In contrast, options such as power steering and power brakes
could be installed as standard equipment at roughly list price without consequence. [ 17]
Industry profits are highly dependent upon unit volume. During the 1970s, Arvid
Jouppi, an industry analyst, estimated that GM profits fell 2.5 times faster than unit sales,
while Ford and Chrysler profits fell 3 and 4 times faster, respectively. [ 10] Thus,
manufacturers are careful not to overprice their products in order to maintain market
share and profitability. Another constraint on price changes was the increasing
competition from foreign producers, which limited the extent to which domestic makers
could transfer these compliance costs. An additional consideration when increasing
vehicle prices is that prospective buyers often consider the change in price from their last
vehicle purchase several years ago and not necessarily the change in price from the
previous model year.
The initial pricing of a vehicle is a highly subjective and complex process. In
addition to production costs, manufacturers also consider the return on investment, the
return on sales, vehicle attributes ( physical and psychological), market conditions, and
used car prices. [ 28] Pricing strategies generally fall into two categories: cost pricing
and image pricing. Cost pricing bases the price of a vehicle on the price of other models
in the same vehicle segment with any necessary adjustments made for actual production
costs. As the largest manufacturer with the ability to set the lowest prices, GM had most
of the control over vehicle prices since models with similar attributes had to be priced
equivalently to compete. Thus, both base vehicle prices and option prices fall within a
narrow margin among all manufacturers. [ 17]
Image pricing bases the price of a vehicle on its appeal within the market and is
the preferred pricing strategy as it tends to be more profitable. Luxury end models are
typically priced using this method to capitalize on the status they confer to their owners.
For instance, the Cadillac Seville and Lincoln Versailles were priced with more than
$ 4500 ( 2002 dollars) of profit. [ 17] Although profit margins will vary for each model,
manufacturers believe these variations are needed to capture all segments of the market.
[ 10] For instance, automakers deliberately price the base model to have little profit in the
hopes that consumers will purchase profitable options or else become brand loyal and
upgrade to a more expensive model next time.
5. MANUFACTURER INCENTIVES DURING PERIODS OF CHANGING REGULATION
From 1975 through the early 1980’ s, auto manufacturers needed to employ
creative marketing strategies to maintain sales volume given the overall increase in
20
vehicle costs and prices that resulted from investments in fuel economy improvement and
other performance and amenities enhancements as well as emissions improvements.
Conventional marketing tools such as heavy advertising can be successful in overcoming
the public’s resistance to a product. For example, the sluggish sales of the downsized
1978 Chevrolet Malibu eventually exceeded sales of its predecessor by 50 percent with
the aid of a national advertising campaign. [ 10] The success of Ford’s MPG campaign,
GM’s downsizing effort, and AMC’s Buyer Protection Plan were all the result of
effective advertising. However, underlying any successful campaign is the need for a
quality product that appeals to consumers. Advertising can do little for a product that is
perceived as inferior or a poor value. For instance, sales of GM’s Vega compact car were
slow despite heavy promotion, as consumers believed it to be of poor quality. [ 29]
Incidents such as Ford’s recall of 3.7 million cars in 1977 for product liability reasons
also hurt consumer confidence in vehicle quality. [ 9] Furthermore, although effective
advertising has the power to generate demand, it can only do so when the product is in
line with consumer preferences. In the case of fuel efficient cars, miles- per- gallon- type
advertising could not prevent consumers from purchasing larger, less fuel efficient cars
when the fear of oil shocks subsided. [ 29]
Another strategy employed by automakers and dealers was the use of creative
financing. Roughly two- thirds of new car were purchased with credit during the late
1970’ s. [ 10] In response to lackluster sales, auto dealers believed that reducing loan rates
to below ten percent would boost demand. [ 30] Loan rates of course are related to
New Car Loan Terms
0
10
20
30
40
50
60
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
Year
Maturity Period ( months)
0
2
4
6
8
10
12
14
16
18
20
Interest Rate / Loan Value
($ k)
Maturity Period Interest Rate Loan Value
Figure 5.1 New Car Loan Terms
[ Source: Federal Reserve Bank http:// www. federalreserve. gov/ releases/ g19/ hist/ cc_ hist_ tc. html]
21
market interest rates. Although car loan interest rates have recently fallen well below ten
percent, they remained well above that level during our case studies, peaking in 1982 at
almost 18 percent. ( See Figure 5.1) Thus, as interest rates remained high and vehicle
prices increased, the maturity period of the loans were extended so that monthly
payments would not change drastically. In 1974, financial institutions offered 48 month
