Navigant Research Blog

Minimal Fuel Economy Impact from Regulatory Executive Order

Sam Abuelsamid — February 6, 2017

The presidential executive order that commands two federal regulations to be rescinded for every new rule enacted probably will not have a direct impact on US Corporate Average Fuel Economy (CAFE) mandates, but that does not mean they will not change. At this time, it seems highly probable that at the very least, penalties for failing to meet the standards to increase fuel economy to 54.5 mpg by 2025 will be significantly reduced, and those targets may be slashed as well. Even if that does happen, it may have only a minimal impact on the product development strategies of the auto industry.

Since the CAFE regulations were already in force, the fact that the US Environmental Protection Agency (EPA) reaffirmed the standards in the waning days of the prior administration mean they are not directly subject to the new order. In addition, section 5(a)(i) of the order also states that:

Nothing in this order shall be construed to impair or otherwise affect:
(i)   the authority granted by law to an executive department or agency, or the head thereof …

The current CAFE regulations were enacted under the authority of the 2007 Energy Independence and Security Act, signed by President George W. Bush, which specifically called for a fleet average of at least 35 mpg by 2020. That would appear to make CAFE at least partly exempt from complete elimination without a corresponding repeal from congress. As of December 2016, the unadjusted fleet average in the US market was at 31.2 mpg. The auto industry would only need to get to 35 mpg to meet the congressional mandate.

Technology Development Will Continue, but…

If the new Secretary of Transportation Elaine Chao opts to scale back the standards or penalties, the industry will still develop fuel economy and emissions technologies to meet standards set by California and the global market. The problem that the industry faces in the US market is an environment of low fuel prices and an increasing consumer preference for less efficient utility vehicles. Faced with the realities of the marketplace, manufacturers are finding it difficult to sell smaller, thriftier vehicles.

If the national standard were reduced while maintaining California requirements, it would provide automakers with the opportunity to meet market demand in regions such as Texas with higher margin products—such as the full-size pickup trucks and SUVs that are favored there—without resorting to incentives to stimulate demand for small cars. This would allow some subsidization of electrified vehicles in those markets that require them.

Uncertainty and Instability

Ford CEO Mark Fields has claimed that having standards that market demands will not support with sales could end up costing up to 1 million jobs. The CEOs of Ford, GM, and Fiat Chrysler met with President Trump days after he took office to discuss this. The industry would also like to see the elimination of separate standards for California, which are possible under a waiver granted by the EPA through a clause in the Clean Air Act.

Rescinding this waiver could prove problematic. It likely could lead to a battle that would end in the Supreme Court. If it became a state’s rights case, it is not at all clear how even a conservative majority on the court would rule.

This is a situation unlikely to be resolved quickly—and the resulting uncertainty creates instability in the business.

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