|June 21, 2018|
How the Carmakers Trumped Themselves
|These are strange times for America's car industry.|
This month, the White House will decide the fate of a set of federal rules called the Corporate Average Fuel Economy standards, or cafe standards. These laws regulate the miles-per-gallon number of "light-duty vehicles"---that is, sedans, minivans, Ford F-150s, and anything else that's street-legal and weighs less than 10,000 pounds.
The rules work mostly by getting a little more stringent every year. In 2018, cafe requires new vehicles to average about 29 miles per gallon (or mpg). By 2025, they must hit 39 mpg. (The government talks about fuel economy with two different numbers: A "cafe" figure, which estimates a car's idealized miles per gallon; and the EPA's "window sticker" number, which is used by dealerships to estimate real-life fuel economy. In this article, unless otherwise indicated, all mpg estimates approximate the window-sticker scheme.) Note that these are fleet-wide numbers: Some small cars will run more efficiently, pushing 50 mpg; pickup trucks will probably hunker in the high 20s.
Or, at least, that's how the law has worked. It now seems likely that the Trump administration will freeze the standards in 2020. In other words, starting next fall, the U.S. government would no longer require new cars to become steadily more fuel-efficient. For environmentalists and consumer advocates, it amounts to a nightmare proposal.
Does the car industry want the same? That's an interesting question. They certainly seem to find the cafe standards frustrating. For the last two years, they've claimed the rules are expensive and out of step with what Americans desire; they also argue that the Obama administration rammed cafe down their throats. And the industry's lobbyists have been complaining about the rules to any Trump administration official who would listen, up to and including the president.
But now they claim they don't want the freeze. What gives?
Setting the stage for this farce is a development that almost everyone---including the car industry---says is a good thing: New cars and trucks sold in America burn much less fuel than they did a decade ago. In 2007, new vehicles in the United States averaged about 20.0 mpg. Last year, they averaged 25.2 mpg.
This happened, in short, because the government ordered it.
On May 21, 2010, President Obama unveiled an ambitious new set of cafe standards. They aimed to get idealized U.S. fuel economy to 50 mpg by 2025. (Real-life fuel economy would lag behind this number.) They also doubled as climate-change policy, since more fuel-efficient vehicles release less carbon-dioxide pollution. Obama said the rules would save Americans money and "create or save more than 700,000 jobs."
The car industry seemed less frustrated on that sunny morning. The chief executives of Daimler Trucks and Volvo flanked Obama as he made that announcement, nodding along with the young president. An overwhelming coalition endorsed the rules: Environmentalists, labor groups, consumer advocates, and every single automaker endorsed or acquiesced to the new cafe standard.
But then again, the industry didn't have much choice. Obama used Chrysler and GM's government bailout to require them to comply with the rules. And if that wasn't enough, he had twin Democratic majorities in Congress. He could write new fuel-economy laws, if need be.
It hadn't always been this way. At the birth of the American car industry, the government didn't do much about fuel economy. Though it belched toxic air pollutants, the Ford Model T could run at 25 mpg, almost tying today's Ford F-150. But in the fat decades that followed World War II, cars became engorged, yacht-like, and wasteful. In 1973, new cars averaged 12.9 mpg, an all-time low.
The oil embargo changed all that. Gas prices shot up to 55 cents per gallon (or about $2.80 in today's dollars). In 1975, Congress ordered the Department of Transportation to create the first fuel-economy rules. The cafe standards were born, working much as they do today, with fuel economy increasing a little bit every year. By 1991, new cars averaged 19.6 mpg.
But gas was cheap again, and the Reagan administration had declined to increase the standards after 1990. Soon Congress defunded the office that wrote cafe. Over the next two decades, the fuel economy of new cars only improved by 0.4 mpg. Innovation fell off: The data suggests that many newborns came home from the hospital in 1991 in cars that burned less gas than the cars in which they learned to drive in 2007.
Never mind the fleet average: By the gas crisis of the late 2000s, the EPA's fuel-economy methodology was so outdated that consumers struggled to cost-compare vehicles. The cafe standards assumed no one would ever run an air conditioner. And the rules as written did not apply to the largest SUVs, like the Pantagruelian Hummer, which averaged 11 miles a gallon.
