Will California Save The US Auto Industry From Itself?

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Originally published on EV Obsession.

The EPA has stated its intent to freeze Obama-era fuel efficiency standards at the 2020 levels. This could be a disaster for the industry the EPA is supposedly trying to help. Due to a waiver to enforce their own air standards, California may just be able to save the US auto industry from itself. To understand what that means, we need to look at some history first.

Why Were These Fuel Efficiency Standards Set?

The first piece to understand is why these fuel efficiency standards were set. The narrative that has emerged is that these standards were set to reduce carbon pollution. While that may be part of it, it wasn’t what was said at the time. The core reasons stated at the time were to reduce American dependency on foreign oil and to help stop something like the 2008 automotive industry crisis from happening.

If you don’t remember what happened in 2008, the very short version is that President George W. Bush gave out loans of $17.4 billion to keep GM and Chrysler from having to liquidate their operations through bankruptcy. President Obama later approved the loans, as well as their terms.

Why were GM and Chrysler in such big trouble that it took billions of dollars to bail them out? There were two main reasons – the first is that the housing bubble burst, which led to less home equity lines available for use in purchasing cars. The second was because gas prices had been steadily rising and doubled in a few years.

Gas Prices Double By 2008

Consumers who drove inefficient vehicles suddenly found themselves unable to pay for the fuel for those vehicles. Dealerships all of a sudden saw a huge number of SUVs and trucks traded in for vehicles with better gas mileage. US automakers simply weren’t building those cars, and sales cratered.

Seems Familiar?

A lot of the same warning signs are popping up now.  Based on a number of different factors worth an article in themselves sometime, the price of oil has become less predictable, and some in the industry are expecting a doubling of oil prices in as little as 12–18 months.

At the same time, the US auto industry is abandoning cars in favor of larger and larger SUVs because, according to them, that is what the public wants. But, according to at least Consumer Reports, auto buyers are willing to pay over $10,000 now for a car that will save them $1,000 in fuel cost per year. It can be expected that someone will make those cars. Perhaps that is part of the reason we are seeing waits to get all competitive electric vehicles right now.

It Gets More Familiar

The 2008 crisis wasn’t the first time that the US auto industry went through a huge downturn. In the early ’90s, US automakers ran into a similar convergence of issues, due largely to a dramatic drop in sales of less-fuel-efficient trucks and gas-guzzling vehicles as Americans increasingly worried about what might happen to fuel prices with regards to the Persian Gulf War.

A similar story played out in the late ’70s, when gas nearly doubled between 1979 and 1981. Here is a direct quote from an article written in August of 1984 entitled “U.S. Auto Industry: Strategies for Survival:”

“The Energy Policy and Conservation Act of 1975 required auto makers to double the fuel economy of their autos from a 1974 average of 14.2 miles per gallon to 27.5 mpg by 1985. At the same time, the ever-increasing concentration of autos on American highways and consequent rise in traffic fatalities gave impetus to safety regulations, notably the 1977 requirement that automatically closing seat belts or inflatable air bags be installed in all new cars. Auto industry resistance to these measures, coupled with Detroit’s failure to produce a small car of high quality, discouraged many consumers, who turned to foreign manufacturers.”

Spot the Trend?

I don’t think this can be understated. In all four cases, the American automobile industry believed consumers didn’t care about gas mileage. Twice it resulted in US automakers needing to be bailed out (Chrysler was also bailed out in December of 1979 by Congress to the tune of $1.2 billion dollars). All four times, there was a huge upheaval in the industry.

Which Brings Us To Today

The EPA argues that fuel efficiency standards should be frozen at their 2020 levels. Their argument is that new fuel efficiency standards would lead to vehicles costing $2,340 more, on average. This would lead to fewer new cars being purchased, and would leave older, less safe cars on the road.

Given what we know from Consumer Reports about fuel efficiency, however, $2,340 seems like a great deal.

There are hints this may already be happening. The auto industry is on track to plateau or sell fewer vehicles this year, while the top five electric car models seem to be sold out for months. According to a AAA survey, about 20% of Americans are interested in an electric car as their next car.

US automakers are particularly hesitant to develop serious electric cars. In the Tesla Q1 2017 conference call, Elon Musk stated that he expected to see the Bolt produced in the quantity of 20,000 to 30,000 units a year, or just enough to claim the CARB credits for the car. Actual production? 23,297 in the US for 2017.

Supposedly, they are ramping up production by 20% to meet demand. With places like Canada having waiting lists of more than a year to get a Bolt, either building electric cars is tough for legacy automakers or they still don’t believe they are worth investing in.

The Rest of The World Isn’t Sitting Still

At the same time, other manufacturers are starting to seriously step up their game for electric cars and hybrids. Almost all of the luxury brands are bringing out new electric cars in the next few years. VW has secured billions in battery production to bring the ID Crozz to market in 2020. China now has over 400 EV manufacturers, with many hoping to break into the US market.

Based on these trends, a spike in fuel costs could be disastrous once again. And this time, who knows if we’ll want to bail out the legacy automakers.

California May Save The Auto Industry From Themselves

The savior in all of this could be the state of California. Since the beginnings of the Clean Air Act, California could set its own standards if they were more stringent. This authority was granted because California had its own air standards before the EPA. Other states are allowed to follow California’s waiver. Today, 13 states and the District of Columbia have agreed to follow California’s rules.

Having two sets of rules was difficult, with most automakers deciding to work under the stricter rules because of how large the market size for the states that followed the rules were. Because of this, in 2009, the EPA agreed to work with California and automakers to create new fuel efficiency standards that would be the same country-wide. These are the standards that the EPA announced that they will be freezing.

To do this, the EPA needs to remove California’s waiver, a waiver which has already been granted. California has stated that they will fight this. Minimally, California will keep this in court for a long time, making automakers have to decide what to follow. Additionally, a new administration can simply decide to stop defending the case, reverting the rules to what was agreed on. That’s basically what happened in 2007 when the EPA tried to state that California could no longer have it’s waiver. The Obama administration moved in and granted the waiver before the court case was resolved.

That’s why the 2013 mileage deal was so important. Automakers wanted a national standard. The EPA got together with both California and the automakers and jointly developed that plan. Essentially, the 2013 deal is the California waiver.

There is much uncertainty around how that will play out in court, although the three previous times that this same item was legislated in court, the California rules won, including the landmark case Massachusetts v. EPA. That case is the landmark cases in which the EPA argued that they had no legal obligation to limit greenhouse gases as a pollutant, and the courts stated that, in fact, that was the point of the EPA. California will argue that they are not trying to set a fuel mileage standard, but simply trying to use their already settled authority to limit greenhouse gases. It is unlikely the EPA will be able to stop them.

Which leaves the US auto industry in the same spot today that it was when the EPA announced its goal to freeze fuel efficiency. Automakers will begrudgingly follow the California rules until the legal case is resolved or dropped.

Maybe when the next major price oil spike comes, US automakers will have products to sell.

And for that, they will have California to thank.

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Frugal Moogal

A businessman first, the Frugal Moogal looks at EVs from the perspective of a business. Having worked in multiple industries and in roles that managed significant money, he believes that the way to convince people that the EV revolution is here is by looking at the vehicles like a business would.

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