MEXICO FACTSHEET: Proposed fuel economy/co 2 emission standards

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1 MEXICO FACTSHEET: Proposed fuel economy/co 2 emission standards A regulatory proposal published by the Mexican Government on July 7, 2012, aims to regulate fuel efficiency and CO 2 emissions of new passenger vehicles, including cars, pickup trucks, and SUVs. The goal of the proposal is to obtain an average new car fleet average fuel economy of 14.9 km / l in New light vehicles sold in 2011 averaged 13.1 km / L, up from 11.8 km / L in The regulatory impact assessment and anteproyecto (the regulatory proposal) can be found at: International Context The regulation would create the only vehicle fuel economy standards in Latin America. The regulation is harmonized in design and stringency to that of the U.S. regulation 2 and harmonized standards adopted by Canada 3 and would allow the automotive industry to promote cost- effective strategies across North America. Mexico Context There was an 11% increase in fuel efficiency between 2008 and The annual rate of improvement required by the proposal would be 2.6%, significantly lower than the trend over the last three years, when average fuel economy increased by 3.5% annually. This is also significantly lower than the rate of improvement of 3.7% required by U.S standards. Fleet- average CO 2 emissions from new vehicles decreased from 198 gco 2 /km in 2008 to 180 gco 2 /km in 2011, a 9.3% reduction. This rule meets the requirements set out within the framework of plans for national development, climate change and energy. This is the first national standard in Mexico to set targets in accord with the Ley General de Cambio Climático (General Law on Climate Change). PND: President s Plan Nacional de Desarrollo (National Development Plan) for includes strategy 10.3, the adoption of international vehicle emissions standards for CO 2. PECC: Programa Especial de Cambio Climatico (Special Program on Climate Change) for includes Goal 24, implementation of fuel economy and CO 2 standards for new light- duty vehicles. 1 Nota técnica sobre la evolución de las emisiones de bióxido de carbono y rendimiento de combustible de los vehículos ligeros nuevos en México , INE, June Published jointly by the US Environmental Protection Agency and the National Highway Traffic Safety Administration in 2010, the "Light- Duty Vehicle Greenhouse Gas Emissions Standards and Corporate Average Fuel Economy Standards " has an implementation period of Passenger Vehicle and Light Truck Greenhouse Gas Emissions Regulations, by Environment Canada, also will be implemented

2 PRONASE: Programa Nacional para el Aprovechamiento Sustenable de la Energia (National Program for Sustainable Energy) for includes Action to publish an efficiency standard for new light- duty vehicles. LGCC: Ley General de Cambio Climático (General Law on Climate Change) includes Article 102, which requires mitigation of climate change through actions that include raising energy efficiency of the passenger vehicle fleet through the establishment of efficiency standards for new vehicles and control of emissions for imported vehicles. Description of the Proposal This is a joint proposal of the Environment (SEMARNAT), Energy (SENER), and Economy (SE) ministries. It regulates new vehicle emissions of CO 2 in grams per kilometer, and provides the equivalent regulatory metrics for fuel economy in km/l. The regulation would be implemented for new vehicles from model year 2014 through 2016, and also includes 2013 as a voluntary compliance year to help generate credits towards the regulatory targets in future years. The regulation pertains to light vehicles with gross vehicular weights up to 3,857 kg. Separate compliance curves based on the vehicle size or footprint (area between the four wheels of the vehicle in m 2 ) are provided for two categories passenger cars and light trucks (SUVs, Minivans, Pick ups). The overall goal is to achieve an average fuel economy of 14.9 km/l for the new model year 2016 fleet. This overall goal is not a standard for each individual vehicle, but refers to the fleet average of all passenger cars and light trucks that are sold in Mexico by The proposal includes 1% and 2% reductions from the original fuel economy targets of the U.S. NHTSA Corporate Average Fuel Economy (CAFE) regulations for passenger vehicles and trucks, respectively, in order to add flexibility and consider various technology development strategies that are expected in Mexico. The technologies considered in the modeling of the expected compliance with the regulation are existing technologies that are present in other markets, and the regulation does not require fleet composition shifts or advanced technologies like hybrids and diesels that are currently more costly. The government estimates the following benefits from the application of the standard over a period of : o Reduction in fuel consumed: 70 billion liters o CO 2 emissions avoided: 170 million tons of CO 2 o Health benefits due to diseases and deaths averted (through reduced upstream pollutant emissions): 4,170 million pesos (approximately $314 million) The reduction in fuel consumption adds up to fuel savings (at current fuel prices of pesos per liter) of 720 billion pesos (approximately US$54 billion) for Mexico consumers, with the government saving an additional 160 billion pesos (US$12 billion) for reduced costs of subsidies (at current subsidy levels of 2.2 pesos per liter).