The public demanded action, and California roused itself. Under the Clean Air Act, the state has a special right to regulate toxic air pollutants from car tailpipes. In 2005, it tried to extend this ability to regulate greenhouse gases. The state's governor, Arnold Schwarzenegger, argued that climate change posed a special risk to the state's air quality, and that it should therefore be allowed to enforce its own fuel-economy rules.
The car industry balked: Would it really develop one set of cars for California, and another set for the rest of the country? The Bush administration denied the state's request and vowed to fight it in court. But gas prices kept rising, and eventually Bush had to act as well. In 2007, Congress reauthorized the cafe program, ordering automakers to improve their fuel economy every year through 2030. At the same time, the Supreme Court issued a historic ruling, allowing the EPA to regulate carbon dioxide as an air pollutant.
Then the economy collapsed, the automakers faltered, and Obama won. The new president moved quickly, granting California's request and beefing up the EPA. But he also tried to spare the industry. He proposed that there be just one unified set of national rules: a new cafe standard, which would regulate fuel economy and greenhouse gases, and which would be issued by the the EPA, the Department of Transportation, and the state of California.
With the new rules in place, fuel economy began to chug again. In a few short years, it climbed by almost five miles per gallon. It hit 25.1 mpg in 2014, according to the Transportation Research Institute at the University of Michigan. The whole thing seemed to be working: Cars were getting lighter, hybrids were on the rise, and every automaker was rolling out more fuel-efficient cars.
And then, suddenly, it wasn't.
According to the University of Michigan, new vehicles averaged 25.1 mpg in 2015. The next year, they averaged 25.1 mpg again. In 2017, they averaged 25.2 mpg. In the EPA's data, things looked even worse. From 2013 to 2016, the agency showed new cars improving from only 24.2 mpg to 24.7.
What had happened? The fuel economy of all vehicles actually was improving. Ford, for instance, cut 700 pounds from its F-150s and managed to get the truck to 22 mpg.
But the market had changed. The United States began drilling for more oil---and suddenly gas prices plunged. Meanwhile, as Americans considered buying their first post-recession vehicles, they gravitated toward a new kind of car. Writing in this magazine in 2014, Alexis Madrigal described a "mutt" vehicle that was "part SUV, part car, part minivan." It was the crossover. It had taken over the market: Soon, two crossovers were sold for every three cars.
Every car and truck sold in the United States could get steadily more fuel efficient---but fuel economy as a whole, nationwide, could stop improving. Americans seemed to be trading their sedans for crossovers and light SUVs, driving into dealerships with Camrys and leaving in Highlanders. And carmakers had little incentive to stop them: Crossovers, which cost as much as passenger cars, can be sold for tens of thousands more. The crisis had passed.
When the automakers endorsed Obama's cafe standards, they still exacted two concessions. These set the stage for what was to come.
First, the new cafe standards would apply differently to different cars. Light trucks would have to meet less stringent rules than cars. And all the rules would automatically adjust to match the "footprint" of new cars---the idea being that the rules should account for the size of car that's popular with consumers. If one automaker sells mostly crossovers and pickups, it shouldn't be held to the same standard as another that sells mostly sedans and coupes.
Second, the rules would be revisited. The EPA and the Department of Transportation had to look at the data anew and tweak the rules to match reality, and they had to do it "no later than April 1, 2018." Since the toughest rules were always scheduled to bite in the late 2010s, the car industry would basically get one more chance to fight.
Four years in advance of that date, the EPA began making sure it would meet the deadline. Agency researchers spent two years poring over thousands of pages of economics, engineering, and air-quality research. In July 2016, they published their preliminary conclusions. In a 1,200-page report, the EPA, the DOT, and California argued that new technologies would let carmakers hit their goals even more cheaply than once anticipated. The rules would also improve safety and add jobs, they said.
In short: The cafe standards were working, and they should not change.
