Explained: Why fuel efficiency standards in Australia are expected to reduce costs for car owners
As the Australian government works on a national electric vehicle (EV) strategy and fuel efficiency standards for new light-duty vehicles (LDVs), let’s take a moment to address a couple of common misconceptions about standards, new technologies, and vehicle costs. For the most part, these can be traced back to a basic mistake: equating purchase price with vehicle cost.
Purchase cost is one cost, but far from the only cost. Owning a vehicle incurs costs over years, and analyses of emission standards in the European Union and the United States suggest that standards in Australia would result in large fuel savings that offset or outweigh any potential increase in the purchase price of the vehicle.
Table 1 has details of prior ICCT studies which found that fuel cost savings accrued over an 8-year ownership period in the European Union and a 15-year ownership period in the United States outweigh the incremental cost of a technology needed to meet carbon dioxide (CO2) emissions targets. (The incremental cost here is the additional cost the manufacturer bears when changing from an old technology to a new one.) The consumer benefits are even larger with more stringent CO2 emission reduction targets, as shown for the European Union.
Table 1. Estimated manufacturer costs and consumer benefits from complying with fuel efficiency/CO2 emissions targets
|Time frame of estimate||Baseline year||CO2 reduction from baseline (%)||Incremental technology cost from baseline (US$)b||Consumer payback period (years)||Net savings in fuel cost in US$c (number of ownership years in the estimation)|
|2021||50%||$1,339 c||4||$1,000 (8 years)|
|2021||100%||$1,182 c||1||$4,655 (8 years)|
|2025||18.5% – 26.6%||$772 – $1,343||Not estimated||2 to 3 times higher than cost (15 years)|
a) EU estimates are for passenger cars only; U.S. estimates are for LDVs, including passenger cars and light trucks. b) For the EU estimates, technology cost represents direct manufacturing cost only. For the U.S. estimate, technology cost includes direct manufacturing cost and indirect cost for factors like warranty, overhead, and retooling. c) Currency converted to U.S. dollars (@ 1 Euro = 1.10 US$ as of April 17, 2023) from original estimates reported in Euros. Net savings in fuel cost account for consumer benefits accrued over the ownership period after the cost is paid off during payback period.
These EU estimates are for passenger cars purchased in 2030 and 2035, and the CO2 emissions reductions are relative to baseline year 2021. The 2030 target is assumed to be met by manufacturers through a combination of internal combustion engine vehicle (ICEV) technology improvement and EV sales; the 2035 target is assumed to be met with a full transition to battery electric vehicles (BEVs). That the incremental manufacturing cost from the baseline year is lower in 2035 than it is in 2030 is mainly due to improved learning and the maturation of EV technologies, and large-scale production of EVs.
As shown in Table 1, EU consumers can expect full payback for the initial investment within 4 years of use if the vehicle complies with the 2030 CO2 target. This payback period is much shorter, within 1 year, if the vehicle conforms to the more stringent 2035 target; this is because of larger fuel cost savings with a BEV in 2035 compared to 2030 and reduced technology cost in 2035. For the EU study, estimated net savings with BEVs purchased in 2035 are larger compared to relatively less-efficient vehicles purchased in 2030, and larger than the initial incremental cost in 2035. Indeed, the net savings from reduced fuel cost over an 8-year ownership period are nearly four times higher than the incremental technology cost of a vehicle purchased in 2035.
Our U.S. estimates assumed progressively more stringent standards for LDVs at a rate of 4%–6% fuel-use reduction per year from 2025 to 2030. Such scenarios lead to about 18%–27% fleet-average CO2 emissions reduction in 2030 relative to 2025. Fuel savings for a vehicle purchased in 2030, over the 15-year ownership period, would be two-to-three times larger than the incremental technology cost for the assumed standards. In addition, the U.S. Environmental Protection Agency’s estimates for the enacted 2023–2026 LDV greenhouse gas emission standards show that the consumer fuel savings over a 30-year lifetime of a 2026 model year vehicle outweigh the initial increase in vehicle cost by $1,080 relative to a no-action scenario; this results from a fleet-average greenhouse gas emissions reduction of 18% from the no-action scenario.
Australia’s LDV market has been 100% imports since 2017. As the advanced technologies needed to meet fuel efficiency standards are already widely adopted in the other markets from which Australia imports vehicles, fuel efficiency standards pose little risk. Indeed, Australia is better positioned now to introduce fuel efficiency standards at a similar stringency level as the United States or European Union because the technologies are mature and being produced at scale. This makes the technologies cheaper than they were in their early years on the market.
Another misconception concerns the purchase price of EVs. Although these currently tend to be more expensive in terms of upfront cost than ICEVs, this is expected to change. A 2022 ICCT study assessed the upfront purchase costs and first-owner vehicle ownership costs of new BEVs compared to gasoline ICEVs in the United States between 2022 and 2035 across each LDV segment, including cars, crossovers, SUVs, and pickups. Details of the results are in Table 2.
Table 2. ICCT cost-benefit assessment of battery electric vehicles (BEVs) versus conventional gasoline vehicles (Slowik et al., 2022)
|BEV range in miles (km)||Incremental purchase price compared to conventional vehicles if purchased in 2030 (US$)||Number of years of operation to reach ownership cost parity if purchased in 2030||Savings in ownership costa per BEV purchased in 2030 (US$) over 6 years of ownership|
|150 (241)||-$7,364 to -$5,285||zero (immediate)
|$11,486 to $16,846|
|200 (322)||-$6,150 to -$4,395||$10,493 to $15,180|
|250 (402)||-$4,629 to -$3,260||$8,520 to $12,382|
|300 (483)||-$3,263 to -$1,628||$7,361 to $10,697|
|350 (563)||-$1,561 to $570||$5,907 to $8,765|
|400 (644)||-$319 to $2,748||zero to 2 years||$4,603 to $6,979|
a) The total cost of ownership includes vehicle price, fuel and maintenance cost, charging equipment, and tax.
For most of the ranges and vehicle segments, BEVs in the United States are estimated to attain purchase price parity with comparable ICEVs within the 2024–2029 time frame. The negative values for incremental price in Table 2 indicate lower upfront costs for the BEVs than the ICEVs in 2030. As a result, most BEVs offer ownership cost parity at the time of purchase. BEVs with higher range such as 400 miles, particularly for the pickup truck segment, are expected to take a few more years from 2030 to reach price parity and thus would take 2 years of operation to reach ownership cost parity. Nonetheless, across the BEV ranges and segments, the savings in total cost of ownership compared to ICEVs over 6 years of ownership vary from $4,603 to $16,846 per vehicle purchased in 2030. Even for the 400-mile range electric pickups, the ownership cost savings outweigh the incremental cost significantly, by two times.
The above makes clear how important it is to consider vehicle ownership cost over time when thinking about the costs of complying with fuel efficiency standards. Just looking at the initial, short-term increase in vehicle price, if any, doesn’t show the whole picture. The goal of fuel efficiency standards is to achieve more fuel-efficient vehicles, and consumers will save money from reduced fuel costs that accrue over years of ownership. These savings are often much higher than any increase in the upfront cost.