South-Western College Publishing - Economics  
Global Warming's Sticker Shock: Cars Will Be More Expensive
Subject counting costs of complying with global emissions regulations
Topic Production and costs; economics and the environment
Key Words

emissions, regulations, environment, efficiency

News Story

Investment firm Sustainable Asset Management, together with the Washington-based World Resources Institute, recently issued a report detailing the costs to automakers of complying with the environmental regulations expected within the next decade in the U.S., Europe, and Japan. And the report wasn't good.

The report found that, in addition to the regulations already put in place in the last 50 years, the U.S., Europe, and Japan will likely enact yet more new regulations. These expected legal requirements will raise Ford's costs of producing a vehicle by $403, GM's costs by $377, and Honda's costs by only $24. That difference between U.S. made (Ford and GM) vehicles relative to foreign car makers (Honda) isn't accidental. Honda and Toyota could actually benefit from new regulations because they have already made significant investments in creating environmentally-friendly technologies, such as hybrid gas/electric engines.

Because the analysis of new regulations are based upon conjecture rather than on hard data, projecting the costs of these new regulations become difficult. At the same time, China is preparing to introduce additional fuel standards: Since China has the fastest growth of automobile purchases globally, this move could influence what other countries do as well. One analyst pointed to the "carbon intensity" of Ford's profits, indicating the extent to which Ford's profits relies on vehicles that create significant carbon emissions. Therefore, Ford products are vulnerable to new, stricter environmental regulations. For investors thinking about future purchases of Ford stock, this could pose a problem.


(Updated September, 2004)

Questions
1.

One Ford spokesperson commented on the expense of the new regulations, saying that Ford and General Motors have lagged behind Japanese automakers in researching energy-efficient vehicles because American firms face higher costs of medical insurance premiums for their workers in the US than in Japan. Why would this be an issue for Ford (hint: think about the total cost of producing a new automobile)?

2. Why would the cost of a new vehicle increase as a result of new environmental regulations? What kind of cost is the regulation trying to make the automaker consider in its production?
3. Using a graph of supply and demand in both markets for American-made automobiles and Japanese-made automobiles, illustrate the potential effect on price and quantity if new regulations are imposed in the US and in Japan.
Source Danny Hakim. "Catching up to the Cost of Global Warming." The New York Times.. 25 July 2004. http://www.nytimes.com

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