For more than four decades, corporate average fuel economy standards have been a fact of life and a bane for the American auto industry.
Like virtually all regulations, the industry has pushed back against efforts to toughen the efficiency and emissions mandates. With the 2016 election of President Donald Trump, it quickly became clear that one of the administration's top priorities was rolling back regulations including CAFE and greenhouse gas emissions.
But just as CAFE can often be at odds with the realities of the consumer automotive market, an overly simplistic view that all regulations are bad can be at odds with the reality of a complex global business. Decisions that impact a vast supply chain and an extended product development and manufacturing process come years before a new vehicle arrives in the marketplace.
With more than one-quarter of 2018 behind us, the industry is locking in products for 2021, 2022 and beyond. Meanwhile EPA Administrator Scott Pruitt has just announced the decision to rescind the 2022-25 model year greenhouse gas targets finalized in the waning days of the Obama administration.
A year after reopening the midterm review of the regulations, the EPA issued a 38-page report that offers no notable details about what the agency plans to do with the targets beyond indications that they will be relaxed. Pruitt has also publicly indicated that he wants to rescind the Clean Air Act waiver that lets California set its own standards that are tougher than national requirements.
Now the agency must begin a rule-making process in conjunction with NHTSA to set the 2022-25 targets, but it has given no indication about when that will begin. While the EPA is responsible for regulating emissions, NHTSA has oversight on CAFE. Because the greenhouse gas emissions are correlated to fuel consumption, the targets were set with the intention that the two standards would be equivalent.
In all likelihood, the EPA and NHTSA will try to lower the targets to the minimum allowed by law, which in this case is the 2007 Energy Independence and Security Act that mandated a CAFE increase to 35 mpg by 2020. Going below 35 mpg would require an act of Congress, which would further delay the process.
Meanwhile, a global industry that requires stability for its product planning still must deal with California's greenhouse gas standards that align with the EPA and similar standards in Europe and Asia. Given that China is by far the world's largest market, any company that wants to compete there will make technology decisions based on that market's needs. Even if the EPA tries to revoke the California waiver, a lengthy court battle would ensue with no guarantee the federal agency would prevail.
With so much uncertainty, including the 2020 presidential election, the reality is that the industry is unlikely to make any notable changes to its long-term product plan based on the latest EPA announcement.
Most major automakers have announced aggressive plans to launch dozens of electrified models over the next five to 10 years. Because the industry will have to meet demands for cleaner, more efficient vehicles globally, in California and the other dozen states that follow California's regulations, automakers have an economic incentive to achieve as much scale as possible to drive down costs.
It should come as no surprise that the auto industry has been notably quiet since the EPA announcement.
While automakers might generally like the idea of relaxed U.S. regulations, the reality is that the administration's changes only further complicate a difficult business.
The best the industry can hope for now is further relaxation of the penalties for missing CAFE and greenhouse gas targets so that automakers can sell more high-margin pickups and utilities that will fund the other future products that will continue on plan.