A BETTER CANADA A CLEANER ENVIRONMENT: The Development of Motor Vehicle Fuel Consumption Regulations January 17, 2008
ISBN 978-0-662-05357-6 Catalogue number T46-45/2008 Her Majesty the Queen in Right of Canada, represented by the Minister of Transport, 2008. TP 14759 (01/2008)
1. Background Few countries in the world can rival the natural beauty and majesty of the Canadian landscape. Our very identity as Canadians is shaped by the environment in which we live. Climate change is a growing threat to the environment and of significant concern to Canadians. The dangers posed by global climate change are apparent, threatening ecosystems and the way of life in communities around the world. Local and regional air quality problems threaten people s health, degrade the environment and reduce economic production. The main activity that causes smog and acid rain fossil fuel combustion also produces greenhouse gas (GHG) emissions that contribute to climate change. Action is needed now. The Government of Canada is taking action to improve the environment and health of Canadians by reducing GHG emissions and air pollutants from all major sectors: actions to reduce total greenhouse gas emissions by 20% by 2020 and 60% to 70% by 2050. The Government s Clean Air Regulatory Agenda is the cornerstone of these efforts. It recognizes the need to act quickly and go beyond voluntary approaches to enforceable regulations. Our new regulations will offer a nationally consistent level of protection for the health of Canadians and their environment. Efficient, accessible and reliable transportation is critically important for Canada s economy and standard of living. It is essential for personal mobility and for the efficient movement of freight in domestic and international markets. However, our reliance on our transportation system comes at a price: transportation is one of the largest sources of air pollutants and GHG emissions in Canada. It accounts for about 25% of all Canada s GHG emissions, and has grown by 27% between 1990 and 2004. Cars and light trucks together account for about 12% of total national emissions. Over the past 30 years, Canada has had a voluntary policy for improvements in fuel consumption from cars and light trucks. In 2005, the vehicle suppliers signed a Memorandum of Understanding (MOU) to reduce GHG emissions from cars and light trucks by 5.3 million tonnes in 2010. Despite some improvements in fuel consumption and emissions control technology achieved through these voluntary policies, total fuel consumed and GHG emissions have risen substantially over the last two decades. For this reason, the Government has announced its intent to regulate the fuel consumption of motor vehicles under the authority of the Motor Vehicle Fuel Consumption Standards Act (MVFCSA) starting with the 2011 model year. 1
Policy Context The Canadian motor vehicle manufacturing industry is Canada s largest manufacturing sector, and is closely integrated with that of the United States (U.S.) in what is essentially a North American industry. Assembly plants in each country specialize in specific vehicle models and supply them for the entire continent. Canada s share of production for the joint market is much greater than its share in new vehicle purchases: Canadian plants produced 2.6 million vehicles in 2006, most of which were exported to the U.S. Sales in Canada were 1.59 million in that year, most of which were imported. In the U.S., regulated Corporate Average Fuel Economy (CAFE) standards have been in place since 1975, but had most of their effect within the first decade. These standards were changed only by minor increments in the last two decades. Recently, however, a number of legislative proposals for more stringent federal standards were considered in the U.S. After much debate, the Democrat-led Congress agreed upon a bipartisan target of unprecedented stringency for 2020, and passed the Energy Independence and Security Act which was signed into law by President Bush on December 19, 2007. The Energy Act amends the CAFE legislation by requiring standards to be set from model year 2011, sufficient to achieve an average among new vehicles in 2020 of 35 miles per gallon (6.72 litres per 100 km). As of the release date of this paper, no further announcements had been made of the process and schedule to be followed by the U.S. Department of Transportation in setting the annual standards needed to achieve this goal. The Energy Act also expands manufacturers flexibility in meeting annual standards in a number of ways including allowing credit trading between fleet classes (cars and light trucks) and between manufacturers; the extension of credits for alternate- and flex-fuelled vehicles; and exemptions for low-volume manufacturers. It also contains measures that will serve to complement fuel economy regulations such as consumer education, the establishment of