The report also addressed the crossover boom---and here, the Obama administration's footprint rule came into effect. Surveying the new popularity of crossovers, the government downgraded its projections: By 2025, average fuel economy would only hit about 37.0 mpg, it said. (It had once aimed for nearly 39.0.) But as this adjustment occurred automatically, the text of the cafe standards did not itself have to change.
Carmakers didn't like these results. They argued that the crossover boom necessitated much more sweeping changes to the cafe standards. And with the auto bailout well in the past, they didn't need to pull punches. Mitch Bainwol, the president and CEO of a major auto lobbying group, the Alliance of Automobile Manufacturers (a.k.a. the Auto Alliance), told the EPA in September 2016 that the rules assumed consumers would buy more hybrid and electric vehicles than they were actually buying. Carmakers were making these cars, he said, but Americans weren't buying them: While the number of electric or semi-electric cars on the market had almost tripled since 2010, they only made up 3 percent of car sales in 2015.
And this all mattered, he said, because the rules were impossible for gas-powered cars. "Less than 4 percent of current models meet [the] 2021 targets, and the sales of these most fuel-efficient vehicles remain extremely low. Currently, no diesel or gas-powered (non-hybrid) vehicles make the 2025 targets," he told the agency.
The rulemaking was expected to run into 2017. And on Earth-2, where Hillary Clinton won the presidential election, perhaps the agency would have heard the industry's complaints and modestly weakened its rules. Or perhaps it would have introduced some new mechanism and let carmakers buy their way out of the problem. Or maybe the EPA administrator would have called every major auto CEO into her office, thumped the 1,200 pages of research on the table, and said, We know these rules are possible, see you in court.
Here on Earth-1, Donald Trump won. The Obama administration, which already possessed plenty of technical support to affirm the rule, accelerated its schedule. On January 13, 2017, the outgoing EPA administrator, Gina McCarthy, announced that it was her final determination that the cafe standards should remain unchanged.
Automakers went nuts.
To hear Gloria Bergquist tell it, the car industry also thought it was living on Earth-2, for a time.
"During the election, as we always do, we prepared an introduction to the auto industry for the new administration," she told me last week. Bergquist is a spokeswoman for the Auto Alliance, which represents Ford, GM, Toyota, Volkswagen, and eight other carmakers. "We prepared it, and we were going to give it to both camps. But then we figured, a week or two before the election, let's just give it to Hillary Clinton."
Then Clinton didn't win. "So we just put Trump's name on it and gave it to his team," she said.
The letter called for the incoming administration to undertake a "comprehensive regulatory review" of everything Obama had done since September 1. It asked for Trump to "harmonize and adjust" the cafe standards, and it depicted the EPA as a bogged-down car: "Technology and change are swamping the regulatory capacity to manage our emerging reality. Reform is imperative."
Obama's EPA, perhaps eyeing these letters, gave its final approval just days before Trump took office. The automakers attacked. In February 2017, both of the industry's major lobbying groups wrote letters to Scott Pruitt, the new EPA administrator. They begged him to reverse the rulemaking, lamenting that the fate of an entire sector was at stake.
The new "standards threaten to depress an industry," wrote Bainwol, the Auto Alliance president. "If left unchanged, those standards could cause up to 1.1 million Americans to lose jobs due to lost vehicle sales."
Bainwol reserved special condemnation for the Obama-era EPA. Its rule was "riddled with indefensible assumptions [and] inadequate analysis," he said. The technical report suffered "egregious procedural and substantive defects." And its decision to lock in the cafe standards "may be the single most important decision that EPA has made in recent history."
And how should Pruitt deal with the rule? "EPA should promptly withdraw it," Bainwol said.
The automakers, and not just their lobbyists, aggressively courted Pruitt. Auto executives from across the industry met with Pruitt throughout 2017, according to internal EPA documents recently released by the Sierra Club. In April of that year, Pruitt met with GM's general counsel and its executive vice president for public policy. The next month, Pruitt sat down with Ford's vice president of government relations. "Administrator Pruitt regularly meets with constituents impacted by the agency's decisions," said an EPA spokeswoman when reached for comment.
In late August, Pruitt met with Toyota executives. In November, a Toyota vice president secretly arranged to drive Pruitt around D.C. in a Lexus worth around $100,000. The agency and the automaker agreed in advance not to tweet or post about the meeting in public.
