Evidence Mounts: Lagging Truck Fuel Economy an Opportunity Cost of EPA Emission Rules

The end of the month (Jan. 31) is the deadline for submitting comments on EPA and the National Highway Traffic Safety Administration’s (NHTSA’s) joint proposed rule to establish first-ever greenhouse gas/fuel economy standards for diesel trucks and other heavy-duty (HD) vehicles. When finalized, the rule will substantially increase both agencies’ power over the freight goods industry.

The agencies’ chief rationale for the proposal is that the fuel economy of HD vehicles, especially “combination tractors,” the semi-trucks used in long-haul freight, has not improved in recent years or even declined. This is paradoxical, because nobody has a greater incentive to demand cost-effective improvements in fuel economy than people who haul freight for a living.

EPA and NHSTA offer five “potential hypotheses” to explain the “paradox” of “under-investment” in HD vehicle fuel economy. As I explain here, none of the hypotheses demonstrates a market failure and two suggest that truckers are just behaving like prudent buyers. In two other posts (here and here), I develop an alternate hypothesis: EPA’s diesel-engine emission standards, via their impacts on engine performance and the HD vehicle market, caused the very problem the agencies now propose to solve with more regulation.

I am now pleased to share additional evidence supporting my hypothesis.

In March 2010, Kevin Jones, a reporter for The Trucker magazine, interviewed Daimler Trucks North America President and CEO Martin Daum at the Louisville, Ky. Mid-America Trucking Show.  Daum told Jones that EPA’s emission standards added $20,000 to the cost of an 18-wheeler over the previous six years. That’s a substantial chunk of change truckers don’t have to spend on vehicles with better fuel economy.

Daum draws a distinction between “push innovations” (changes compelled by regulation) and “pull innovations” (changes driven by market demand). This too speaks to a point made in the earlier posts. To comply with EPA rules, engine manufacturers had to spend hundreds of millions of dollars and deploy hundreds of engineers to develop emission-control technologies rather than fuel-saving technologies. “Push innovations” crowded out “pull innovations.”

ECON 101 also tells us that as price increases, demand falls (other things being equal). Consequently, even if newer trucks were more fuel efficient, the $20k cost increase imposed by EPA’s emission standards would discourage truckers from buying those vehicles.

In fact, however, as earlier posts discuss, newer vehicles typically get fewer miles per gallon, because emission-control technologies decrease the fuel efficiency of diesel engines. A Wall Street Journal article from April 2007,  by Robert Guy Matthews, sheds light on this point:

A requirement that newly manufactured diesel trucks spew out less soot starting this year is posing a paradox for truck fleets: These new-generation trucks are cleaner than older-generation vehicles, but they get worse mileage.

With emission standards to get even tougher in 2010, truck-fleet owners are seeking changes to other rules, to help improve efficiency. Some are lobbying for the go-ahead to hitch up longer trailers, while others are pushing requirements for manufacturers to make engines offering a certain minimum mileage.

Previous-generation trucks average about nine or 10 miles to each gallon of diesel fuel. New engines designed to meet the more-stringent federal mandate on truck exhaust get about one mile less to the gallon. That may not seem like much, but it all adds up for large fleet owners that operate trucks crisscrossing the country.

“For every additional mile-per-gallon lost, it costs us about $10 million in [total annual] fuel costs” said YRC Worldwide Chief Executive Bill Zollars. YRC is one of the largest transportation providers in the country, operating a fleet of 20,000 trucks. . . .

Freightliner LLC, the largest heavy-duty truck maker in North America, confirmed that some loss of fuel economy was inevitable for engines to comply with the new standards. Certain parts of the engine must run at a higher temperature to burn off pollutants, and that requires more fuel.

A few pieces of this puzzle still elude me. How much did engine manufacturers actually spend since 2000 to comply with EPA’s emission standards? A March 2004 Government Accountability Office report (p. 12 ) indicates that the total could easily exceed $1 billion. What was the actual cost? More importantly perhaps, what was the actual expenditure as a percentage of total diesel-engine manufacturer R&D? Any information, tips, or leads regarding these matters would be greatly appreciated.