a fuel economy labelling program and a national consumer information program on fuel efficiency as it relates to tires. Pursuant to a Supreme Court decision of April 2007 and a May 2007 Executive Order, the U.S. Environmental Protection Agency (EPA) had been exploring the feasibility of regulations to reduce GHG emissions from motor vehicles under the Clean Air Act (CAA). As of the release date of this paper, it was unclear whether any such regulations were still under consideration. In 2004, the California Air Resources Board approved regulations to restrict GHGs emitted by light-duty vehicles. U.S. law pre-empts individual states from imposing fuel economy and emission standards for new vehicles. California, however, has special status under the CAA with respect to the regulation of vehicle emissions of air pollutants and can apply to the EPA for a waiver to this pre-emption. If California were granted the waiver and set separate standards, the CAA then allows other states to choose whether to apply federal or Californian standards. Fifteen other states have declared intentions to adopt California standards. Some of Canada s provinces have also expressed interest in adopting California s proposed standards, or their intentions to do so. The government of Quebec announced a regulation to that effect in January 2008, which its policy documents indicated would be conditional on California adopting the standards. British Columbia, Manitoba, Prince Edward Island and Nova Scotia have also committed to similar standards. 2
Although California sought such a waiver and developed its own vehicle emission standards, the EPA announced on December 19, 2007 that it was denying the waiver. California has since made a petition to the U.S. Court of Appeals to review the decision. Nevertheless, the U.S. Department of Transportation is proceeding to develop national regulations under the new Energy Act. Regulated standards for fuel consumption have also recently been proposed for the first time in Europe. The vehicle fleet in Europe has long been more fuel-efficient on average than that in North America, reflecting different market conditions (notably the higher price of fuel), road conditions and transport requirements. As part of its greenhouse gas reduction strategy, the European Commission in the late 1990s negotiated voluntary agreements with vehicle manufacturers to reduce the emissions from cars by 25% from 1996 levels by 2008. Concerned that the voluntary targets were not being achieved, the Commission in December 2007 proposed mandatory standards to achieve an average of 130 grams of CO 2 per kilometre by 2012. The proposal includes standards differentiated by vehicle weight, implying different standards for each manufacturer, depending on the mix of vehicles it sells. Complementary measures are proposed to achieve an additional 10 grams per kilometre, including improvements to air conditioners and tires, and shifting vehicles to bio-fuels. 3
Development of Canadian Regulations The Government s Clean Air regulatory policy is outlined in the document entitled Regulatory Framework for Air Emissions, released on April 26, 2007. The Framework articulates the Government s commitment to address global climate change and safeguard the health of Canadians through the development of mandatory and enforceable standards for greenhouse gas emissions and air pollutants in all sectors. It stresses the Government of Canada s responsibility to lead on these issues in order to provide a nationally consistent level of protection for all Canadians. The Framework builds upon an October 2006 Notice of Intent which outlined the Government s intent to regulate the fuel consumption of road motor vehicles under the authority of the Motor Vehicle Fuel Consumption Standards Act (MVFCSA) after the expiry of the voluntary GHG MOU. The Framework indicates that for cars and light-duty trucks, the existing voluntary agreement with the automobile industry will be succeeded by an ambitious mandatory standard. The standard will be benchmarked against a stringent, dominant North American standard and achievable in the integrated North American automobile market. The Framework further expresses the Government s intention to work in close collaboration with the U.S. government, and to pursue the concept of a Clean Auto Pact, toward establishing an environmentally ambitious North American regulatory standard. The new U.S. Energy Act constitutes a radical change in that country s fuel economy policy, which will stimulate the development and adoption of new fuel-saving technologies by all vehicle manufacturers. With its differentiation by size of vehicle, it will require innovations across their entire range of cars and light trucks. The Energy Act stipulates that the annual standards that will be required to meet the 2020 goal are to be designed initially from model year 2011 for up