Pruitt, who has questioned basic climate science, was not an obvious ally of the carmakers. Many manufacturers have integrated climate change into their public messages. On its website, Ford brags that its strategy is "based on climate science and modeling by recognized authorities, including the U.S. National Center for Atmospheric Research." And Toyota warns that "extreme weather phenomena around the world ... attest to the reality of global warming."
But as fall turned to winter, these same carmakers appeared to get desperate. The Auto Alliance, which represents Ford and Toyota in Washington, openly questioned settled scientific findings in a February letter to the EPA. It suggested that climate scientists were "tuning" their models to get certain results, and it cast doubt on whether global warming would cause droughts, floods, and more intense hurricanes.
It also cited a study that said tailpipe pollution does not cause early deaths, a claim that runs counter to decades of settled environmental science. The study was published in Regulatory Toxicology and Pharmacology, a journal notorious for publishing research in defense of cigarette smoking.
Even as it pushed junk science, the industry hasn't been clear about how, exactly, it wants the cafe rules to change. I asked Bergquist, the Auto Alliance spokeswoman, whether the agency should do something technical, like change its climate models or economic simulations. "I couldn't say that," she told me. Instead, the agency should "be transparent about what the rule's going to be and why," she said. "Let's have a discussion."
And it's clear that some parts of the rule haven't worked as planned. As written, cafe allows automakers to trade pollution credits, so that companies that don't meet the standards (like Chrysler and GM) can buy away rights from carmakers that exceed them (like Toyota, Nissan, and Tesla). But there's a lot of secrecy around the credit-selling process, and automakers can only trade credits in one-to-one deals. "No one knows what it costs to buy a credit," says Sam Ori, the executive director of the Energy Policy Institute at the University of Chicago. "If you were trying to set up the most inefficient, least liquid, and most difficult-to-understand market available, this is it."
Automakers argue cafe has other drawbacks. It costs money to put all that fuel-saving technology on every car, they say, and all that gear makes new cars more expensive. Americans are driving progressively older vehicles: In 2016, the average car on the road was nearly 12 years old, a record high. The car industry says that if new cars were cheaper, more Americans would replace their vehicles with comparatively more efficient cars.
The industry likes to highlight a fluke in the way that fuel economy is described in the United States: When measured in miles per gallon, the biggest fuel savings are concentrated at the lower end of the scale. Consider four cars that all travel 100 miles. The first car gets 20 mpg, and it requires five gallons of gas to make the trip. The second car, at 25 mpg, needs only four gallons. The third car, at 35 mpg, burns 2.9 gallons. And the last car, a 40-mile-per-gallon-er, uses 2.5 gallons. In other words: An increase of five mpg produces progressively less gas saving. (European countries avoid this problem by largely describing fuel economy in liters per 100 kilometers.)
Car companies use this fact about mpg to imply that the current standards are good enough: The government would best bring down emissions, they say, by getting Americans to trade their old, inefficient vehicles for new ones.
Consumer-advocacy groups loathe these arguments, as they calculate that Americans save more money with the rules than without them. In a recent report, the Consumer Federation of America found that nearly half of "all-new 2017 models" cost less to buy and fuel than their 2011 counterparts did.
"The retail cost of cars doesn't go down; it always goes up," said Jack Gillis, an author of that report and a researcher for the federation. "But one of the most remarkable aspects of cafe is that the fuel savings that result from the standard more than pay for the annual increases to cost of the vehicle."
"The fuel savings also cover---and this is what's more important to me---the cost of new safety features, like automatic crash protection, automatic braking, and automatic lane changing," said Gillis, who has also written every edition of The Car Book since 1980.
Defenders of the rule also say that we've been here before. Since the mid-1950s, automakers have resisted government regulation about passenger safety, air pollution, and fuel economy. Yet every time, the rules have cost much less than feared, argues the Union of Concerned Scientists, an environmental group. In the ensuing years, air pollution has plunged, fuel economy has more than doubled, and the vehicle-fatality rate has been cut in half.
