Stricter fuel-economy standards can actually bring economic benefits to the automotive industry, the Detroit Three in particular, a new report concludes.

Last year, President Obama announced that the United States Environmental Protection Agency and National Highway Traffic Safety Administration would work with California to develop fuel economy and greenhouse gas (GHG) emissions for model years 2017-2025. The agencies are considering a range of standards, representing an annual decrease in carbon dioxide (CO₂) emissions of 3 percent to 6 percent — that is, nominally a range of 47 miles per gallon (mpg) to 62 mpg in 2025. Current rules require auto companies to produce a fleet of vehicles averaging 34.1 miles a gallon by 2016.

The federal agencies and California have committed to propose the new standards by Sept. 1, 2011.

In a recent report by analysts at Citi Investment Research, baseline data suggest that stricter fuel-economy standards will actually bring economic benefits — in both sales and profits — to the auto industry and, in particular, Detroit automakers. The report was produced by Citi and Ceres, a nonprofit that brings together investors, companies and environmental organizations who embrace sustainable business practices.

According to Fuel Economy Focus: Perspectives on 2020 Industry Implications, the fuel-economy standards currently under consideration would result in a 6 percent increase in industry sales in 2020, compared with their baseline scenario. For Detroit automakers, which have lagged behind companies like Toyota in this area, sales would increase 9 percent. “More importantly,” the report says, “total industry variable profit rises by 8 percent and Detroit Three variable profit rises by 12 percent.”

Simply put, stronger mileage and GHG standards would boost sales and variable profits in 2020 for the auto industry worldwide, with the Detroit Three experiencing the largest financial benefits; Detroit automakers’ variable profit gains would garner more than half of all increased profits.

The report says that, in playing catch-up on fuel economy, “light trucks and larger cars, in which the Detroit Three sport a greater share, have greater potential to add consumer value through improved fuel economy than do smaller cars and car-based trucks. This is because future fuel economy increases [will] have a greater impact on the fuel economy of these larger vehicles, thereby providing more utility to the consumer, and since full-size trucks tend to be used for commercial purposes, this is a key factor in the purchase decision.”

“The 6 percent scenario [for the auto industry] would be cost-effective for consumers starting at gas prices of less than $2 a gallon in 2020. It will not only reduce petroleum imports but also save consumers money,” the report states. “Given that gas prices are much higher than this level now, and likely to remain well above $2.00, this makes the consumer savings from increased fuel economy even greater.”

Already, with gasoline prices pushing $4 per gallon, consumers are flocking to more fuel-efficient cars, shunning SUVs and snatching up smaller cars and hybrids.

According to a survey from AutoTrader.com, 62 percent of car buyers surveyed in March and April said they would consider a more fuel-efficient vehicle for their next purchase, up from 53 percent in January and February.

“As the average price for a gallon of gas began hitting the $4 mark across the nation, consumers continued shifting their focus toward fuel-efficient cars,” the consumer information website says in its latest monthly Trend Engine report, released last month. “This increase in interest is especially apparent on the most-searched new-vehicles list, where two fuel-efficient cars — the Ford Focus and Hyundai Sonata — made big jumps to land in the top 20 and showed notable increases in average asking price. Across the board, the majority of trucks and SUVs experienced declines, showing that Americans’ love affair with larger vehicles takes a hiatus when gas prices spike.”

The Citigroup report estimates that hybrids’ market share will rise from 2.4 percent in 2010 to 3.4 percent by 2015, with a combination of new plug-in (1.4 percent) and fully electric vehicles (1.2 percent) combined representing 2.6 percent of the market. Diesel powertrains would represent 3.5 percent of the market in 2015, up from 2.3 percent in 2010.

Perhaps most important, reaching the 6 percent scenario is technically feasible, with many technologies already on the shelf or in the near-term pipeline. These technologies are expected to appear more quickly and at lower costs as demand accelerates.

Already, “American automakers are not just making world-beating, competitive products, they are doing fuel economy,” GreenCar.com says. “And they are doing it well: Ford and GM have cars that get 40 mpg and are on the cutting edge on electric vehicles.”

“Our study shows that the automakers are well positioned to meet the fuel economy requirements necessary in 2020 with a variety of approaches already in their product plans,” Alan Baum of automotive research firms Baum and Associates said in an announcement of the Citibank report. “Consumer interest in fuel economy, and their expectation that gas prices will remain high, suggests that consumers will purchase these products.”

In fact, a new poll of voters in Michigan and Ohio — the heart of America’s auto and manufacturing industry — found overwhelming and intense support for the auto industry increasing average fuel economy to 60 mpg by 2025. According to the poll, from Ceres, 80 percent of likely Ohio voters and 76 percent of likely Michigan voters believe a national 60 mpg standard will encourage American car makers to innovate, boosting sales and protecting American auto jobs.

What do you think? Does this report hold weight?

Resources

Presidential Memorandum Regarding Fuel Efficiency Standards
The White House, May 21, 2010

Fuel Economy Focus: Perspectives on 2020 Industry Implications
Citi Investment Research and Ceres, March 30, 2011

New Reports Outline Economic Benefits of Stricter Fuel Economy and GHG Standards…
Citi Investment Research and Ceres, March 30, 2011

New Reports…See U.S. Auto Industry Boosting Profits, Sales with Higher Mileage Standards
Citi Investment Research and Ceres, March 30, 2011

Who Will Reap the Dividends of Fuel Economy?
by Felicity Barringer
The New York Times, May 20, 2011

Almost Two-Thirds of U.S. Auto Shoppers Now Considering More Fuel Efficient Vehicles…
AutoTrader.com, April 19, 2011

Consumer Demand for Better MPGs Increased in April…
AutoTrader.com, May 16, 2011

Voters in America’s Auto & Manufacturing Heartland Want 60 MPG Fuel Economy Standard by 2025
Ceres, May 25, 2011

Detroit’s Rebound Is Built on Smaller Cars
by Bill Vlasic
The New York Times, May 29, 2011

The Future of Fuel Economy
The Economist, Oct. 8 2010

The Future of Fuel Economy
by Jim Park
Truckinginfo.com, June 28, 2010

Fuel Economy is Key to the Automobile’s Future
by Roland Hwang
GreenCar.com, May 10, 2011