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Fuel Regulations and Potential Effects on Industry & Consumers

CADA's Hatch Talks Fuel Regulations and Potential Effects on Industry & Consumers

Canada is following the lead of the U.S. and rolling out a set of environmentally friendly rules that aim to cut greenhouse gas emissions from cars and light trucks. Under the new regulations, vehicles produced between 2017 and 2025 will have to reduce emissions by an average of 5 percent a year — every year.

What impact will this have on dealers and the automotive industry as a whole in Canada?

Michael Hatch, chief economist for the Canadian Automotive Dealers Association, appeared on the CBC business news show "The Lang and O'Leary Exchange" to discuss this very issue.

The news anchor started the interview out by citing the initial industry outcry regarding an increase in cost due to the impending regulations.

Hatch responded, aiming to calm worries that the increases may be a heavy burden on consumers and potentially affect dealer sales in the long run.

"You know this is a regulation we have been expecting for some time, and I think it would be naïve to assume that regulations don't have costs. There is going to be some costs associated with this," Hatch said. "Some of the estimates that we have seen range in the middle of 5 to 6 percent in terms of the increase of a price of a new car over the next 12 to 13 years, which isn't exactly astronomical. It's something that will be seen, but over the next number of years; it's not going to happen overnight."

Though prices will most likely rise, Hatch further stressed that these increases will be small compared to the last few decades' increase in new-car affordability.

"But set against the fact that over the last 20 to 25 years we've seen average new-car prices come down to historic lows in the past couple of decades … the increased cost associated with this new regulation is not going to come anywhere near the increase in affordability for new cars in the last 20 years," Hatch stressed.

Though prices may even out, eventually, many think the regulations will make the North American automotive industry more uncompetitive on a global scale, risking bankruptcy by big manufacturers, such as Chrysler - much like what the industry saw in 2008 in the U.S.

Hatch responded to this concern, noting, "What we have is a continental industry here in North America; most of our trade on the automotive side happens between Canada and the U.S., and in an ideal world, we would have one set of rules on a global basis. These rules are meant to address global warming. It's called global warming for a reason... it doesn't know what a border is.

"What the industry in North American and obviously in Canada has advocated for and has asked for is a continental wide approach, so that we've got the same rules in Canada and the U.S." Hatch added.

Hatch also explained that from an industry standpoint in North America, "it's (regulations) a good move," and from a consumer standpoint: many buyers may stand to save money on gas, even though they may pay a little bit more up front.

The news anchor also touched on a less discussed potential outcome from the regulations: innovation spurred by necessity.

"Twenty years ago, a CD player cost $500, or a calculator cost $300; now they can't give them away, because innovation exists, and technology advances in a way that's non linear; in a way that's more exponential, and costs are brought down as a result," Hatch said.

"Now that we have the same set of rules with regards to fuel economy in north America, Canadian and American consumers are going to have access to all those economies of scale, which really brings the sort of estimates for the cost increase that we are seeing today into perspective. And in the long run, it is going to bring those costs down," he continued.

Lastly, Hatch touched on the growth within the Canadian automotive retail sector, noting that it has been very strong this year in terms of auto sales. The Canadain industry saw 7 percent growth in terms of new-car demand year-over-year, according to Hatch.

"We sell primarily to a domestic market here in Canada, which is very strong and will continue to be very strong with these regulations," he concluded.