At a time when the economy is struggling, we have to wonder why the federal government would want to impose further economic disruption. I'm talking about the next round of EPA engine emission regulations for heavy-duty trucks, scheduled to go into effect in January 2007.
We're only now beginning to get a handle on the kind of economic impact the switch to engines compliant with EPA-mandated emissions rules for '02 is having on the trucking industry.
The most obvious economic consequences for fleets will be the anticipated reduction in fuel economy and a probable increase in maintenance costs. The base year prior to the deadline for the next round of emissions regs is sometime during the mid-1990s, so we ought to compare fuel economy on vehicles with '02 engines to those used in the mid-'90s, not those using “interim” engines ('00). The degradation of fuel economy between '00 and '02 engines is significant.
Another major economic impact will be the higher purchase price of the equipment and the probable decrease in residual value on first trade-in.
In addition, OEMs incur extra costs when they re-tool the engine compartments to accommodate new engines. We know they'll have to amortize these costs over the next cycle of equipment purchases.
And when equipment is held longer than the normal trade cycle, maintenance and repair costs go up. That data is readily available from carriers. In addition to higher maintenance costs, there may also be increased warranty costs associated with engines that were installed without being fully tested.
At a time when we are concerned about reliance on foreign oil, how much additional fuel will be required to do the same job as before the new engines were installed? Will this increase in demand affect the price of fuel? And what is the likelihood that the price of home heating oil will increase due to the competing need for increased refinery capacity?
What happens to truck makers' profits when they have to significantly increase production rates to meet pre-buy demand, only to dramatically cutback in the next two years to allow normal demand to catch up? I'm not sure, but I suspect the cost to train skilled assemblers, machinists, quality control personnel, production line management, etc. is more than what was recovered from recent price increases.
Local and regional economies also suffer when manufacturers hire skilled workers for a short period of time and then lay them off. What happens to the economy of a community when unemployment rises and spending at local shops and restaurants declines.
Something else that is often not taken into consideration is the impact on the normal trade cycles, including and how the secondary market reacts to a shortfall of equipment — followed by a glut. A significant portion of freight is moved on trucks that were bought as used equipment. Carriers that use primarily used equipment have their own set of problems finding cost-effective and reliable equipment to sustain their operations.
The economic impact of a seemingly well-intentioned regulation goes far beyond the initial purpose of the regulation. This is not to say that it shouldn't be put in place. However, there is an extraordinarily disruptive way to do it and a more measured way.
Wouldn't it be reasonable to allow the trucking industry, with oversight by regulators, to fully test alternative equipment so a measured decision can be made and thus avoid disruptive economic consequences? Then again, maybe not.