April 6, 2018

Stuck in a Regulatory Ditch

Environmental Protection Agency Administrator Scott Pruitt has determined that the EPA’s greenhouse gas emissions standards for cars and light trucks in model years 2022-2025 are overly ambitious and unrealistic. The announcement of this finding was met Tuesday with waffling from automakers, protests from environmental groups, and cheers from climate skeptics and the Wall Street Journal editorial page.

To say that we could do more to cut carbon emissions is an understatement, especially for transportation emissions. The transportation sector is now the largest single contributor to U.S. greenhouse gas pollution; it surpassed the power sector in 2016 and amounts to almost 30 percent of U.S. carbon dioxide emissions. But cutting emissions from transportation poses unique challenges, because cars and trucks are owned by individuals with diverse needs, who are constrained by existing infrastructure and limited fuel options.

Any economist will tell you that regulating the efficiency of cars and trucks is an inefficient way to go about putting a dent in transportation emissions. It’s all in the price signals that are being sent. Installing pollution control devices increases the production cost of cars, thus also their sticker price, but increasing their efficiency makes them cheaper to drive. So incentives work against the goal. Make cars more expensive at the outset, and you reduce fleet turnover into more efficient units. Make cars less expensive to drive, and people will drive more. The regulators’ only hope is that efficiency gains happen fast enough and cheaply enough that they outpace these mitigating effects. If automakers can’t pull it off, consumer costs pile up without accumulating enough benefits for consumers or the planet. And these are not necessarily cheap regulations, costing hundreds or thousands of dollars per vehicle for many makers and car models (EPA estimates, see table C.8 on page A-126).

Administrator Pruitt is law-bound to enforce greenhouse gas emissions standards for cars. EPA made the endangerment finding, determining that greenhouse gas emissions create a threat for human health and welfare, for car emissions in 2009. Emissions standards have now been on the books since 2012. Eliminating them, just like reversing the endangerment finding, would involve overturning a prior factual determination by EPA, which would require extraordinary evidence and a determined legal defense. Even making moderate adjustments downward may prove difficult. EPA will now have to justify why, 15 months after the Obama EPA said everything was copacetic for the 2022-2025 standards, it has reached the opposite factual conclusion.  

EPA’s finding renouncing the Obama standards says new information has changed the math for how much we can expect the regulations to save consumers and benefit the climate. While it is disappointingly vague, we can get a sense of where EPA will go in setting replacement standards. Gas prices have fallen and are projected to stay low, eroding the payback from more expensive cars that use less fuel. Electric vehicles are stalling out, hamstringing a key compliance mechanism. And emissions reductions are much less valuable (to this administration), meaning that any greenhouse gas regulation will be less beneficial.

It’s worth a brief digression to clarify what car standards EPA has authority over, because greenhouse gas standards, measured in grams emitted per mile driven, are only half the regulatory beast. Fuel efficiency standards, measured in miles per gallon, are required under the Energy Independence and Security Act and administered by the National Highway Traffic Safety Administration as the CAFE standards. For a car that burns gasoline, these two efficiency measures are pretty much the same. If an automaker installs new technology on a car to increase the number of miles it can travel on a gallon of gasoline, then it will burn less gas for every mile traveled and, therefore, emit less carbon dioxide. But the compliance systems, in reality, are not the same. That introduces room for additional costs without additional benefits.

There is some evidence that the EPA greenhouse gas standards are slightly more expensive to achieve. The credits carmakers trade to meet them go for more money than the credits for CAFE standards, indicating that the CAFE standards are less restrictive. EPA could plausibly loosen the restrictions on greenhouse gas standards to bring them more in line with the CAFE standard, either by adding crediting mechanisms or easing the greenhouse gas standards (and maybe also the CAFE standards). Given the complexity of such command-and-control regulations, there is plenty of room for EPA to make adjustments to the greenhouse gas standards.

The problem Mr. Pruitt faces is California. The state has the ability to set its own greenhouse gas standards—not fuel efficiency standards—for vehicles under section 209 of the Clean Air Act and an EPA-granted waiver. That waiver creates a lot of problems if the goal is to cut regulatory costs. If Pruitt reduces the federal standards, but leaves the waiver in place, then California could decouple its compliance mechanisms from EPA’s entirely, and the 12 states that have adopted the Golden State’s standards would presumably follow. That would leave automakers to comply with no less than three efficiency standards (CAFE, EPA greenhouse gas standards, and California greenhouse gas standards).

If Pruitt goes after the waiver, California will sue him (I’m in no position to handicap that battle) and in any case, the next Democratic administration would seek to reinstate it. Regulatory certainty will be a joke and the whole affair will be a mess.

Car efficiency standards leave everyone in a tough spot. Pruitt can only unwind them so far in the face of court challenges and the California waiver. The automakers have future administrations and the California market to consider. And climate advocates now find themselves defending kludgey and indirect regulations that are among the least efficient means of reducing greenhouse gas emissions.

I would be far happier defending policies to reduce fuel use (for example by easing zoning restrictions), a low carbon fuel standard (there, at least, prices impact the fuels and not the cars), or a carbon tax (which demonstrably reduces transportation emissions).