3 Regulatory Process On May 9, 2012, regulatory advisory committees of the each of the three agencies held meetings and approved the draft regulatory proposal. Committee members were given 30 days to provide comments on the proposal. On July 4, 2012, the committees convened once more to review the responses from the government to the comments that had been received. All three committees again voted to approve the proposal and publish it for public comment. On July 7, 2012, the proposal was published by the Mexican Regulatory Commission, COFEMER, for a 60- day period of public comment, after which the government will publish a response to comments and a final regulation. Vehicles and Technologies Automotive technology is rapidly evolving to both increase efficiency and reduce technology costs. Figure 1. Fuel economy improvements from existing vehicle efficiency technologies 4<#@$+;(#A"%-%*#"+=-*'B"+C$'-.7D0/D23- <=%(")0&"),()"/2&6()(6(7"#&%-6>$/4-)&")"*,?&.-//"/&!"#$%&'()*+,-./0123-!"#$%"&'()#&#*+,&!++",,$#&-"G+*"'+& <."%0*(%&5-'"*&/0""*(),2&+%%"//-*("/&& 9%:"-,;<=0$>-./0?23- :0-5;/0+*0&0-&".(6()+0"&(#.(),& 4#(',)*,,*$' *"&,"+*/2&."//&3*(%4-)2&-546(7"#&/8(9(),& 4*#",-./0523-!"#$%"&*-..(),&*"/(/0+)%"& Fuel economy can be improved by over 20%, with many attractive combinations of efficiency technologies. Technologies like turbocharged direct- injection engines can do so while also improving acceleration performance; dual- clutch high- efficiency transmissions with six or more speeds are now cheaper than the current conventional four- speed automatics; and stop- start (engine shut- off when the vehicle is at rest) offer great efficiency gains in congested stop- and- go conditions and are especially well suited for Mexico. In addition, turbochargers eliminate problems of loss of power that can occur at high altitude and better transmissions increase efficiency on steep inclines. New technologies are rapidly entering the automotive market (see Figure 2).

4 +!"# Figure 2. Penetration of technologies in the US!"#$%&'&()*+"%",-./&%* *!"# )!"# (!"# '!"# &!"# %!"# $!"# --.#/# #678739# )/9:11;##/#<73;# =-.#/#>?9942# )/9:11;##/# #678739# =-.#/#6?89EF?9G?#.E3F7#/#H6I# OJF3?;#/#.7J784# Fuente: Lutsey, N. (2012). Regulatory and technology lead- time: The case of US automobile greenhouse gas emission standards. Transport Policy. 21: Table 1 shows examples of new vehicle models in the US that have achieved improved fuel economy in vehicle redesigns in recent years Table 1. Examples of efficiency technology improvements from redesigned vehicle models in the US Original fuel New fuel Vehicle Vehicle class economy economy Change Low- carbon/efficiency technologies model (km/l) (km/l) Ford Direct injection, 6- speed dual- clutch transmission, Compact car % Focus electric power steering Subaru Impreza Hyundai Sonata Nissan Altima Mazda CX- 5 Station wagon!"# %!!%# %!!&# %!!'# %!!(# %!!)# %!!*# %!!+# %!!,# %!$!# % Midsize sedan % Midsize sedan % Small sport utility vehicle 0&1"'*)".-* % Continuously variable transmission, 160- lb mass reduction, lower rolling- resistance tires, electric power steering Variable valve timing, direct injection, 6- speed, aerodynamics, mass reduction Intake/exhaust valve timing, continuously variable transmission, taller gear ratio, mass reduction, aerodynamics Direct injection, 6- speed transmission, mass reduction, aerodynamics, friction reduction, high compression Atkinson engine Turbocharging, direct injection, 6- speed transmission, mass reduction, aerodynamics Turbocharging, direct injection, 6- speed transmission, mass reduction, aerodynamics Ford Large sport % Explorer utility vehicle Large pickup Ford F % truck Source: U.S. Environmental Protection Agency, consumer label fuel economy for model year vehicle models Table 2 shows two examples of the types of technologies that the regulatory standards help to promote in the marketplace.

