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Who Killed Fuel Economy Standards?

Obama-era standards are dead. Who pulled the trigger?

Oil

Source: Rigzone.com

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?

Figure-1

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.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Sallee, James. “Who Killed Fuel Economy Standards?” Energy Institute Blog, UC Berkeley, July 13, 2020, https://wordpress.com/post/energyathaas.wordpress.com/10863

James Sallee View All

James M. Sallee is an Associate Professor in the Department of Agricultural and Resource Economics at UC Berkeley, a Research Associate of the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. He is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles.

7 thoughts on “Who Killed Fuel Economy Standards? Leave a comment

  1. Something that both presidents have in common both Obama and Trump do either one of them have an engineering degree in automotive design I don’t think so , but one thing about Donald Trump he is letting the manufacturers build the cars the way they can build them the most efficiently on their own without being told what to do that’s the difference I think Trump is doing it the right way.

    • The carmakers who sided with Trump did it out of fear of retaliation and not following their better judgement on how to design more efficient cars. In addition, and following your logic we will need an economist to be President for him to establish a sound economic policy. Another one to be a doctor to establish a safe public health policy and so on… the way administrations work is by having specialized departments for each one of the topics the President has to rule and he finally applies his/her better judgement. Now, would you trust the rule of a President who tells you to drink bleach to treat a viral disease?

  2. You can download Bento’s Congressional testimony, including the “Flawed Analysis” paper that appeared in Science, here: https://www.congress.gov/116/meeting/house/110157/witnesses/HHRG-116-GO28-Wstate-BentoA-20191029.pdf
    Bento claims that the flawed (Trumpian) analysis of CAFE standards includes “misguided parameter choices,” notably using the domestic instead of the global social cost of carbon, that this is a “substantial departure from a comprehensive protocol for benefit cost analysis,” and that “To the best of my knowledge, there is [sic] no scientific reasons in favor of altering the broadly accepted notion that the calculation of the benefits from reducing carbon emissions should be global…”. This is odd because there is a well-known controversy regarding said choice of the domestic vs. global cost of carbon, beginning with Gayer and Viscusi’s critique of the Obama administration’s use of the global SCC, precisely on the grounds that it violated OMB protocols on benefit-cost procedures. (Gayer and Viscusi later published their critique [REEP 2016], and it has been widely discussed [e.g. by, according to Max’s blog, “Whose Damages Should Count,” the “very smart Matt Kotchen”]).

  3. While I agree with Prof. Sallee’s larger point, that there are plenty of fingerprints on this to share the blame, I think it’s pretty clear from watching the tRump misadministration in action that the major, original driving force (no pun intended) for this is the inherent animus tRump has for anything ‘Obama’. The GM and Toyota position provided convenient ‘cover’ and the oil/gas industry no doubt provided plenty of fuel for the fire but I doubt that either had much role in persuading the misadministration to take this on.

    Seems to me the larger question is what role CAFE standards are likely to play in the future – in some sense they have become anachronistic – or at least the debate about what they should be may be less relevant. With the increasing practicality of EV’s, some policy makers and regulatory agencies are beginning to look beyond fuel standards with mandates toward ZEV.

  4. Agree that the economic analysis surrounding the SAFER was quite weak. There were also problems, of course, in the Obama rule analysis — for example,it assumed that vehicle sales had no sensitivity to vehicle prices and ignored substitution between new and existing vehicles. While the Obama analysis was better overall, both analyses were conducted with a particular regulatory outcome in mind.

    Turning to the standards themselves, while the SAFER rule is definitely too weak, the Obama rule may be too strong given the inherent inefficiencies in fuel economy standards as a tool reduce emissions from fuel use (which you allude to in the post) as well changing conditions in fuel and vehicle markets.

    A national version of the deal that California did with Ford/Honda/VW/and BMW in 2019 would likely be better than either of the options compared. In an August 2019 analysis, Rhodium found that a national deal based on the California deal would cut cumulative GHG emissions over 2021-2035 by roughly 85 percent of the cut achieved by the Obama rule. Still not the cheapest GHG reductions out there as long as coal-fired generation is still around to be displaced, but it could be quite effective in paving the way emissions reduction in transportation that will definitely be needed to reach economy-wide net zero or near-net-zero GHGs by 2050.

  5. OK, James….. where do you stash your kids during video calls????
    [the rest of your text is spot on…]

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