4 Questions About the Fuel-Economy Freeze

Samantha Oller, Senior Editor/Fuels, CSP

pickup trucks

WASHINGTON -- Americans love their trucks and SUVs, especially when gasoline prices are low. It’s this relationship with the gas-guzzler that is at the heart of a growing regulatory and legal battle.

In 2012, the U.S. Environmental Protection Agency (EPA) announced emissions and fuel-economy standards that would require doubling the nationwide vehicle fleet average to 54.5 miles per gallon for cars and light-duty trucks by 2025. In January 2017, just before President Barack Obama left office, the EPA announced that the U.S. auto industry was beating expectations on meeting the standards, and that it planned to leave them in place.

Automakers complained the decision was rushed and did not reflect the era of lower gas prices that began a few years after the 2012 standards were set. As the administration changed, auto manufacturers found that the new leadership in the EPA and White House was much more receptive to their argument.

“The Obama administration’s determination was wrong,” said EPA Administrator Scott Pruitt in an April statement. “Obama’s EPA cut the Midterm Evaluation process short with politically charged expediency, made assumptions about the standards that didn’t comport with reality and set the standards too high.”

The EPA said it would begin working with the National Highway Traffic Safety Administration (NHTSA), which oversees the Corporate Average Fuel Economy (CAFE) standards, to set new targets for the 2022-2025 model years. It was an expected move, considering the business-friendly attitude of the Trump administration and Pruitt, but it set off many concerns.

Read on for four questions raised by the decision, and some context behind it ...

1. Is a change justified?

gas price sign

“I think that’s a wise thing to do,” said Devin Lindsay, principal analyst of North American powertrain and compliance forecasting for IHS Markit, London. The original 54.5-mpg target was set under the assumption that gasoline prices would remain high and new technology that consumers would want would continue to allow big efficiency gains, he said.

But gasoline prices did not remain high; instead, they fell from $3.62 per gallon in 2012 to $2.42 in 2017, according to the U.S. Energy Information Administration. At the same time, consumers began gravitating toward larger, less-fuel-efficient SUVs and trucks. SUVs’ market share has risen from 32% in 2012 to 43% in 2017, while the market share for sedans has fallen from 38% to 26% during the same time frame, according to IHS Markit.

“The decision to reassess really validated that there are so many other market factors we need to consider,” Lindsay said. “Let’s go back to the drawing board, include those in this new environment and see what we get.”

2. Was the original target within reach?

ev charging

Technology could help automakers reach the 54.5-mpg target, Lindsay said. The problem is it would involve “a considerable level of electrification, and that’s where the price is really going to skyrocket for them.”

“The uncertainty [for automakers] is if we’re forced to come out with these technologies, how much profit will we be able to continue to make? And will our customer base really prefer these types of vehicles from us?” Lindsay said.

Pickups and SUVs, although they have lower fuel-economy targets than passenger cars, would also require higher electrification. “That’s an unknown segment,” Lindsay said, adding that when General Motors introduced a hybrid truck, it did not sell well.

“That’s where it gets difficult,” he said. “[Consumers] will notice more of a shift to the electrification side when that’s added to a vehicle.” And that shift comes mainly in one area that resonates with consumers: price.

3. What about California?

los angeles airport 405

Complicating matters is the state of California, which was granted a waiver by the EPA during the Obama administration to set its own, tougher vehicle-emission standards. A dozen additional states, representing more than one-third of the U.S. vehicle market, follow California’s standards. In its announcement on the decision to reopen the standards, the EPA under Trump said that waiver “is still being re-examined,” and it struck an aggressive stance toward the underlying rationale.

“Cooperative federalism doesn’t mean that one state can dictate standards for the rest of the country,” Pruitt said. “It is in America’s best interest to have a national standard, and we look forward to partnering with all states, including California, as we work to finalize that standard.”

A draft proposal from the EPA and NHTSA later was leaked that presented several options for revising the standards, including one that seemed to be the favorite: freeze the fuel-economy standards at their 2020 level of around 37 mpg through the 2026 model year. (Under the current standard, the fleetwide average would hit 46.8 mpg with the 2026 model year.)

Another significant element in the leaked proposal: The feds would challenge California’s waiver to set its own stricter emissions standards. In response to the news, California and 16 other states filed a lawsuit against the EPA in May to keep the current standards, Reuters reported. Together these states represent around 43% of U.S. auto sales.

4. Now what?

assembly line

Automakers had lobbied the Trump administration and EPA for the 2022-2025 targets to be relaxed. What they did not want, however, was for them to be frozen and a legal fight with California triggered that could stretch out over years.

“We’re going to see a long legal battle between California and the feds,” said Fellipe Balieiro, director of energy and mobility for IHS Markit. “I don’t see it not being messy.”

Automakers are now lobbying the EPA and NHTSA to take a more moderate approach, one centered around continuous yearly improvements, if at a smaller scale than originally agreed to under the Obama administration, Automotive News reported.

“The problem is it’s just so late in the game; that’s the insane part of it,” said Lindsay. Automakers already have mapped out and begun enacting their strategy for the next 10 years, he said.

“It’s one thing to put in risk. Will customers want to buy the technology? How will they move in terms of segments?” Lindsay said. “But now you add in uncertainty there for the market itself. Do I invest in hybrids or electric when there really won’t be any point to making them? That adds a new level of complexity in there. It makes it hard to turn the ship around this late.”

For more on the implications of a CAFE and emissions rollback, see the June issue of CSP magazine.