Australia - a gas guzzler dumping ground?

With domestic car-makers on the way out, the time is right for Greg Hunt to deliver on his rhetoric about matching Europe and the US on fuel economy standards. He'd ease the pressure on Direct Action and save consumers billions.

ClimateWorks has released a study finding that if the Australian Government were to simply follow the lead of the US and Europe’s vehicle fuel economy standards, it would save 3.7 billion litres of fuel per annum – equivalent to 50 per cent of all automotive fuel used in Australia in 2012.

As discussed yesterday (The sunny side of a manufacturing demise), Australia is one of very few major economies in the world which doesn’t apply fuel economy standards on new passenger motor vehicles. Yet we are reasonably progressive on the application of energy efficiency standards on electrical appliances.

This is to a large extent a reflection of both Labor and Liberal governments’ concern to avoid undermining domestic motor vehicle manufacturers who specialised in a dying niche of large, six and eight-cylinder cars with poor fuel economy.

The chart below illustrates the standards enacted for passenger vehicles across jurisdictions that are major producers of motor vehicles (in grams of CO2 emissions which directly translate to fuel consumption). Note that Australia does not apply a regulated standard.

Fuel economy/CO2 emission standards by country

Graph for Australia - a gas guzzler dumping ground?

Source: International Council on Clean Transportation

At present, Australia already mimics Europe’s noxious emission car tailpipe standards and test procedures, but with a lag of a few years. 

ClimateWorks has then assessed what could be achieved if we were to do something similar with Europe's fuel economy/CO2 emission standards. This would involve a steady phase-in where Australia would match Europe's 2015 target of a fleet-wide average of 130 grams of CO2 per kilometre by 2020 and its 2020 standard of 95g by 2024.

This timing is roughly equivalent with the level of ambition the United States has proscribed under its own fuel economy standards. So there should be no absence of vehicles available that allow Australia to achieve such a target. Also, it’s important to note that such a standard is an average across all new vehicle sales, so some vehicles can exceed this target provided other cars are sold with emissions below the target. This allows for substantial diversity in car types to suit different people’s vehicle purposes.

While this standard is not any more ambitious than what many other countries are aiming for, it would represent a substantial improvement on what ClimateWorks expect would happen without a standard in force.

They estimate the fuel savings would reduce Australia’s annual fuel bill by $7.9 billion by 2024 while reducing greenhouse gas emissions by 4 million tonnes in 2020 and 8.7 million in 2024.

Importantly, these fuel economy standards would actually end up delivering a net economic benefit. That’s because while they would increase the upfront purchase price of a car, it would be paid back within three years through reduced fuel bills.

The chart below illustrates their estimates for how the standards would influence the average motorist’s fuel bill assuming 14,000 kilometres of travel per year and a steady rise in the price of oil (assumes a fuel price of $2.10 per litre in 2024).

Annual fuel cost and savings per motorist – business as usual compared to following EU standard (assumes 14,000km per year)

Graph for Australia - a gas guzzler dumping ground?

Source: Rare Consulting (2013) and ClimateWorks analysis.

According to ClimateWorks the average Australian motorist hangs onto their car for five years. They estimate this means that even though cars might cost an extra $2500, and most likely less than this, the average motorist will still end up around $1763 better off once fuel savings are taken into account.

Five-year fuel costs and net saving per motorist – business as usual compared to following EU standard (assumes 14,000km per year)

Graph for Australia - a gas guzzler dumping ground?

Source: Rare Consulting (2013) and ClimateWorks analysis.

Plus, those in the second-hand market would see even bigger benefits as the fuel economy gains would be maintained after five years, while the extra incremental cost would be depreciated. This could mean greater benefits for lower income households.

It’s worth noting that there wouldn’t just be savings to motorists' back pockets but also savings for the government’s Emission Reduction Fund. That’s because every tonne of CO2 avoided via these fuel economy standards means one less tonne the government has to purchase with taxpayer money to meet its 2020 emission reduction target.

So will the Australian government follow other countries’ lead?

While the introduction of fuel economy standards was a broken promise of the prior Labor government, it is not official Coalition policy.

Still, Environment Minister Greg Hunt has repeatedly spoken favourably about fuel economy standards as a means of reducing carbon emissions. For example, when the Labor government originally proposed to include petrol in its emissions trading scheme, Hunt repeatedly said it would be better to address vehicle emissions through fuel economy standards. As recently as December last year at the Carbon Expo conference Hunt mentioned how both Europe and the US were employing these standards as a form of 'direct action' to reduce emissions at lower cost to the economy than would be achieved via an emissions trading scheme. 

So Hunt seems to personally believe that such a policy is a good idea. In addition the key blocker to implementation of such standards – the domestic manufacturing operations of Ford and Holden – will soon be no longer. Also, Hunt desperately needs some regulatory measures to supplement his meagre budget for the ERF if he is to have any chance of meeting the 2020 emission reduction target.

But whether he can win the day in Cabinet is a completely different proposition to what he might think personally.

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