5 Vehicle Model Table 2. Two examples of new vehicle technologies promoted by fuel economy standards Rendimiento Picture de Combustible Description (km/l) Ford Focus 1.0L Ford CEO Alan Mulally, with EcoBoost engine 21 Helps Ford achieve sales growth in Europe Makes up 23% of Ford Focus Europe sales Offers 47% increase in fuel economy, to a level above many hybrid models Uses 1.0- liter EcoBoost engine, the International Engine of the Year center/press- releases- detail/pr- ford- focus- 10litre- ecoboost- off- to center/press- releases- detail/pr- ford- launches- production- of- focus BMW 328i BMW 328i with 23% fuel economy improvement bmw- 328i 14 Illustrates how new technologies can achieve high acceleration performance, luxury, and great fuel economy 23% fuel economy improvement Greater power and torque Utilizes turbocharging, direct injection, 8- speed transmission, stop- start idle elimination series/2012/road- test.html series/2012/2012- bmw- 328i- sedan- full- test- and- video.html Market Conditions The North American market is highly integrated. Chrysler, Ford, GM, Honda, Nissan, Toyota, VW each have at least 3% market share in Mexico, the US, and Canada. Nissan and VW have greater market shares in Mexico than in the rest of the region. Hyundai does not operate in Mexico, but does so in other countries. Renault and Peugeot, with 2% and 1% market shares in Mexico, are not operating in the rest of the region. The regulated market in Mexico represents about 1 million vehicles, while there were million annual U.S. sales and about 1.5 million sales in Canada in recent years.

6 Global Automotive Industry In the U.S., the automobile industry supported the nearly identical 2016 standards that are proposed in Mexico, as well as much higher standards for model year 2025 that are now being finalized. The automobile industry, labor groups, and environmental groups agreed in 2009 to regulatory standards that would achieve a 14.5 km/l fleet average in the U.S. for model year Figure 3. President Obama announcement on 2016 standards (May 19, 2009) Dieter Zetsche! (Merc-Benz)! D. Thormann (Nissan)! Jim OʼSullivan (Mazda)! John Mendel (Honda)! Bob Nardelli (Chrysler)! Fritz Henderson (GM)! Alan Mulally (Ford)! Stefan Jacoby (Volkswagen)! F. Eichiner (BMW)! Jim Lentz (Toyota)! Government-industry agreement (May 19, 2009) Obama administration, automakers, and California agree to national US standards On July 29, 2011, the same groups also agreed to more stringent standards that would achieve 21 km/l by model year Figure 4. President Obama announcement on 2025 standards (July 29, 2011) John Krafcik (Hyundai) Scott Becker (Nissan) John Mendel (Honda) Sergio Marchionne Bob King L. Jackson Josef Kerscher (Chrysler-Fiat) (UAW) (EPA) (BMW) Dan Akerson Alan Mulally Jim O Sullivan Andrew Goss (GM) Doug Speck (Ford) (Mazda) (Jaguar-Land Rover) (Volvo) R. LaHood Jim Lentz (Toyota) (DOT) Vehicle manufacturers are taking advantage of more integrated markets around the world to reduce the number of vehicle platforms. This trend provides a significant reduction in costs for manufacturers because they can share the costs of technology development among more models and higher sales volumes (see Table 3).

