NATSO Analysis: Trump Administration Seeks To Roll Back CAFE Standards

The Environmental Protection Agency on August 2 released its long-awaited proposal to freeze fuel efficiency standards for cars and light-duty trucks.  The controversial proposal undercuts one of President Obama’s most significant environmental achievements and presents a serious challenge to the right of states to set stricter mileage standards than the federal government.  If finalized as proposed, the Trump Administration’s approach would lessen the gasoline demand destruction that the original mileage standards presented.  The proposal is also likely to slow-down congressional efforts to reform the Renewable Fuel Standard because many stakeholders’ motivation for participating in such talks was to mitigate stringent vehicle mileage standards’ impact on their businesses.

The new proposed Corporate Average Fuel Economy (“CAFE") standards faced predictable opposition from not only the environmental community but also individual states and (counter-intuitively) auto-industry representatives who, while opposing the Obama-era standards, fear that the Trump proposal goes too far and that the inevitable litigation between states and the Trump Administration will lead to years of uncertainty.

The proposal would freeze CAFE standards for cars and light trucks at 2020 levels, beginning with 2021 models.  The Trump Administration says the changes “would save over 500 billion dollars in societal costs and reduce highway fatalities by 12,700 lives,” citing the enhanced safety features associated with larger, less efficient vehicles and the diminished financial incentive consumers will have to hold on to older, less safe vehicles as opposed to purchasing newer, more efficient and expensive cars.   

The Administration added that its proposal would have only minimal effects on climate change and air pollution.  “U.S. fuel consumption would increase by about half a million barrels per day . . . and would impact the global climate by 3/100^th of one degree Celsius by 2100 . . . when compared to the standards set forth in 2012,” says the proposed rule.

Under the frozen standards, the combined car and light truck requirements would rise to 37 miles per gallon, producing an average of 241 grams of carbon dioxide per mile.

The Trump proposal would also revoke a legal waiver that was granted to California under the 1970 Clean Air Act (and now followed by 13 other states) that lets those states set pollution standards that are more stringent than the federal government’s.  California and the other states have said they are confident that they will prevail in court and that the Trump Administration cannot revoke the legal waiver without an act of Congress. 
In the near-term, the proposal is very likely to stifle progress surrounding legislative efforts to reform the Renewable Fuel Standard.  Such discussions have involved, among other things, consideration of a higher minimum “octane” standard for gasoline. Many domestic automakers have said this would be necessary for them to satisfy the Obama-era CAFE standards without massive investments in electric vehicles.  This prospect was seen as potentially appealing not only to automakers but also to any sector that relies upon liquid fuels being the primary source of energy for motor vehicles (including the biofuels industry). 

Some automakers have said they will need to make investment decisions regarding future model year vehicles (in terms of electric vs. internal combustion engine vs. hybrid) within the next six months to be assured of satisfying the Obama-era CAFE standards.  The proposal released on August 2 will stifle progress on these RFS reform talks because it mitigates the urgency of compliance with the Obama-era rules, meaning stakeholders will be less inclined to compromise on their key priorities in order to further the reform talks.  (Although the rule isn’t finalized, the proposal represents a strong indication that the Obama-era standards will be scaled back, and stakeholders will respond to this signal.)

According to OPIS, most supply and demand analysis still suggest that U.S. gasoline demand will be relatively flat in the next three years.  Drops in demand might be tied to demographic changes (e.g., young people driving less and moving to urban centers; economic conditions (less driving occurs when the economy is stagnant or low in growth); and prices.  The 2016-2018 period has seen annual gasoline demand close to 9.3 million barrels per day thanks to relatively cheap crude prices and low-to-moderate retail prices.  Analysts had been expecting that the freeze might occur with the 2021 model year, but a freeze of 2020 standards is still likely to create a downward trend in U.S. gasoline demand in the second part of the next decade, most experts agree.

The Agency will accept comments for two months and issue a final rule some time after that date, likely in late 2018 or early 2019.  NATSO will be filing comments.