Whatever the automakers did, it worked. On April 3, Pruitt announced that he would direct the EPA to change the cafe standards. Next to him stood Bainwol, the leader of the Auto Alliance, and John Bozzella, the president of Global Automakers, the industry's other major lobbying group.
It had not been a good couple weeks for Pruitt. He faced questions over the more than $100,000 of taxpayer money he had spent on first-class flights and the lobbyist-owned condo that he had rented on Capitol Hill. That morning, The Atlantic reported that Pruitt had defied the White House to give raises totaling $84,000 to two senior staff members.
The EPA termed the April 3 announcement a "press conference," but the agency had invited precious few members of the press. It had tried to conceal the event from every news network except Fox News. (Fox notified other news outlets and made its video available to them as a pool feed.)
The car industry had found a new friend in government---and he was really embarrassing. In his remarks that morning, for instance, Bainwol gave a lengthy explanation of why the cafe standards were not being rolled back. They were only, he said, being "revisited" and "adjusted." Individual automakers picked up the same talking point: A spokesman for Fiat Chrysler referred me to the "adjustment" comment, and a Ford spokesman told me, "We have not asked for a rollback."
Yet that same day, Pruitt proudly tweeted that he had just announced the "rollback" of Obama-administration fuel standards. He decorated the tweet with a photo of a grimacing Bainwol and Bozzella.
A few weeks later, Bloomberg reported that the EPA was considering freezing the standards in 2020 at roughly 30 mpg. (The EPA declined to confirm Bloomberg's reporting, and a spokeswoman added, "We will not provide comment on rules undergoing interagency review.") It was as drastic a "rollback" as could be imagined: Automakers would have no legal reason to increase fuel economy starting next year.
And Americans would pay for the change, according to the Rhodium Group, an energy consulting firm. Even if oil prices stayed low, drivers would spend an extra $193 billion on gas through 2035. And cars would emit an additional 114 million metric tons of carbon dioxide into the atmosphere, the equivalent of opening 28 new coal plants.
But at least automakers had what they wanted. They spent months making sad puppy-dog eyes in Pruitt's direction. They had driven him around and cited junk science. And they had secured their victory: a total freeze of the standards.
But then they balked.
Initially, Pruitt had planned to announce the cafe rollback on April 3 at a Chevrolet dealer in Virginia. But other Chevy dealers hated that idea, and the administrator canceled the event. Soon other automakers had backed off the administrator. "We support increasing clean car standards through 2025 and are not asking for a rollback," wrote Bill Ford, the executive chairman of the eponymous automaker, in a Medium post. A Honda vice president told The New York Times: "We didn't ask for that."
In May, Bainwol---who had once said "EPA should withdraw" the cafe standards---told lawmakers that the government should continue to raise its fuel-efficiency standards every year. It was an implicit rebuke of the 2020 plan.
In a separate letter to the White House, automakers said that "climate change is real and we have a continuing role in reducing greenhouse gases and improving fuel efficiency." Four months earlier, auto lobbyists had suggested that climate scientists were all "tuning" their models; now, they echoed liberal lawn signs across the country.
"It's sort of a case where the dog actually caught the bus," Gillis told me. "Now what's it going to do?"
Something had spooked the car industry. Perhaps they feared a permanent affiliation with Trump and Pruitt, whose endless scandals and anti-climate policies run counter to their prudent, green-conscious image.
Or maybe they fretted about a lawsuit from California. Some auto executives have privately speculated that the administration proposed the freeze specifically to annoy the state. And if the White House denies California's ability to regulate fuel economy, then the state would sue, placing Trump and the car industry on the same side of an acrimonious public fight.
Ori, of the Energy Policy Institute, told me he didn't believe automakers' protests. The industry wants the cafe standards frozen, he said. They just fear the consequences of saying so.
"They're concerned about the public-image aspect of this," he said. "They're concerned that everyone's going to see they're self-interested, that their image as environmental stewards will be tarnished."
"Freezing cafe reduces their regulatory costs," Ori said. "The bottom line is just that industry wants the lowest costs possible. If you're telling me that for some reason, in this case, industry doesn't want the lowest costs possible, then you have to have a really good explanation---because that would run completely counter to the relationship we've seen between government and industry and climate policy throughout the entire history of this business."
