Non-Independence Day as EPA Prepares to Scuttle CAFE

There are big stakes here – political, environmental, global competitiveness, the price of new vehicles, profits and / or losses at automakers and suppliers.

All the signs are there that President Trump is prepared to sabotage the existing CAFE – corporate average fleet economy – rules. These have directly lessened emissions and increased fuel economy – benefiting consumers but to the detriment of automakers, especially the Detroit Three and luxury vehicle purveyors that are reliant predominately on the sale of trucks, SUVs or larger vehicles. The EPA is now starting the rulemaking process to adopt new standards for model years 2022-2025.

Last week, the U.S. Environmental Protection Agency (EPA) published a Notice on the Mid-Term Evaluation of Greenhouse Gas Emissions Standards and said it would place it in the Federal Register – a requisite step toward modifying the emission rules. This potential shift or softening of CAFE extensive and serious implications for all automotive industry participants. (CARB Defies Trump on Vehicle Emission Standards)

Oil from terrorist-supporting or politically unstable regimes is against the best interests of U.S. citizens.

Its the latest twist in the long and challenging-  and sometimes contradictory – story of the U.S. approach to regulating fuel economy and emissions.

According to the notice, the Administrator – Scott Pruitt a lawyer and anti-regulation zealot Republican politician currently mired in scandals about his cronyism and reckless spending of taxpayer dollars – thinks the “EPA based its current standards on information that is now outdated, and that more recent data suggests the current standards may be too stringent.”

In a direct slap at President Obama, EPA is withdrawing the previous Final Determination issued by the Agency on January 12, 2017 and ask for comments for rulemaking appropriate standards for model year 2022-2025. (CAFE, Global Warming Rules Approved for 2022-25)

The Obama Administration’s EPA aggressively pursued an overall reduction in GHG, but the Trump administration – “Global Warming is a Chinese hoax says the current occupant of the Oval Office” – has very different intentions. Informed opinion from real news sources holds that the EPA will substantially reduce the targets for GHG regulation for light-duty vehicles (and by association, the National Highway Traffic Safety Administration (NHTSA) will also lower the Corporate Average Fuel Economy (CAFE) targets).

Manufacturers, states, non-governmental organizations, and other special interest groups will can provide input into the controversial rulemaking process in the coming months. It’s on odds on favorite that legal battles will ensue before new MY 2022-2025 fuel economy and emissions standards are determined.

During the 2016 model year, “many” companies, for the first time, had to rely on banked credits to comply with the U.S. GHG regulations. The current EPA regulation was designed to enable companies to accumulate credits for exceeding the regulations in the early years and to be able to leverage those credits as the standard became more stringent.

However, notes the Center for Automotive Research, companies found themselves below the standard and needing to use credits much soon than had been anticipated. The chart shows that for 2016, the industry missed the two-cycle tailpipe emissions regulation by nearly double the performance gap in the previous year. Auto manufacturers were not able to offset this widening gap with other credits (i.e., flex fuel, air conditioning leakage and efficiency, or other off-cycle credits).

For the first time, the industry reported a net loss of GHG credits in 2016; that is, they used more credits than they earned. Given current consumer preferences for big trucks and market segment trends, the growing deficit between regulatory performance and banked credits likely means that many manufacturers may not comply within a few years.

Suppliers and automakers are making substantial investments in fuel efficiency technology and need to amortize those expensive investments over millions of units at a global scale, not without risk.

Auto suppliers may lose returns on these investments if the U.S. weakens its CAFE and GHG regulations, and therefore many would like to keep the Obama-era regulatory targets in place. However, vehicle manufacturers—must be able to pass the cost of new technology through to consumers. Getting consumers to pay can be especially challenging in the U.S. market where most consumers do not value fuel efficiency as much as other global regions, and where costly technology may not be needed to meet the relaxed regulatory standards.

Stay tuned there are big stakes here – political, environmental, global competitiveness, the price of new vehicles, and profits and or losses at automakers and suppliers.