Reform That the EPA Should Consider When Making Fuel Economy Rules

Earlier this week, the Environmental Protection Agency (EPA) released its final determination in its mid-term review of greenhouse has emissions that will govern new passenger vehicles sold in the United States from 2022-2025.  The agency decided that the standards are too high, and now plans to lower them.

Many news articles have been written about the EPA and the decision, and it seems that auto companies wanted to revisit the standards.  The reason may not be about improving auto standards but rather innovating the credit market.

Here is the relevant text, which comes in a section about electric vehicle sales and is intended to explain one of the major differences between the original determination completed by the Obama Administration and the one completed by the Trump Administration:

“The agency’s January 2017 Determination was completed at a time when the trends and data…showed that the majority of the major car-manufacturing companies were “over-complying” with their relative GHG compliance requirements and building up credits. EPA’s latest data show that starting in MY 2016, many companies, for the first time, had to rely on credits in order to comply with the program. While these companies did remain in compliance, they are relying on banked credits which suggests that it may be increasingly difficult for them to comply going forward as they use up their supply of credits. Additionally, the stringency curve dramatically increases at around the same time these credits could run out, further complicating the feasibility of compliance for MY 2022 – 2025.”

At the time that this determination was made, the industry as a whole was producing vehicles whose performance was already above the standards.  As a result, companies were focused on greenhouse gas emission shortfalls.  When the oil prices crashed in 2014, American consumers began purchasing more SUV’s and pickup trucks that were less efficient than cars. Because trucks are less efficient than cars and generally more costly to improve, compliance levels started to drop. Following the oil drop, incentives on flex-fuel vehicles expired.

While the EPA discussed these developments as indicative of a problem, the credit system was still working as intended. The credit provided flexibility and the ability to reduce compliance costs in the event of a plunge in gasoline prices.

Part of the problem has to do with the kids of vehicles that companies sell in regards to the EPA rule.  The three biggest U.S. auto companies that were major credit consumers in 2016 were GM, Ford, and Chrysler.  Moreover, some of the big three will soon likely be out of banked credits. After consuming 13 million tonnes of credits in 2016, GM, for instance, had only 19 million left entering 2017. Chrysler and Ford are in similar situations. These companies were all likely consumers of credits again in 2017, though EPA has not yet publicly released that data.