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CAFE Standards Benefit Honda, Tesla

Brian Hicks

Written By Brian Hicks

Posted August 30, 2012

The final version of a previously proposed fuel-economy rule (known as the corporate average fuel economy, or CAFE) includes extra credits for sellers of natural gas-powered vehicles.

That should make Honda Motor Co. (NYSE: HMC) very happy, since it is currently the only automaker that sells compressed natural gas-powered cars within the U.S. market. Thus, it can use the credits to meet the new fuel economy standards.

The rule covers a time period between 2017 to 2025, and was announced this Monday.

Bloomberg reports:

“Providing incentive credits for natural gas vehicles makes a great deal of sense under this regulation,” Edward Cohen, Honda vice president of government and industry relations, said in an e-mail yesterday. “A dedicated natural gas vehicle reduces CO2 emissions by 25 percent and petroleum consumption by 100 percent.”

The rule is set to cost the general auto industry up to $136 billion as they work to meet the new standards. On the other hand, it will result in savings worth $451 billion to consumers in terms of fuel costs. And, of course, the fact that Honda can already meet the new standards should spur competition among other major companies like Toyota (NYSE: TM), GM (NYSE: GM), etc.

Under the CAFE rule, automakers must double average fuel economy of passenger vehicles sold in the U.S. market by 2025. Interestingly, Honda had initially protested the earlier version of the bill. That version offered extra credits to U.S.-based automakers that manufacture hybrid pickup trucks. However, the present version could see an increase in fuel cell-powered vehicles on U.S. roads, which is certainly a positive thing.

Aside from the big names, smaller companies like Tesla Motors Inc. (NASDAQ: TSLA) could also benefit from the new rule. It allows them to sell any credits for exceeding fuel standards to other companies that don’t meet their quotas. Tesla, of course, makes plug-in electric vehicles only, thus resulting in zero emissions.

According to the Obama administration, CAFE in conjunction with another mandate that covers vehicle model years 2012 to 2016 should reduce U.S. oil consumption by 12 billion barrels, meaning fuel savings in excess of $8,000 over the lifespan of a vehicle, by 2025.

It isn’t all rosy, though, as the National Automobile Dealers Association has expressed concerns that the consequent price increases of roughly $3,000 for vehicles would discourage buyers. It’s a delicate business, striking a balance between enforcing fuel economy standards (typically raising costs for consumers in the short term) and fuel savings (typically more than offsetting costs, but over the longer term).

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