loans for the first time on a widespread basis. Monthly payments in 1974 averaged $ 132,
with four percent of buyers financing their cars with loan periods of 36 to 48 months. By
1976, this percentage was over 30 percent, and by 1978, 60 percent of buyers secured
loans for 36 to 48 months, with average monthly payments of $ 174. [ 3, 10] While
longer loan periods help mask increased vehicle sales prices, they are less effective when
interest rates are high. Particularly during the early 1980’ s when interest rates peaked,
higher monthly payments appear to have deterred consumers, with high interest rates
accounting for 8 percent of lost sales. [ 31]
When advertising or financing strategies fail, manufacturers typically turn to
dealer incentives or customer rebates to stimulate sales. Rebates are preferable to direct
price reductions when inventory levels are high as they can be offered intermittently as
opposed to more permanent price cuts. Although such programs are generally viewed as
last resorts since they reduce profits, they are preferable to plant shutdowns or lost market
share. Manufacturers also hope that increased sales can bring production back to more
efficient levels. [ 29] The costs of incentives are not negligible, though. In 1975, the
industry spent a total of $ 100 million ( 1975 dollars) on an incentives program that only
raised monthly sales by 8 percent. [ 29] Chrysler was the only manufacturer to view the
program as successful in light of the savings from reduced inventory. However, the
effects of the rebates were short- lived and inventories rose again when the program
ended.
This result is consistent with
most other rebate programs, as
incentives generally shift the timing
of a vehicle purchase rather than
generate sales that would not have
occurred without incentives. The
Congressional Budget Office
estimated that a $ 1,300 rebate in
1980 would have generated only 0.8
million “ new” sales for the year
( possibly diverted from the used car
market), while accelerating 1.7
million purchases that would have
occurred within the next year or two
and subsidizing the remaining 5.8
million purchases that would have
occurred regardless of the rebate.
[ 31] Figure 5.2 supports this finding
with sales unresponsive to incentives
by the end of the year, presumably
because all demand had been
Figure 5.2 Monthly U. S. Auto Sales Showing
Impact of 1981 Price Incentives
[ Source: Reference 29]
22
fulfilled. [ 16]
Similar to advertising, though, the success of a rebate program also depends on
the quality of the product being discounted. Offering of rebates does not automatically
translate into increased sales, as some manufacturers that offer rebates actually fare worse
than their competitors who did not offer rebates. [ 29] Some of the variation in
effectiveness could be due to dealers who raise prices, either by reducing list price
discounts or lowering the trade- in value, so that they profit from the rebate as well. [ 31]
Factors confounding sales volumes
Price alone is not the only factor affecting sales volume, though. While interest
rates play an important role in a vehicle purchase decision, a survey by the National
Automobile Dealers’ Association in May of 1980 found that almost half of auto credit
applications were refused compared to a typical rate of 10 to 15 percent. [ as reported in
29] The other major factor affecting sales volume is the general health of the economy.
Vehicle sales generally change in accordance with the gross national product. Between
1973 and 1975, GNP declined by two to three percent while vehicle sales dropped by
almost one- fourth. [ 31] 1980 and 1981 were similarly poor years in terms of both
economic health and vehicle sales, with sales down by one- third compared to their peak
in 1978. [ 18] Figure 5.3 also shows changes in vehicle sales to be highly correlated with
the Conference Board’s consumer confidence index, which gauges consumers’ outlook
on economic conditions. Both case study periods overlap with slumps in consumer
confidence, confounding the effect of price increases on vehicle sales. However, given
Vehicle Sales and Economic Conditions
0
20
40
60
80
100
120
140
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Year
Consumer Conf / GDP
0
2
4
6
8
10
12
14
16
18
Interest Rate / Sales
Consumer
Confidence
GDP ( 02$
trillions)
Vehicle Sales
( Million)
Auto Interest
Rates
Figure 5.3 Vehicle Sales and Economic Conditions
SOURCES: Bureau of Economic Analysis, Federal Reserve Bank, The Conference Board,
Transportation Energy Databook Volume 22
23
that emissions control equipment contributed only partially to vehicle price increases,
aggregate vehicle sales were affected just in a minor way by the tightened emissions
standards.
6. SUMMARY AND CONCLUSIONS
During both case study periods, automakers appeared to have responded to
tightened emission standards by seeking technological solutions, as opposed to modifying
vehicle attributes or changing in fleet mix. Thus, most manufacturers utilized oxidizing
catalysts and three- way catalytic converters to meet the stricter standards. However,
other factors such as engine system modifications, fuel injections, and onboard
diagnostics and computer controls were important contributors to achieving compliance.
