Who Killed Fuel Economy Standards?

On March 30, when many of us were panic shopping for toilet paper and learning where best to stash our children during Zoom calls, federal agencies announced a final rule to roll back fuel economy standards for new cars.

This final rule was the last nail in the coffin for one of the Obama administration’s signature environmental policies, which mandated a doubling of vehicle fuel economy between 2012 and 2026. Much of the gain came via 5.5% annual increases between 2022 and 2026. The Trump administration’s alternative plan calls for 1.5% annual gains instead. This rollback, according to the rule itself, will lead to an increase in carbon dioxide emission of around 900 million tons. That pencils out to $45 billion in additional environmental damages using conventional estimates of the social cost of carbon, to which we add an estimated $10 billion in damages from local air pollution.

Trump’s rollback began back in August 2018, went through some twists and turns, and took a detour to attack the California waiver. Rather than recount all that here, I want to think a bit about divvying up responsibility among some parties. Who killed the standards? Was it government bureaucrats driven by science? Was it the automakers? Or Trump and Scott Pruitt, who was still leading the EPA from his secret phone booth when the original plan was hatched? Maybe the Koch brothers? Who had a motive? Who had the means?

Source: Rhodium Group. Chart shows projected differences in fuel economy under alternative standards.

Did objective analysis kill the standards?

Fuel economy standards are effective, but economists (including yours truly) have a list of grievances with them because of inefficiencies and unintended consequences. So it’s conceivable (to me at least) that a good faith review of the numbers could have led objective analysts to conclude that the Obama standards were too tight.

But good faith science appears not to have been the deciding factor. The cost-benefit analysis that underpinned the first draft of the Trump plan proved to be riddled with errors. After fixing the most egregious mistakes, all of Trump’s horses and all of Trump’s men worked in secret for 18 months to put the rule back together again.

They were able to reconstruct a plan that manages to show a net benefit of the rollback, but only if you squint. To get there, the final rule calls for 1.5% annual increases (the first draft called for a total freeze of fuel economy standards). It uses what might be called (ahem) selective choices of key input parameters. And analysts were reportedly updating methods to add nebulous benefits to “consumer choice” through the final weekend. Even then, to quote the rule itself, the net benefits of the change from the Obama standard “straddle zero.”

The rollback is estimated to provide a $6 billion net benefit when using a 7% discount rate, but the same numbers imply a $22 billion net loss using a 3% discount rate. Suffice to say, the evidence in favor of the rollback is not overwhelming. If the numbers didn’t drive the change, what did?

Did automakers have a compelling motive?

Of the usual suspects, perhaps the most obvious are the automakers. In the standard telling, the Detroit Three (demoted from the “Big” Three based on actual size) want to sell giant gas-guzzling urban assault vehicles, and thus lean hard against standards. And indeed, shortly after Trump’s election, industry representatives went to the White House waiving the flag of low gas prices and regulatory burdens, asking for a loosening of the Obama-era rule.

But there is exculpatory evidence here. While it’s clear that at least some automakers stood to gain from a modest weakening of the Obama-era policy, this dramatic rollback is not broadly in industry’s interest.

Automakers hate big swings in policy because they have to make long-run investments in research and vehicle design. The rollback magnifies uncertainty because it set up a massive legal fight—23 states, led by California, have sued to preserve the higher standard in their jurisdictions, potentially creating a two-tiered system loathed by industry. Moreover, the next Democratic administration is all but guaranteed to revisit the standards, whereas the industry’s original request to keep headline increases, but juice all the loopholes, might have flown under the radar.

Instead, the rollback has caused an industry schism as California and D.C. pull in opposite directions. Like children caught in an acrimonious divorce, 17 automakers signed a letter last June urging California and Washington to go to counseling, hoping they’d get back together. That failed, so ultimately Ford, Honda, VW and BMW have publicly sided with California, while GM and Toyota toe the Trump administration line.

All this division and strife makes it clear that the dramatic policy we now have was not crafted by automakers. Instead they look to be the proverbial dog that caught the car.

Maybe it was personal

And that brings us to the role of administration officials and the President himself. Trump has a clear desire to be seen undoing some actions of his predecessor, and he has fashioned himself a champion of deregulation, a Reagan second-coming. Undoing one of Obama’s signature environmental achievements might thus be an end in itself for Trump and officials like Pruitt. A light tweak of the standards might serve the automakers goals, but a total undoing of the Obama policy better serves the symbolic goals of officials aiming to establish anti-regulation bona fides.

Who really has the most to lose?

But I think it is too easy to explain every Trump administration action as driven by the President’s insecurities, animus and mood swings. If no one really wanted a dramatic rollback, it’s hard to imagine things ending where they did. But there is a powerful interest group that has a clearer motive than the automakers—the oil industry.

For the folks selling liquid dinosaurs, there isn’t much nuance here. The less efficient are vehicles, the better. About 40% of all petroleum used in the US goes into passenger cars, and US drivers account for about 8% of global demand for all petroleum products. Doubling US fuel efficiency is thus a direct hit to the bottom line of oil producers. It’s an even bigger deal for North American refiners and distributors, who operate in a market with less global trade and thus stand to gain more from U.S. demand. And the move towards electrification, which is spurred by tighter standards, is an existential threat.

In contrast, the burden on automakers is more subtle and likely much smaller. Suppose a standard forces automakers to install a technology that saves a (perceived) $1000 in fuel costs, but adds $1200 to the sticker price. A consumer will perceive this as a $200 increase in price, which hurts automaker profits by depressing demand. But for the oil supply chain, revenue falls by the full $1000. There aren’t opposing forces here, just a drop in demand.

The bigger concern for automakers is the need for increased R&D and vehicle design costs. But a US rollback might not save them that much because they have to sell into global markets that are running well ahead of the US in terms of efficiency and plans for electrification. As such, the oil industry has more to lose here than the automakers.

And indeed Big Oil’s fingerprints have been found at the scene. Investigative reporting has shown how oil industry talking points found their way into legislation and how thousands of people who filed public comments on the rollback nabbed pieces of text from an industry Facebook ad campaign.

The verdict

I wish I could end with a scene in which I cleverly talk the relevant parties into revealing their actions on the stand. But I can’t do that, and there isn’t any reason to think there is a single cause—indeed, it might be best to conclude, Murder on the Orient Express style (spoiler alert!), that everyone did it. But I do think that economic logic and the available record suggests a bigger role for the oil and gas industry than is discussed in most coverage.

If you were a fan of the Obama-era policy, there is good reason to hope for a resurrection. It may prove hard to stand behind the cost-benefit analysis backing the final rule, and a Biden administration would likely reverse course immediately. But in the meantime, a vintage or two of vehicles will roll off of assembly lines a little thirstier than they would otherwise have been, which will help keep a few marginal wells pumping in the Permian, while automakers planning for the future have to guess at legal and electoral outcomes.

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