Automakers can't risk big mpg retreat

WASHINGTON — The federal government is ceding its leadership role in squeezing more fuel efficiency out of the auto industry.

But the pressure is still on.

Automakers, which successfully petitioned the Trump administration in 2017 to reopen a review of the standards, welcomed the administration's proposed relaxation of fuel economy standards last week and the potential relief from penalties for missing escalating fuel-economy targets established in conjunction with the Obama administration and California regulators.

The Trump administration based its proposal on the premise that consumer safety should be a bigger priority than fuel economy, since consumers aren't buying electric or alternative-powertrain vehicles in large enough numbers to move the needle on carbon emissions.

But with California and other states mobilizing in the courts to fight the new proposal on public-health grounds, automakers can't risk too much of a pullback.

They remain under pressure to treat federal fuel economy and emissions rules as a floor and to pursue a resolution with the states to avoid costly, protracted litigation that could throw product plans and supplier relationships out of whack.

Billions of dollars have already been invested in advanced vehicle technologies and product plans, including pledges by several brands to offer electrified vehicles across their lineups. As a result, experts say, there is plenty of motivation in the industry to continue developing low- and zero-emissions vehicles, despite thin demand.

"Manufacturers aren't saying 'We're going to stop all our r&d.' That's a fallacy," said Rebecca Lindland, executive analyst at Kelley Blue Book. "Twenty percent of Generation Z says it is interested in an environmentally friendly vehicle. Demand is coming, so that's why manufacturers will continue to develop these types of vehicles.

"But to push unrealistic goals when there isn't that kind of pull from the market is an expensive challenge," she added.

Consumer focus

The safety case
The Trump administration's proposal is based in part on a safety argument that's rooted in consumer economics: that the cost of fuel-economy technology might deter consumers from upgrading to new cars with advanced safety features. Consumer surveys provide some support for this argument, showing that consumers are generally unwilling to pay a premium for fuel economy but are prepared to spend more for safety.
   
Which autonomous features would you be willing to pay extra for on your next vehicle?
Adaptive cruise control 24%
Automatic parking 33%
Lane-departure warning/lane-keeping assist 41%
Blind-spot detection 61%
Pre-collision system 52%
I would not pay extra for any of these features 24%
   
How much more would you be willing to pay to have a vehicle with one or more autonomous features?
Less than $1,000 42%
$1,000 to $2,000 42%
$3,000 or more 16%
Source: Edmunds survey, September 2017

The proposal from NHTSA and the EPA would cap federal fuel efficiency requirements for passenger vehicles at the 2020-model-year level of 35 mpg, lowering the real-world driving average to 29 mpg, vs. an estimated 36 mpg under the Obama-era plan. It also proposes to void California's special authority to regulate vehicle emissions more strictly than federal standards. That power provided strong motivation for the auto industry to negotiate with the Obama administration and California officials on the single national program finalized in 2012.

Trump officials cast the proposed rule in populist terms by spotlighting the notion of affordability in the calculus over fuel economy. The agencies cited an unorthodox safety argument: that lower fuel economy standards would annually cut 1,000 highway fatalities, because the technologies currently required to meet them are driving up new-car costs and discouraging consumers from upgrading to safer vehicles.

But for the auto industry, experts say the legal challenges coming from California and other quarters will lead to years of uncertainty, unless they can negotiate their way out. Few see a compromise path toward another multiparty national program brokered by automakers, given the diametrically opposed positions of California and the Trump administration.

There's also an electoral wild card if President Donald Trump isn't re-elected: If the proposed rule hasn't been finalized by 2020, a new administration could simply revert to the existing rule, refuse to defend the new rule in court or propose a new rule, said Janet McCabe, an Obama administration EPA official who now teaches law at Indiana University.

"Do they count on the rule going through and being upheld in another administration," she said, "or assume the worst and keep complying with the rule that's on the books until this rule is finalized and upheld in court?"

Free to exceed standards

Automakers will still have the freedom to go beyond the standards, and may need to in order to stay competitive in the U.S. and meet regulations in global markets.

"What we are proposing is a floor at 2020 levels holding out to 2026. And, frankly, it's the floor for an average" across the fleet, NHTSA Acting Administrator Heidi King told Automotive News. "So, there's room for manufacturers to produce what consumers want."

General Motors and American Honda Motor Co. said they will stick to plans for more environmentally friendly vehicles despite the Trump administration's plan to reset emissions targets.

"To reduce the requirements this late in the game doesn't change anything," Steve Center, vice president of Honda's connected and environmental business office, said at the CAR Management Briefing Seminars in Traverse City, Mich. "The product cycles going forward — that work's done. We view those regulations as a low bar; that's the bar you have to hit to play."

GM President Dan Ammann last week reaffirmed the company's commitment to improved fuel economy and eventually a fully zero-emissions lineup. In the meantime, he said, "we'd like to get clarity as soon as we can, and we'd like to get commonality as soon as we can."

Automakers face other pressures, to stay on the clean-car track, such as developing vehicles for global markets where some countries plan to phase out internal combustion engines, a rise in oil prices that could make fuel-sipping cars more popular again and the reputational risk associated with big polluters.

"While this gets sorted out, automakers will continue to make vehicles that meet current standards, which will include a healthy mix of SUVs and fuel-efficient vehicles," predicted Jeremy Acevedo, an industry analyst at Edmunds. "But the fact remains that oil prices are far from stable, so it's naive to think that prices will stay low forever."

Institutional investors are concerned about automakers becoming less competitive if they can't sell vehicles in places such as China and India, said Danielle Fugere, president of As You Sow, a nonprofit shareholder advocacy group that promotes environmental and social corporate responsibility. They also look at carbon risk from the standpoint of climate change negatively impacting the overall economy and their broad portfolio of investments.

But Luke Tonschal, director for clean vehicles and fuels at the National Resources Defense Council, cautioned that it may be difficult for companies to move too far ahead of standards if the marketplace isn't keeping pace.

"Automakers are going to be forced to guess what their competitors will be doing," he said, "and that makes planning that much harder."

You can reach Eric Kulisch at ekulisch@crain.com

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