The cost of emissions control systems peaked in the early 1980s, at costs
estimated to range from $ 875 to $ 1350 per vehicle ( US$ 2002). Costs declined through
the 1980s as manufacturers learned to design and manufacture the technology better.
Still, these compliance costs were not fully passed onto consumers in the form of
increased vehicle prices, at least immediately. In some years when emission control costs
increased substantially, average vehicle prices actually declined, confirming that other
more important factors are at play. Those other factors influencing pricing include the
desire to smooth sales over time and across models so as to balance planned production
volumes with shifting demand. They also include myriad smaller goals, such as using
pricing to boost sales of vehicles with high fuel economy so as to achieve the company’s
CAFE standards, or making entry- level cars attractive to first- time buyers ( who, it is
hoped, will become brand loyal and later upgrade to more expensive and profitable
vehicles). In addition, automakers use other non- pricing tactics to respond to regulatory
changes and market shifts – including advertising and financing incentives.
Automaker response to new emissions regulations was not straightforward,
uniform, nor transparent. We found, though, that even with aggressive new emission
standards that imposed large cost increases, the effect on vehicle prices could not be
detected. When the costs were significant, other cost and pricing factors seemed to be
even more important. The added compliance costs associated with emission reduction
were just one more factor used by companies in setting prices. Aggregate new car sales
were affected only in a minor way by emissions regulations.
24
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25
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Brookings Institution.
19. Grad, F. P., et al., The Automobile and the Reglation of Its Impact on the
Environment. 1975, Norman: University of Oklahoma Press.
20. Manufacturability and Costs of Proposed Low- Emission Automotive Engine
Systems. January 1973, Report by the Panel on Manufacturability and
Producibility to the Committee on Motor Vehicle Emissions of the National
Academy of Sciences.
21. Chase Econometric Associates, Part II of the Economic Impacts of Meeting
Exhaust Emission Standards, 1971- 1980. Part III. The Economic Impact of
Pollution Abatement. 1971, NTIS PB207202.
22. Bernard, J., et al., Automotive Emissions Control Technology-- Final Report
Prepared for National Commission on Air Quality Washington, DC. July 1980,
Falcon Research and Development Co. PB82- 128059.
23. Vogan, C. R., Pollution Abatement and Control Expenditures, 1972- 1994. Survey
of Current Business, 1996. 76( 9): p. 48- 67.
24. Wang, Q., C. Kling, and D. Sperling, Light- Duty Vehicle Exhaust Emission
Control Cost Estimates Using a Part- Pricing Approach. Journal of Air Waste
Management Association, 1993. 43: p. 1461- 1471.
25. Anderson, J. F. and T. Sherwood, Comparison of EPA and OTher Estimates of
Mobile Source Rule Costs to Acutal Price Changes. SAE Publication 2002- 01-
1980, 2002.
26. Cumulative Regulatory Effects on the Cost of Automotive Transportation
( RECAT). February 1972, Prepared for the Office of Science and Technology.
27. Santini, D. J., Commercialization of Major Efficiency- Enhancing Vehicular
Engine Innovations: Past, Present, and Future Micro- and Macroeconomic
Considerations. Transportation Research Record 1049, 1985: p. 24- 34.
28. Braden, P., S. Marshak, and R. Whorf, Automotive Marketing Methods and
Practice. September 1979, Gilbert R. Green & Company, Inc. Prepared for U. S.
Department of Transportation. HS 804- 522.
29. Siegel, H. M., T. M. Burrows, and C. J. LaCivita, Automobile Marketing Strategies,
Pricing, and Product Planning. Final Report. August 1978, ASL Engineering,
Inc. Prepared for U. S. Department of Transportation, National Highway Traffic
Safety Administration. DOT HS 803- 218.
30. Peterson, J. E., Protectionist Fever Sweeps Washington Amid Efforts to Spark
Economic Recovery. Ward's Automotive Yearbook 1983, 1983: p. 16- 17.
26
31. Current Problems of the U. S. Automobile Industry and Polices to Address Them.
Staff Working Paper. July 1980, Natural Resources and Commerce Division,
Congressional Budget Office.
27
APPENDIX A: DESCRIPTION OF CARBITS VEHICLE ATTRIBUTE DATABASE
A comprehensive database has been compiled for model years 1975- 2002 for
vehicle attributes at the make, model, and series level ( though data at the series level are
incomplete). EPA Fuel Economy Guide Reports provide the foundation for the database
for model years 1978- 2002. Additional attributes were added from Ward’s Automotive
Yearbooks, matching vehicles based upon engine displacement and fuel economy.