to five model years. It is anticipated that these standards will be announced in a Notice of Proposed Rulemaking during the first half of 2008. The U.S. goal of 35 m.p.g. in 2020 provides an ambitious benchmark for fuel efficiency standards. With the customary choices by Canadians of a more fuel-efficient mix of vehicles than the U.S. (including a higher proportion of cars versus light trucks), adoption by Canada of the same size-based standards as those being developed in the U.S. would result in actual Canadian fleet performance better than that in the U.S. If the standards achieve 35 m.p.g. (6.7 L/100 km) in 2020 in the U.S., they would achieve better than that in Canada. As such, the Government of Canada intends to develop regulations prescribing standards at least as stringent as those in the U.S. In developing the regulations, the Government of Canada will consult with industry, non-governmental organizations, other levels of government and other stakeholders, including the public. Input received during these consultations will be considered during the development of the regulations. Proposed regulations will then be submitted for approval by the Governor in Council before being published in the Canada Gazette, Part I. Stakeholders will then have 90 days to comment on the draft regulations. It is anticipated that the final regulations will be published in the Canada Gazette, Part II by the end of 2008, sufficiently in advance to allow them to apply to the 2011 model year. 4
Evaluation of Proposed Standards To evaluate options for Canadian standards, the Government of Canada will analyze the U.S. federal proposals, and reasonable and practical alternatives. The standards proposed by California will also be analyzed for comparative purposes. The evaluation will forecast the effects the standards would have on vehicles sold in Canada. From the changes expected in technologies, the effects on fuel consumption performance of the Canadian fleet will be estimated. An economic analysis of the proposed regulations will be undertaken, in accordance with Federal Government procedures. This will include an analysis of costs imposed on suppliers and users of vehicles, and of the benefits in fuel savings, together with the social values of reductions in emissions, and any effects on safety. The effects on total output and employment in the economy will also be considered, and their distributions by regions and sectors. The best current evidence in Canada will be sought for these analyses. 5
Stakeholder Feedback The GoC invites comments from all stakeholders on the regulation of fuel consumption in Canada. Views are welcomed on any aspect of the regulation development process, including the consultation process itself. As well, the Government encourages comments on issues relating to Canadian policy objectives, legislation and administrative processes, including the following: (1) New features of the U.S. Energy Act expanding manufacturers flexibility in meeting annual standards and their desirability or feasibility in a Canadian context including: Extension of allowable use of credits earned for over-achievement of standards in one year to any of the previous or subsequent five years (rather than three years in the previous Act); Trading by a manufacturer of credits between cars and light trucks; Trading of credits between manufacturers; and Extension from 2014 to 2019 of credits allowed for flexible-fuel vehicles, and inclusion of bio-diesel. (2) Other administrative issues in application of the MVFCSA, including: Lead time and schedule for regulatory process; and Exemptions for low-volume manufacturers. (3) Methods and assumptions in the analysis of implications for Canada, including: Forecasts of vehicle sales, fuel consumption and emissions; Technology cost estimates; Discount rate for valuation of costs and benefits in future years; and Monetary values of GHGs, air pollutants, safety and congestion effects. (4) Potential complementary measures to fuel consumption regulation, such as: Policies envisaged in the U.S. Act, including revisions to fuel consumption labelling and a new program of consumer information on replacement tire performance; and Other measures that might stimulate technology adoption, choices of fuel-efficient vehicles, or vehicle usage. (5) The implications of the emergence of state/provincial standards, including those in California, for national regulations. All views expressed and submissions received will be considered in proceeding with the development of the regulations. Although some opportunities will be provided for verbal comments, all stakeholders are asked to submit written submissions by March 15, 2008 to Brenda Hensler-Hobbs, Executive Director, Motor Vehicle Fuel Consumption Regulations Task Force, at: Transport Canada 330 Sparks Street Place de Ville, Tower C Ottawa ON K1A 0N5 E-mail: mvfcrtf@tc.gc.ca 6