12 Mar 19

Why US automakers should wish for more regulation

Be careful what you wish for: that motto also applies to the US car industry. In early 2017, within days of Trump taking office, they petitioned the new president to relax Obama's strict emissions targets. But the new president's proposal to do just that is now meeting resistance from those same automakers – plus a coalition of 14 states, led by California. 

In the US, the fight for cleaner cars is not waged through CO2 emissions targets (as it is in Europe, for example), but via fuel efficiency standards. Those are of course largely parallel pathways: one way to emit less CO2 is to burn less fuel; and more fuel-efficient cars will release less CO2 (and other greenhouse gases) into the atmosphere. 

51 mpg by 2025
Obama, the previous president, adopted a stringent set of fuel efficiency standards. Under Obama's rules, the fleet-wide fuel-efficiency average per manufacturer would have increased year after year to reach nearly 51 miles per gallon (4.61 l/100 km) by 2025. 

But Big Auto said the rules were too expensive for them to comply with – an industry lobbyist put the cost as high as $200 billion between 2012 and 2025. On the other hand, Tier 1 suppliers, who stand to gain $90 billion in new orders, remain overwhelmingly in favour of the Obama standards, now suspended. 

Because in comes Trump, whose administration has formulated the so-called SAFE (Safer Affordable Fuel Efficient) Vehicles proposal. It wants to virtually freeze fuel standards for cars and small pickups from model years 2020 to 2026. That would mean fuel efficiency by 2025 would be at just 37 mpg (6.35 l/100 km). 

9 million vehicles
The difference between the Obama plan and the Trump plan has been calculated by the State Energy and Environmental Impact Center at NYU School of Law as between 16 and 37 million metric tonnes of CO2 by 2025, which is equivalent to the annual emissions of more than 9 million vehicles.

The Trump administration feels supported for its proposed relaxation of the rules by the market itself. Petrol prices in the US remain relatively low, which means fuel-guzzling SUVs continue to be popular and there is limited appetite with consumers for a fuel efficiency drive that many feel would only cost them money, in terms of more expensive vehicles. 

But public opinion is as divided as US politics in general, and along the same ideological lines: whereas the right abhors emissions standards as government intervention, the left feels the scrapping of Obama's proposed fuel efficiency drive is of a kind with Trump's exit from the Paris Climate Accord: Big Business winning out over the fight against climate change, not to mention consumers' rights to a healthy environment. 

Clean Air Act
That is the context in which California – not just the US state with the largest population, but also a solidly Democratic one – is taking the lead in the fight against this Republican administration's SAFE Vehicles proposal. California is not accepting the watering-down of emissions standards at federal level. The state, which received an exemption under the 1970 Clean Air Act to set its own emissions standards, vows to impose stricter regulations at state level. 

Compromise talks between the White House and California have broken down last month. Not a lot of good faith is left between both parties: the federal government still hopes to finalise its proposal this summer and even wants to challenge California's emission standards exemption.

In a recent meeting at the White House, US carmakers were less than lukewarm in their support for the president's fuel efficiency proposal. While (still) not opposed per se against a relaxing of standards, the manufacturers fear the uncertainty that would follow the emergence of a double standard: a lax federal one, and a stricter 'Californian' one, adopted by a significant number of states (together representing around 40% of the US car market). 

“Years of litigation”
Following the meeting, a Ford spokesman expressed “disappointment” about the inability of the federal government and California to reach an agreement on future fuel efficiency standards.

The Auto Alliance, the trade association which represents more than 70% of US vehicle manufacturing, was more forthright in its assessment: it wholeheartedly supports both the annual increases in fuel efficiency and a nationwide fuel efficiency standard that includes California. 

If the federal government is not able to achieve that, the result could be “years of litigation” over a federal proposal that many consider legally flawed, and the fracturing of the unitary US car market, with OEMs forced to sell a different mix of cars in different parts of the country. 

Bigger danger
Meanwhile, a bigger danger looms. The fuel efficiency fight between Trump and California is a rear-guard battle in a war that is already over in the rest of the world. 

Both China and the European Union are convinced of the need to move away from fossil-fuel mobility and are forging ahead with increasingly strict emissions standards. And that's just one side of the coin. They're also pushing much harder towards electrification - especially China. 

Manufacturers, both in China and Europe, are being pushed by activist consumers (increasingly including corporates) and pulled by more and more restrictive rules on internal-combustion engines (by national, but especially local regulations) towards building cars with ever lower emissions – or no emissions at all. 

300,000 units less
If US manufacturers escape similar pressures at home, they risk becoming complacent – and eventually obsolete – in the global marketplace. A warning in that sense was issued by the International Council on Clean Transportation, which stated in a recent study that “the present uncertainty (…) could well ensure that the US market lags behind Europe and China in technology innovation and adoption. The automakers and the White House could bring that about.”

And it's not just US carmakers’ market share overseas that's under threat. Should a sharp rise in fuel prices occur, domestic cars would become uncompetitive vis-a-vis foreign models, even in their home market. A study by Ceres found that a sudden spike in fuel prices could result in a combined loss of 300,000 units sold less per year for the Big Three from Detroit (GM, Ford, Fiat Chrysler). 

As they did during the Great Recession from 2007 onwards, American consumers will trade in their big SUVs for more fuel-efficient models, which in future may increasingly be foreign-made, or at least foreign-designed. Perhaps US automakers should have wished for more, not less regulation...

Authored by: Frank Jacobs