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Morningstar | We Think New Fuel Economy Rule Proposal Likely Won't Change Automakers Electric Vehicle Plans

As discussed in our April 2 note, the U.S. Environmental Protection Agency and the National Highway Traffic Safety Administration rescinded Obama-era emission and fuel economy rules for model years 2022-25. On Aug. 2, the EPA and NHTSA announced eight possible new scenarios called the Safer Affordable Fuel-Efficient Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, or the SAFE Vehicles Rule. Scenarios include leaving the Obama rules in place or gradual increases at various rates for cars and light trucks; however, the Trump administration's preferred scenario is to leave rules for model years 2021-26 at 2020 rules, setting an industry average of 37 mpg (43.7 for cars and 31.3 for light trucks). The federal government is also seeking to remove California's waiver of exemption from the Clean Air Act's restriction on states setting their own greenhouse gas emission standards for model years 2021-25 granted in January 2013.

We see a very ugly court battle looming between 18 states, most notably California, and the Trump administration. We would not be surprised if the U.S. Supreme Court has to rule on whether the Trump administration can change the rules and whether California can keep its waiver and continue to set its own rules. This matters because the California Air Resources Board rules are stricter than the federal rules, so if the state and the federal government are not cooperating, California’s rules effectively become the national standard because automakers will not develop two versions of the same vehicle to sell in different parts of the U.S. In 2017, California made up about 12% of new vehicle registrations. We doubt the new proposal would change automakers' electrification plans because vehicle makers have to comply with new Chinese EV rules in 2019, Tesla has shown there is interest in EVs, and GM for example said on Aug. 2 that it still is committed to a future of zero crashes, zero emissions, and zero congestion.

The SAFE Vehicle Rule has a 60-day comment period, and the NHTSA and EPA will hold three hearings. In an ideal scenario, we would like to see consumers decide what fuel economy they want rather than government regulation. Realistically, there will be regulation, and we want just one federal standard so the auto industry has certainty to make product plans. However, many states’ attorneys general have said they will fight Trump’s EPA if the Obama-era rules are rescinded. California Gov. Jerry Brown's office released an Aug. 2 statement on the SAFE Vehicles Rule proposal saying in part that, "California will fight this stupidity in every conceivable way possible." California leads an 18-state coalition that makes up about 43% of the U.S. auto market, mostly West Coast, Northeast and a few Midwest states, that is suing the federal government to try to prevent the undoing of an agreement CARB reached in 2012 with the auto industry and the Obama administration that called for fleetwide fuel economy requirements over 50 mpg by the 2025 model year. Texas and Florida, the second- and third-largest states for new vehicle registrations last year at 9% and 7.7% respectively, are not part of the 18-state coalition.