A Short Story of Fuel Efficiency Standards and America's Auto Industry

For years now, America’s auto industry has faced an uncertain regulatory future regarding fuel efficiency standards, which had been resolved in 2012 when the Obama administration imposed tough but achievable requirements through 2025. In doing so, desired regulatory certainty was achieved with the backing of all major automakers under a national program.

Background on the fuel efficiency standards debate

U.S. automakers always want to build vehicles to meet a single national fuel efficiency standard as otherwise they must manufacture cars to multiple specifications. For example, California’s requirements are based on the state’s longstanding EPA waiver, allowing the state to set stricter standards at its discretion. Aligning the federal government’s and California’s regulatory paths keeps things simple.

Although the Obama administration set a single national standard creating the uniformity and certainty the industry wanted, with the advent of the Trump administration and its anti-regulatory stance, the auto industry bifurcated. Half of the industry saw an opportunity to agitate for looser efficiency standards that they would prefer to live with.

Ford, Honda, BMW, Volkswagen and Volvo, however, opted to stick with more ambitious targets and struck a deal with California to track more closely with Obama-era rules in accordance with the state’s EPA waiver. Conversely, General Motors, Fiat-Chrysler and Toyota, among others, decided to push for a relaxation of efficiency standards, believing that the stricter Obama-era rules would force them to build vehicles the public didn’t want. The Trump administration, happy to lend a sympathetic ear, embraced the opportunity to jump into action.

Turning back the clock – and MPG requirements

Trump’s EPA did two things. Firstly, the agency relaxed fuel efficiency standards, altering the mandated 54.5 mpg requirement to 40 mpg for model year 2026 for cars and light-duty trucks. Secondly, the EPA sought structural change designed to defang California’s influence.

The Trump administration attempted this by filing a lawsuit seeking to end the EPA waiver California had enjoyed, backed by those automakers wanting looser regulation. Since California is the largest vehicle market in the nation, removing the state’s ability to self-regulate would have been the Trump administration’s ace up its sleeve to set a new, nationwide and less stringent set of fuel efficiency standards.

But after the November election, with the Trump administration defeated it was all unfinished business, resulting in the last four years for the car industry looking like this: Uncertainty once again over fuel efficiency requirements and an auto industry itself divided over a desired regulatory framework.

An election, and a shift

The story continues, though. A combination of a Biden win, technological advancements and an auto industry seeing emerging global regulatory realities means there is new potential for the industry to realign under a single more ambitious national regulatory standard once again.

And in this post-election moment, General Motors might prove to be at the fulcrum of the turnaround, albeit accidentally.

The company has been somewhat of an enigma during the recent past. Though aligning with the Trump administration’s efforts to relax fuel efficiency standards, GM concurrently forged ahead with plans for its own “all-electric future” along with a pledge to sell only emissions-free vehicles by 2035; an incongruent stance between what it was building and what it was lobbying for.

But Biden’s win in the general election likely nudged GM to reverse course on its regulatory ambitions. By mid-November, GM announced it was abandoning its participation in the legal fight over California’s waiver, and as the New York Times reported at the time, it seems GM’s CEO, Mary Barra’s decision to withdraw from the lawsuit was based on the imminently changing political landscape.

And then last week, with GM - one of the biggest players - already out of the lawsuit, the challenge to California’s waiver fell apart completely. The remaining automakers backing the end to the state’s waiver announced that they would no longer seek to block California from setting its own fuel efficiency standards. These developments since November could start to bring the auto industry back into alignment with one another, organized around renewed targets.

As various sources reported, the Biden administration is already working on crafting new fuel-efficiency standards with the EPA. The result could align national regulations with California's requirement of 51 mpg by 2026 - albeit with a national standard likely pushed back a year or two.

Automakers must confront an all-electric reality

Rulemaking will, of course, take some time. But it also opens up the possibility for ambitious zero-emissions goals in years to come. California’s governor, Gavin Newsom, already signed an executive order for emissions-free vehicle requirements by 2035, which environmental groups will likely push for nationally, too.

These targets also align with the emerging global context in which automakers find themselves. The United Kingdom has already said it will go all-electric by 2035, while the European Union is targeting 30 million electric vehicles (EVs) to drive on its roads by 2030. Since auto manufacturing is a global business, the momentum towards increased efficiency standards transcends America’s borders and will surely signpost what products companies will spend their research and development dollars on.

Finally, technologically, things have moved on since the push first began to relax standards at the advent of the Trump administration. Battery prices continue to fall. Bloomberg reports that in 2020 battery costs were 13 percent lower than the year before, falling to around $137 per kWh. Furthermore, the holy grail of $100 per kWh should be achieved by 2023, at which point EVs will reach price parity with internal combustion engine cars.

Putting this all together, the Biden administration now has the opportunity to unify the industry by sealing long term regulatory certainty the automakers desire, based upon higher standards of efficiency and more ambitious goals, in line with an industry which faces new global realities.

Image credit: Jack Gisel/Unsplash