Ward’s also provided the basis for model years 1973- 1977, during which period EPA
data were not collected. Other vehicle characteristics were included using Consumer
Reports tests of select vehicles. Because the number of vehicles tested by Consumer
Reports is significantly fewer than the vehicles listed in Ward’s, regression analysis will
be used to devise a formula to obtain values for acceleration and maximum rated load for
the remainder of the vehicles. The table below describes the variables currently included
in the database and their sources.
Data Source
Column Header Description EPA Wards CR
Year Model Year X
Class EPA Vehicle Class ( available only for 1978- 2003) X
Manufacturer Manufacturer name ( note that some manufacturers have
been omitted) X
carline name Model name ( note that vehicle series are not distinguished) X
wheelbase Length of wheelbase in inches X
curb weight Curb weight in pounds X
gross vehicle weight Gross vehicle weight ( curb weight + maximum rated load +
passenger weight) in pounds for light trucks only X
maximum rated load Maximum rated load in pounds X
horsepower Net horsepower X
traction Traction Control: Blank= none; 1= optional; 2= standard X
abs Anti- lock Brakes: Blank= none; 1= optional; 2= standard X
hp- ca Net horsepower for California vehicles ( only early imports) X
msrp Manufacturer suggested retail price in nominal dollars X
airbag Airbags: Blank= none; 1= driver; 2= dual; 3= side;
4= rear/ side; 5= ceiling X
Towing Capability ( lb.) Towing capability in pounds ( mostly light trucks) X
0- 30 Acceleration 0- 30mph in seconds X
0- 60 Acceleration 0- 60mph in seconds X
45- 65 Passing acceleration in seconds X
195- mile trip fuel
economy Consumer Reports road trip test fuel economy in mpg X
Fuel Econ City Driving Consumer Reports city test fuel economy in mpg X
Fuel Econ Express-wayDriving
Consumer Reports highway test fuel economy in mpg X
convertible? blank= no; 1= yes X
veh type 1= luxury or sports car; 2= SUV; 3= minivan; 9= crossover X
cyl Number of cylinders X
DISP CI Engine displacement in cubic inches X
28
Data Source
Column Header Description EPA Wards CR
fuel system
Number of carburetor barrels or type of fuel injection:
MPFI= multiport fuel injection; SFI= sequential fuel
injection; IDI= indirect fuel injection; TBI= throttle- body
injection; EFI= electronic fuel injection; VV= variable
venture
X
displ ( liters) Engine displacement in liters X
optional disp Optional displacement in liters X
trans Transmission type ( A= automatic; M= manual; L= lockup) X
overdrive OD= overdrive, EOD= electronic overdrive;
AEOD= automatic overdrive X
catalyst Y= catalyst; N= no catalyst X
drv Drive axle type: FWD, RWD, 4WD X
cty Adjusted city fuel economy X
hwy Adjusted highway fuel economy X
cmb Adjusted combined fuel economy X
ucty Unadjusted city fuel economy X
uhwy Unadjusted highway fuel economy X
ucmb Unadjusted combined fuel economy X
fl Fuel type: L= leaded gasoline; U= unleaded gasoline;
D= diesel X
G Gas guzzler vehicle X
T Turbocharger X
S Supercharger X
Type 2 Door 2- door vehicle passenger and luggage volume X
2pv 2- door passenger volume X
2lv 2- door luggage volume X
Type 4 Door 4- door vehicle passenger and luggage volume X
4pv 4- door passenger volume X
4lv 4- door luggage volume X
Type Hbk Hatchback passenger and luggage volume X
hpv Hatchback passenger volume X
hlv Hatchback luggage volume X
fcost Annual fuel cost in nominal dollars X
eng dscr 1 Engine description 1 X
eng dscr 2 Engine description 2 X
eng dscr 3 Engine description 3 X
trans dscr Transmission description X
cls Valves per cylinder ( 2000 and later) X
29
APPENDIX B: VEHICLE CLASS DEFINITIONS FOR PASSENGER CARS
PASSENGER AND CARGO VOLUME
SEDANS
Minicompact
Subcompact
Compact
Midsize
Large
Under 85 cubic feet
85 to 99 cubic feet
100 to 109 cubic feet
110 to 119 cubic feet
120 or more cubic feet
STATION WAGONS
Small
Midsize
Large
Under 130 cubic feet
130 to 159 cubic feet
160 or more cubic feet