As the Trump administration prepares to roll back emissions regulations that push cars to be cleaner and more fuel efficient, it may also set the stage for a political battle that could create a rift in the U.S. auto industry.
After several months of comment and a possible setback from the 35-day government shutdown last month, the newly finalized fuel economy rules are due from the administration by March 31. However, following the publication of the proposed changes, California and eighteen other states announced that if less-stringent fuel economy rules are enacted, they will sue the government — which may lead to a period of prolonged regulatory uncertainty.
In the meantime, automakers and suppliers are stuck prophesying which laws will ultimately win: Obama-era Corporate Average Fuel Economy (CAFE) rules or the current administration’s Safer Affordable Fuel-Efficient (SAFE) standards. Making the wrong bet could come at a high price, according to Brett Smith, director of propulsion technologies and energy infrastructure at the Ann Arbor-based Center for Automotive Research.
“One thing that’s really important to (automakers) is achievable regulation,” Smith told MiBiz. “But the other things that are really important are the certainty, consistency and ability to set a business plan for years, and that’s not the case right now.”
The current regulations were set during the Obama administration, but CAFE standards have a long history of managing the improvement of fuel economy in domestic vehicles like cars, light trucks and SUVs.
The first CAFE rules were enacted in the Gerald R. Ford administration in the wake of the 1973 oil crisis and around the same time the federal government imposed a national maximum speed limit of 55 mph.
As regulations improved efficiency over the next 40 years, “footprint” requirements diversified the standards between passenger cars and light trucks. As well, individual states gained the right to enforce their own more rigorous laws related to fuel economy. If the average fuel economy of a fleet fell below any of the requirements, the manufacturer would be obligated to cover the shortfall through credits or pay a fine.
Then in 2009, President Obama proposed new standards that would add greenhouse gas (GHG) emissions calculations to CAFE, and ultimately, require an average fuel economy of 35.5 miles per gallon by the 2016 model year, a leap from the 2009 average of 25 miles per gallon.
Major car companies and the UAW embraced the predictability and flexibility of the program and by the 2014 model year, automakers had met or exceeded many of its goals. By the time Obama announced a new agreement in 2011 to increase fuel economy to 54.5 miles per gallon by the 2025 model year, he was joined by 13 major auto manufacturers accounting for more than 90 percent of all vehicles sold in the U.S.
Still, compliance with the increasing regulations was not unanimous.
Tony Cervone, executive vice president of communications at Volkswagen, argued the regulations placed an unfairly high burden on passenger cars while allowing special compliance flexibility for heavier light trucks.
“The proposal encourages manufacturers and customers to shift toward larger, less efficient vehicles, defeating the goal of reduced greenhouse gas emissions,” Cervone said at the time.
Volkswagen was later revealed to have been systematically cheating on its emissions tests.
According to analysts, a mid-term evaluation of Obama-era rules shows the costs of technology to lower GHG and increase fuel efficiency have become cheaper than expected and automakers are adopting the new technologies quicker than anticipated. Still, they’ve concluded the 2025 goal is unattainable. In part, as Volkswagen predicted, fuel prices have dropped and American consumers are not buying as many cars as the goal presumed.
Because of the consumer market, companies are failing to find ways to adapt as quickly as they are required, according to Smith.
“It is really hard to sell the technology right now in this market because for most consumers, they don’t see the economic benefit of it,” Smith said. “Battery electric vehicles have gone from being economy cars (like) the Nissan Leaf to Tesla. (That) has made people realize that the way to sell them in some higher volumes is to put them into luxury cars where they’re exciting, where they’re different, where people can afford to pay for the cool technology, as opposed to trying to figure out how to justify it by getting return on their investment through reduced fuel cost.”
A more realistic 2025 average fuel economy target would be in the range of 50 mpg to 52.6 mpg, according to the mid-term report.
“(Automakers) were achieving the standards by using credits starting last year and the year before,” Smith said. “That was probably going to continue going forward because consumers are driving vehicles that aren’t as fuel efficient as maybe the regulations would require, so the industry knew that they had to make noise. They had to make sure it was understood that this was going to be a challenge for the consumer.”
The Trump administration responded with a new proposal to freeze average fuel economy goals in 2021 at 37 miles per gallon and stop states like California from setting stricter standards.
“Increasingly, politics has always been about wild swings,” Smith said. “In this case, you go from the battery electric vehicle being the technology of choice of former President Obama to now the absolute worst idea in the world. You go from greenhouse gases being something we are all very concerned about to leadership that says GHG is silly and even if it mattered, we can’t do anything about it anyway, so who cares.”
Inevitably, leaders in the Democratic party also will issue a response, Smith said.
“Regardless of (a company’s) political beliefs, those kinds of swings are getting bigger and bigger and bigger, from side to side to side,” Smith said. “Those kinds of things are terrible for long-term successful planning, and in this industry that makes bets in years and years and not just weeks and months, that’s a real challenge.”
If the average fuel economy requirements remain flat or even increase by 1 percent, they will be enormously achievable, and automakers may go back to a simpler business model of selling what the market demands, according to Smith.
“If the market demands higher efficiency vehicles, they’re going to have to figure out how to supply them. If the market doesn’t demand it, they won’t do anything but get close to meeting the requirement,” he said. “It’s just business planning. You plan it to what the customer wants as long as you meet the regulatory standards.”
Nevertheless, U.S. companies ultimately will face global standards from China and Europe that will force them to ramp up vehicle electrification plans, Smith warned. He said the Chinese government’s “top-down authority” and Europe’s “consumer-driven, bottom-up” social policies will both add up to the U.S. being outpaced.
“These companies are operating in three very different environments,” Smith said. “In some ways, Europe and the U.S. are more alike, in other ways, Europe and China are more alike, and in technology, the U.S. is probably furthest from all of them.”
Through the haze of this regulatory environment, Smith is closely watching the investments of companies like Ford Motor Co., General Motors and Volkswagen, many of which are heavily skewed toward battery electric vehicles.
“That tells me they are onto something, or they’re going to be broke,” he said.
Volkswagen announced late last year that it would put $50 billion into an “electric offensive.”
As this report went to press, Reuters reported that General Motors was in talks to invest in Plymouth, Mich.-based Rivian Automotive LLC, a startup focused on bringing to market a battery electric pickup and SUV. The deal, also said to involve e-commerce giant Amazon.com Inc., valued Rivian between $1 billion and $2 billion, according to the report.
General Motors had previously stated it would be shifting 75 percent of its employees into battery electrification or vehicle electrification, according to Smith.
“Putting the money in there without a proven market is really fascinating,” Smith said. “It’s a great time to grab the popcorn, sit back and watch.”