Rush hour in downtown Los Angeles, California on highway 110.

On August 2, 2018, after many months of public rhetoric from the administration and the states, EPA and the National Highway Traffic Safety Administration sought comment on a joint proposal to modify the Corporate Average Fuel Economy (CAFÉ) standards for years 2021-2025. The Trump administration’s preferred modification would be a freeze on the standards at 2020 levels, but some alternatives are offered for comment. The administration also intends to revoke the waiver granted to California allowing it to set its own air standards. The comment period is 60 days, and it is expected that a new rule would be promulgated by the end of 2018 or early 2019.

What It Means

There are two elements to this plan of action, with the revocation of the California waiver likely the most contentious, but both will be tied up in litigation for at least a year or two. The Clean Air Act explicitly provides for California to obtain a waiver from regulations promulgated under the Act and set its own, more stringent, standards. Currently nine other states have adopted the California standards. The governor of California has already described the administration’s actions as “stupidity” and that state and 18 others, plus the District of Columbia, have already announced their intention to fight the administration’s new CAFE proposal. And this is not the first attack on the California waiver, which exists because Congress recognized California’s uniquely bad air conditions and its leading role in improving air quality. Two district courts rebuffed earlier efforts in 2007 by the auto industry to overturn the waiver. There is no reason to think that California would let the administration take away that waiver now without a lengthy court battle, in which it would have good odds of success. Of course another possibility – highly remote with the existing Congress -- is that the legislative branch acts to amend the Clean Air Act, to remove the California waiver altogether. Whatever now happens, it is hard to see any real winners in this fight.

The National Interest

If the administration wins its battle to freeze the CAFE standards, Bill Wehrum, assistant administrator of EPA’s office of Air and Radiation, said it would be a “win-win” situation: lower costs for auto manufacturers, lower costs for consumers. In fact, the agencies refer to their policy as the Safer Affordable Fuel-efficient Vehicles Rule (SAFE Vehicles Rule), proffering analyses that suggest requiring more fuel efficient vehicles would result in a less safe vehicle fleet. Oddly enough, Mr. Wehrum makes no mention of the environmental impact, although in its proposal EPA estimates the freeze would result in only a minimal increase in global warming. On the downside, consumers will face the costs of higher gas consumption; however EPA suggests in its economic analysis that such costs will be short-lived as it will cause consumers to drive less. Also, EPA’s success might lessen the incentives for U.S. automakers to develop the models they will need to successfully compete in other countries more focused on electric vehicles, such as China, now the largest auto market in the world. But that’s a trade balance issue.

As California Goes, So Goes the Country...

California and the nine other states that also use its standards, make up a third of the national car market. If the CAFE standards are frozen at 2020 levels, but California successfully defends and exercises its waiver, that fact, along with the pressure to innovate for international markets, will likely force the U.S. automakers to accept the California standards regardless of the administration’s wishes. And even if California should lose its waiver, no one should be surprised if the fifth largest economy in the world used its market leverage to meet its air quality goals through other routes affecting the auto industry.

...And the Auto Industry

It had originally sought to have the administration derail the Obama administration CAFE standards, but did not want the wholesale approach ultimately taken. Now it faces what it most dislikes—uncertainty. It has to make model decisions years in advance, without knowing what standards it will have to meet, or whether there will be two different sets of standards in the U.S. market. Some manufacturers have already indicated they simply intend to continue what they had planned to do regardless of whether the administration succeeds in this rollback effort. In this type of brouhaha, one would expect a negotiated outcome. EPA says it is involved in discussions and willing to reach a compromise. California says it is still waiting to hear from EPA, but it has no intention of compromising on the waiver. The auto industry is encouraging both sides to talk this out. Will a compromise be reached? At least EPA is asking for comments this time before it issues a rule. If the administration wants to actually take effective action, and not just check off another box on its political bucket list, it will have to act very quickly or its efforts will be rendered irrelevant by the realities of the long-term automotive market.