7 Table 3. The reduction in the number of vehicle platforms at Ford Number of core platforms Percent of worldwide sales volume on core platforms 29% 49% 83% Source: Bank of America / Merril Lynch Global Research, May 2011 Europe, Japan, the US, and China are on track to achieve approximately % improvements in fuel economy over the next few years compared to current levels (see Figure 5). Figure 5. Fuel economy and CO 2 standards are causing a significant improvement in passenger vehicle efficiency Kilometers per Liter of Gasoline Equivalent Normalized to US CAFE Test Cycle! 28! 26! 24! 22! 20! 18! 16! 14! 12! 10! Solid dots and lines: historical performance! Solid dots and dashed lines: enacted targets! Solid dots and dotted lines: proposed targets! Hollow dots and dotted lines: target under study! S. Korea 2015: 16.7! Mexico 2016: 14.9! Canada 2016: 14.7! EU 2020: 25.8! Japan 2020: 23.4! China 2020: 21.3! U.S. 2025: 20.9! US-LDV! Canada-LDV! Mexico! 8! 2000! 2005! 2010! 2015! 2020! 2025!!"#$%&'()*+$,)-./,$-/0/1,+$.)+23'(/$4/&'13/+$2(356$7&/$,)-./,$8)5$9/$&'.&/-$):/-$(/;$/(/-.5$4/&'13/+$)-/$12(+'</-/<6$$!=#$>?$@$%)()<)@$)(<$A/B'12$3'.&,C<D,5$4/&'13/+$'(13D</$3'.&,C1288/-1')3$4/&'13/+6$ $ International Council on Clean Transportation, EU! Japan! China! S. Korea! Australia! Industry Concerns Altitude and topography: Higher altitude, holding all else equal, increases the efficiency of any vehicle in use. Higher altitude can reduce the power delivered by the engine. However, since the U.S. market and future regulatory compliance include higher power in the baseline than the current average for the Mexico fleet, there should be no need to adjust the standards for high altitude conditions in Mexico. For model year 2008, vehicles in the U.S. had approximately 17% higher power ratings for a given size than vehicles sold in Mexico. In addition, new transmission technologies that will be required by this standard, along with turbocharged engines, should

8 eliminate concerns about energy losses and efficiency in the harsh operating conditions of Mexico (see previous vehicle technologies discussion, above) Sulfur: Fuel sulfur levels impact aftertreatment control technologies (e.g., catalytic converters) that reduce conventional pollutant emissions, but not vehicle efficiency technology. It is of utmost importance to improve the quality of conventional fuels and emissions standards, but these issues are not related to the current topic of the CO 2 and fuel economy standards. Credits: Automakers have requested credit for vehicles that run on ethanol, a fuel that is not available in Mexico. The automakers also have sought hybrid vehicle tax incentives, which are no longer available in the U.S. and were never part of the fuel economy regulatory package. Finally, automakers have sought special credits for electric and fuel cell vehicles, which are not required to meet the 2016 standards. Quotes from U.S. Automotive Industry Executives "It will be a huge boost for the industry. It's like walking into a toy store, and you can use any toy off the shelf to get you there." Sergio Marchionne, Chief Executive Officer, Chrysler and Fiat Sedgwick, D. and D. Barkholz, New CAFE Standard: 54.5 mpg: A Supplier Bonanza. Automotive News. August 8. "Higher gas prices is spurring people to buy vehicles because they want vehicles that get better fuel economy. We're very well positioned." Mark Fields, Americas President, Ford Motor Company Shepardson, D., Ford: High gas prices boost auto sales. Detroit News. Higher- gas- prices- boost- auto- sales. April 2. The economic recovery and a deep bench of fuel- efficient cars and crossovers have been driving our sales for more than a year, but the combined impact has never been stronger than it was in March Since the last time fuel prices spiked, both the economy and GM's product portfolio are undeniably stronger. Don Johnson, Vice President, US Sales Operations, General Motors Prial, D., US Auto Makers Speed Ahead in March. Fox Business. ahead- chrysler- sales- jump- 34- in- march/ April 3.