The Coming Battle Between California and EPA Over Vehicle Fuel Standards — The Implications for CO2 Emissions and Climate Change

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Two weeks ago, we reported on potential moves by the EPA to weaken fuel economy standards, and in doing so, picking a fight with California and the state’s ability to set its own emission rules through its waiver under the Clean Air Act. Those threatened moves are now reality, as the EPA announced on Monday that current fuel economy standards will be revised.

But underlying the moves to roll back fuel economy standards is the ongoing war between the Trump Administration’s EPA and efforts to reduce U.S. greenhouse gas emissions. To see how, it is necessary to briefly review the history of the vehicle emission standards set to be revised. In 2007, Congress passed the Energy Independence and Security Act (EISA) (Public Law 110-140.) Under EISA, fuel economy standards for cars, light trucks, and SUVs were targeted to be increased 40 percent to an average of 35 mpg by the year 2020.

In 2009, the Obama Administration accelerated this target through a joint rule issued by the National Highway Traffic Safety Administration (NHTSA) and the EPA, based on EISA and the Clean Air Act. Under the new schedule, new cars had to meet a fuel economy standard of 34.1 mpg by 2016 and 54.5 mpg by 2025. Finally in December 2011, the fuel efficiency standards currently operational were set. Under these standards, an average industry fleet-wide emission standard of 163 grams of CO2 per mile traveled was set for model years 2017-2025. These improvements would come in two phases, with manufacturers required to meet an average industry fleet-wide fuel economy basis of 40.9 mpg by 2012 and 49.6 mpg by 2025.

Under these standards, it was estimated that over the lifetimes of the vehicles sold in model years 2017-2025, approximately 4 billion barrels of oil would be saved and greenhouse gas emissions reduced by 2 billion metric tons, with an estimated net economic benefit to society between $326 billion to $451 billion. The reduction in CO2 emissions rises to an estimated 6 billion metric tons over the lifetimes of the vehicles sold in during model years 2012-2025.

With this backdrop, enter the current EPA. First, notice the estimated economic benefit listed above. This range was calculated using a discount rate of 7 percent and 3 percent, respectively, in the benefit-cost analysis underlying the revised standards. Recall that in association with its announced repeal of the Clean Power Plan, the EPA increased the operational applied discount rate to 7 percent, thus pushing the estimated savings in fuel efficiency standards to the lower value of $326 billion. A higher discount rate decreases the economic value of a regulation.

As previously discussed, and confirmed by the EPA’s Monday announcement, the EPA justified its planned rollback of fuel efficiency standards by claiming that the standards imposed by the Obama Administration in 2009, in concert with California, are overly strict for model years 2022 to 2025. As further discussed, EPA Administrator Scott Pruitt recently stated that “the EPA is not ‘presently’ looking at extending standards beyond 2025.” Such actions, of course, would lead to a direct legal confrontation with California and the 12 states, such as New York and Massachusetts which follow the California standards, as California has made clear its intention to continue with the current stricter standards and to strengthen those standards for cars made beyond 2025, as part of the state’s effort to reduce its greenhouse gas emissions 40 percent below 1990 levels by 2030. Put in context, if California’s leading role in setting fuel efficiency standards can be challenged and the operational standards repealed, it could add an additional 540 million metric tons of CO2 emissions just for vehicle models years 2022 to 2025.

If the Trump Administration proceeds to challenge California’s waiver under the Clean Air Act in conjunction with its plans to reduce fuel efficiency standards, not only could there be major disruptions in the U.S. auto market (a two-tiered car market anyone?), but efforts by various states to cut greenhouse gas emissions in accordance with the Paris climate agreement could be impacted. For example, if lower fuel standards become the norm in the U.S., and other regions of the world like Europe and China move to higher standards in response to the Paris climate agreement, how would that help US auto exports? Without the pressure of needing to meet higher fuel efficiency standards, would the auto makers in United States continue their push to develop electric cars, again leaving the U.S. at a disadvantage compared to foreign manufactures and frustrating efforts to reduce greenhouse gas emissions?