Opinion: U.S. car makers need stable standards

Brett Smith
As with nearly all recent regulatory activity, the 2017-2025 emissions and fuel economy regulatory process has been extremely (and increasingly) politically charged, Smith says.

On May 6, seventeen of the world’s largest automakers sent a letter to President Trump asking him to consider making his proposed fuel economy and greenhouse gas (GHG) standards more stringent. The letter also encouraged the president to reach a compromise on emissions standards with the state of California. For a group of vehicle manufacturers to request more stringent standards is striking. It is not often companies ask regulators to make things more challenging.  However, these are unique times in the automotive industry. Coming after nearly five years of troubled negotiating, posturing and planning, the letter reflects a rapidly changing industry landscape.

The car companies have a challenging public relations choice ahead. They realize they must push for a fuel economy standard that encourages consumer choice, yet they also know they need help encouraging fuel economy technology development. With relatively low gas prices, most U.S. car buyers are not focused on fuel economy — and few seem willing to pay extra for it. Higher fuel economy standards make it tougher to sell cars and trucks that U.S. consumers seem to want. However, the manufacturers also know that policy in China and Europe is driving technology change — and the U.S. is already trailing. If regulations are too lax, the U.S could fall further behind.

The manufacturers strongly believe the Obama era fuel economy regulations are too stringent, and have supported a review — and even hoped for a reduction — by Trump. They also realize, however, that it is in their best interest to keep the peace with California, and the only way to do that was to keep fuel economy standards moving forward. The industry asked for relief. The president’s intention to freeze fuel economy standards sent shock waves through the industry.

So, where do we go from here? To look forward, it is helpful to glance backward. The recent U.S. fuel economy and greenhouse gas (GHG) regulation dialogue originated from multiple factors: a severe upward spike in gasoline prices, a Great Recession and associated automotive industry bankruptcies, and two diametrically opposed presidential administrations.

The range of the negotiations may best be illustrated by two events: an uncomfortable gathering of automotive CEOs and Obama in the White House Rose Garden in May 2009; and, an equally awkward gathering of automotive CEOs and a newly elected Trump at the American Center for Mobility in Ypsilanti in 2017.

As with nearly all recent regulatory activity, the 2017-2025 emissions and fuel economy regulatory process has been extremely (and increasingly) politically charged. Widening partisan politics have made the creation of an effective and feasible regulation ever-more challenging, if not impossible. For the automotive industry, this increased uncertainty is an enormous risk. For consumers, it leads to confusion and potential market disruptions.

Commonly referred to as the 54.5 mpg fuel economy standard, the current regulation represents one of Obama’s signature moments. The Obama administration attempted to harmonize three laws (two federal and one state). Named the One National Program (ONP), Obama's regulation combines the National Highway Safety Administration's Corporate Average Fuel Economy (CAFE), the Environmental Protection Agency's GHG regulation and California's emissions standards.

A harmonized fuel economy and GHG regulation enables car companies to serve a singular U.S. market, which is more efficient and less costly than having a patchwork of regulations.

From the moment the ONP was signed, manufacturers understood the standard was going to be difficult to meet — if not impossible. At the time, however, coming out of a severe recession, and owing a figurative and literal debt to the Obama administration, many inthe industry felt unable to push back.

The manufacturers were able to get an important win in the 2012 standard — the midterm evaluation (MTE). The MTE, to be completed by 2016, was their chance to reshape the regulation’s later years. At that time, car companies had recovered from the recession, fuel prices had dropped, consumers wanted bigger vehicles and Trump was elected with a new agenda.

The Obama administration rushed the MTE through just days before Trump's inauguration only to have Trump overturn the decision a few months later with the car companies overwhelmingly support.

For the past two and a half years, the Trump administration has been reviewing the GHG and fuel economy regulations. It may issue a new regulation sometime this summer.

The Trump administration has given guidance they will likely freeze fuel economy regulations at the 2020 levels through 2026. But another element of the administration’s plan may lead to greater disruption — and may have been the real driver behind the car manufacturers’ letter. The Trump administration announced intention to withdraw California’s ability to regulate GHG emission, thus ending the state's Zero Emissions Vehicle (ZEV) program. The proposed revocation of the waiver to the 1975 Clean Air Act was immediately challenged in court by California.

And, it is not just California. There are 12 other states that have adopted the standards (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon Pennsylvania, Rhode Island, Vermont, and Washington). Colorado is in the process of becoming the 13th state to adopt the regulations and, the District of Columbia also complies with California’s emissions regulations.

Together, these states represent a large market supporting a set of regulations that, if left alone, would increasingly depart with the Trump administration's expected federal standards.

For manufacturers, that is far from the efficiency and unity of the One National Program.

So, where does this leave the industry? While there will likely be many twists and turns, there are some key guideposts to watch.

The letter to the president was, first and foremost, a show of solidarity among the car companies. It was a way to let the president know they understood the need for an inclusive and comprehensive resolution. Perhaps there was a bit of public relations involved, too, but there were other important elements behind the letter.

Vehicle manufacturers are aware they are in a rapidly changing world — one with less certainty than ever before. For vehicle manufacturers, regulatory certainty is a critical, but elusive target. As they invest billions of dollars in future products, manufacturers and suppliers need to understand what will be required to meet future standards.

With no final regulation set with certainty beyond 2020, companies must plan for the edge cases. At one extreme is the Trump administration’s proposal to cap fuel economy standards after 2020, and take away California’s ability to set their own emissions standards. At the other extreme is the possibility of California taking the administration to court and essentially delaying any resolution for years.

The U.S. is already a technology island, and it risks becoming a technology backwater. The U.S. automotive market is different from any other major market. Diverging regulations will likely increase that difference.

As U.S. GHG/fuel economy regulation appears set to become less stringent, the opposite is happening elsewhere. China, Europe and others may define the future of advanced vehicle propulsion.

Automakers say protracted litigation over emissions rules effectively would produce two vehicle markets hewing to separate standards within the United States.

In China, the government is trying to position the nation as the technology leader in battery electric vehicles (BEVs). While the Chinese government has policy levers that are not available in many leading countries, their strategy appears to be driven more by creating an industrial powerhouse than an environmental policy.

European federal governments seem less willing than Chinese regulators to set electric vehicle requirements but continue to support increasingly stringent GHG emissions regulation. There is also activity to create zero-emission zones in many larger European cities. These city-led actions will continue to push electric vehicle development and may even lead to BEV regulation at the federal level in Europe.

Diverging regulations between China, Europe and the U.S. will likely increase the difference between those markets. With other countries and regions taking leadership roles in advanced propulsion technologies, there is risk that, driven by divergent regulations, the U.S fall behind in the race to develop battery powered cars.

Brett Smith is the director of the Propulsion Technologies & Energy Infrastructure at the Center for Automotive Research.