The carmakers are stuck with Trump---and I'm not sure they realized it would go like this. At the beginning of the administration, it was possible for certain aspects of corporate America to squint and tell themselves that they were getting a normal Republican administration. They seemed to think that they could bring their stridently phrased concerns to the EPA and get the rule changed---but changed in such a way that the public would not take notice. But this administration is so motivated by anti-regulatory fervor, so automatically against whatever Obama did, that they instead found themselves fighting off a rule change larger than they ever anticipated.
And that could harm the automakers down the road---because they are not the only groups who hate cafe. Environmentalists defend the cafe rules now mostly because they're better than no rules at all. But climate groups also thought cafe's mechanisms---and its "footprint" auto-adjustment especially---represented a kind of compromise with the industry. If carmakers and the Trump administration fillet the rules, then future Democrats will have little reason to concede ground to them. Lawmakers could come up with a scheme that lowers carbon pollution more efficiently: by implementing an economy-wide carbon tax, or by compensating consumers if they bought smaller cars.
"It's really hard to go to bat for cafe," Ori told me. "It's an extremely expensive way to reduce emissions." Miles per gallon is also a "very inefficient way" to regulate greenhouse gases because it's several steps removed from the problem, he added. "It doesn't account for lifetime consumption. You can have one car that's driven 100,000 miles over its lifetime, and the other driven 200,000, but they're regulated the same under cafe."
Along with the economist Michael Greenstone and the former Obama official Cass Sunstein, Ori has proposed regulating cars by their lifetime emissions. The government already keeps sophisticated data on how long cars are driven before they're scrapped. He thinks it should use that data, guiding the carmakers to make the longest-lived cars be the most efficient. The government could also build a cap-and-trade market in the same scheme.
"When a new administration comes in in 2021 or 2025, they're going to be past the specific targets" of the 2007 bill that reauthorized cafe, he said. "There is a good reason to believe the table could be set to do something different on fuel economy."
Gillis, the consumer advocate, wondered if automakers thought all of this through when their crusade began. He noted that the Japanese and Korean automakers endorsed the deregulation effort, even though they make many cars that could meet the 2025 standards today. "A diabolical explanation" might best describe their logic, he said. "Why not join the domestics and ask for a rollback, while they continue to forge ahead with the fuel sippers?" he asked. "The domestics will sit back and say, Well, isn't this wonderful, we don't have to worry about fuel efficiency anymore." Meanwhile the Asian automakers will keep making smaller cars and prosper.
The easiest way for the auto industry to meet the standards would be to sell smaller cars. Automakers swear that consumers don't want passenger cars right now; they want crossovers and small SUVs. One expert who has worked closely with cafe data for years suggested to me that the market is not doing the pushing alone. He wondered if automakers were guiding consumers toward crossovers, which have looser standards under cafe and also much higher profit margins. Cafe might not have caused the crossover boom, he said, but it might help explain why automakers embraced them.
Every other expert I talked to disagreed with this finding. "This particular class of vehicle is not being jammed down consumers' throats," Gillis said. "Consumers really like an open storage area. They really like having three rows of seating."
He continued. "Years ago, there were lots of convertibles. There are not many convertibles right now. Why? It's not because there's anything wrong, necessarily, with convertibles; it's because they've slowly fallen out of fashion. Sedans are slowly falling out of fashion now and they are being replaced by these boxier vehicles."
Yet automakers and Wall Street really like crossovers, too. They cost about the same as a sedan to produce, yet carmakers can charge much more for them. And as cafe sits in the twilight zone, neither dead nor alive, carmakers are hugging them even tighter. Not long after Pruitt said that he would revisit the fuel-economy standards in April, Ford had a major announcement of its own. The company would stop making sedans altogether---the Mustang excepted---and focus on high-margin trucks, SUVs, and crossovers. But by 2020, it would release all of its SUVs as hybrids and debut a long-range electric car. It captured the strangeness of the moment. Oh, I will build fuel-efficient trucks, the automaker seemed to say. But not yet.