Economic & Political Implications of Vehicle Efficiency Standards

By Brett Smith

On August 2, 2018, the US Environmental Protection Agency (EPA) and the National Highway Safety Administration (NHTSA) jointly published the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026. The Joint Notice of Proposed Rulemaking (NPRM) gave much-awaited guidance for future emissions and fuel economy regulation. It is likely there will be a final ruling by the end of the second quarter 2019. When it is released, the rule will be met with passionate reaction.

Many of the 2018 NPRM findings contradict or at least are very different than, the Final Determination released by the EPA in early January 2017 just days before the end of the Obama administration. Not surprisingly, this NPRM has been met with disparate reaction from the spectrum of industry stakeholders.

It is useful to briefly review the history of this regulation—a regulation which got its genesis from a severe spike in gasoline prices, was influenced by a great recession and concomitant bankruptcies; and has been molded by two diametrically opposed administrations. The process may best be illustrated by two events, an uncomfortable gathering of automotive CEOs in the White House Rose Garden in May 2009, and an equally awkward gathering of automotive CEOs and a newly elected president at the American Center for Mobility in Ypsilanti, MI in March 2017. Figure 1 shows key steps and dates creation in the fuel economy and greenhouse gas regulation.

As with nearly all recent regulatory activity, the 2017-2025 emissions and fuel economy regulation has been extremely, and seemingly increasingly, politically charged. Widening partisan politics have made the creation of an effective and feasible regulation ever-more challenging. For the automotive industry, this increased uncertainty provides a great challenge. For the consumer, it presents the likelihood for great confusion and potential market disruptions.

VEHICLE EFFICIENCY STANDARDS

The two most important points of the 2018 SAFE Vehicles Rule proposed (or preferred) alternative include: a cap on greenhouse gas emissions (GHG) and fuel economy requirements for passenger vehicles at 2020 standard (35.5 mpg) through MY 2026, and; a revocation of the California waiver to the 1975 Clean Air Act. Recently, EPA indicated they are considering “tweaking” the preferred GHG proposal, but appear to be committed to the revocation of the waiver for California—an action that will likely lead to a drawn-out legal battle between the administration and California.

For many, the need to reduce the environmental impact of light duty vehicles is of critical—even dire—importance. Realistically, the current administration’s position does not reflect that concern. Much has been written about why GHG/Fuel Economy regulation should or should not be changed. However, it is also important to consider how changes to the regulation may play out. The following are a few key considerations as the regulatory process concludes, and the implementation begins.

The proposed revocation of the California waiver to the 1975 Clean Air Act is fundamental to the current discourse. The waiver allows California to regulate vehicle emissions—which had previously been the domain of the federal government. While manufacturers argue for the importance of certainty for regulation, and a singular national standard, realistically there has been little certainty in recent years. Instead, the existing regulation has created, at best, an uneasy truce. By eliminating California’s regulations, the Trump administrations NPRM represents the prospective to move to a national GHG program. However, in less than two years, there may be another administration with a very different regulatory vision, which would likely cause a forceful swing back. That does not suggest long-term stability for strategic decision-making.

Vehicle manufacturers have long negotiated with California and the administration(s) to have some semblance of consistency within the U.S regulatory structure. In the case of the 2018 NPRM, the Trump administration had been going solo on negotiations with California, keeping the automakers on the outside of the talks. However, negotiations between the administration and California have recently collapsed. The administration, with some aggressive rhetoric, appears to have left the automakers to fend for themselves.

It is very possible the revocation of the waiver will end up in a long court battle. While there are many avenues for resolution of the proposed waiver beforehand, any legal action may end in front of the U.S. Supreme Court. If so, the recent appointments to the Supreme Court may influence the outcome of the waiver. A more conservative Supreme Court may impact decision-making along the way, and at the highest court. This may give the Administration the upper-hand in a legal battle.

As U.S.GHG and fuel economy regulation shifts toward less stringency, the opposite appears to be happening elsewhere. In China, government actions may position that nation as a technology leader in vehicle electrification. The Chinese government has policy levers that are not available in many leading countries. Further, their actions appear to be driven more by industrial policy than environmental policy. European federal governments seem less willing than China regulators to set electric vehicle requirements, but continue to support increasingly stringent CO2 emissions regulation. There is also activity to regulate zero-emission zones in many larger European cities. These city–led actions will continue to push electric vehicle technology development, and may even influence regulation at the federal level in Europe. The type of vehicle bought in the U.S. is already vastly different than elsewhere. Diverging regulation will likely increase that difference, further accentuating the U.S. as a technology island. There is increasing risk that China and Europe may define the future of advanced powertrain propulsion leadership.

With other countries and regions taking a leadership role in advanced propulsion technologies, the U.S. market may not be considered a place to cultivate advanced prolusion technologies. There is risk that, driven by divergent regulations, the U.S loses electric vehicle leadership to other regions. To an extent, the 2018 NPRM addresses the concern of the U.S. market becoming a technology backwater. The NPRM opines that if the U.S. market demands advanced fuel economy technologies, companies will be welcomed to sell those technologies—and over-comply. However, if consumers do not pull, the companies will not have to try to sell technologies that are not valued so they will not have invested in unwanted technology.

Currently, U.S. federal regulators show no interest in setting “stretch” fuel economy or GHG standards. The U.S. federal regulators indicate their new regulations will offer an opportunity for manufacturers to meet consumers’ needs while making a “competitive” profit. Other nations and regions will likely require costly technology to meet emissions and fuel economy standards. Some suggest this added cost for technology will depress vehicle sales in those markets. Meanwhile, regulators argue, less stringent (more achievable) U.S. regulation may encourage a period of strong sales in the U.S.

Suppliers also face challenges with the uncertainty. Many manufacturers indicate their technology pathway for the U.S. market is already in place, and the regulation may have little impact on the products offered. However, market realities suggest that manufacturers will offer technology that the market will support, not what the manufacturers have planned. If there is minimal consumer pull and there is reduced regulatory push for advanced propulsion technology, the likelihood that suppliers’ advanced propulsion technologies gain market acceptance may be greatly reduced.

Suppliers must walk a careful line in support of more stringent U.S. regulation. Many suppliers have done a remarkable job developing advanced propulsion technologies. And, many suppliers have been actively leveraging more stringent regulatory standards to place increased technology content on vehicles. However, it is also clear that the consumer must find value in fuel economy technologies at least as great as the cost.

Suppliers (and manufacturers) have built business plans on global technology deployment— and gaining scale economies by selling advanced technology across many regional markets. The potential loss of the U.S. as a market for advanced propulsion technologies puts added pressure on suppliers (and manufacturers). They may be forced to amortize costs over lower volumes and either pass along that added cost to the manufacturers, or negatively impact their profits.

It is certain the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule will have substantial and lasting influence on all U.S. automotive stakeholders. Yet, the how the regulation reshapes the automotive industry is still very unclear. The U.S. may become a technology backwater, or a profit haven. There may be one national fuel economy standard, or California may win the right to continue to regulate GHG. Manufacturers may continue down a pathway to greater fuel efficiency regardless of regulation, or the suppliers may face difficulty selling their advanced propulsion technologies as U.S. customers shun costlier advanced propulsion technologies. Or, maybe an advanced propulsion battery breakthrough happens, and the future of EVs arrives in time to make the discussion moot.

Source: https://meetingoftheminds.org/economic-political-implications-of-vehicle-efficiency-standards-30483