Fuel Efficient Mandates – The EPA’s Auto Outsourcing Act

One reason auto makers are shifting production to Mexico is expensive U.S. fuel-efficiency mandates, which were supposed to be up for review next year. With its pedal to the metal, the EPA is now seeking to finalize the regulations before a Trump Administration can put on the brakes.

In 2012 the Obama Administration established fuel-economy standards requiring manufacturers to meet a fleetwide average of 54.5 miles per gallon by 2025, a more than 50% increase from today. Most auto makers won’t be able to meet this target without crashing into technological and economic barriers. Yet EPA is required to conduct a midterm review before finalizing the standards for years 2022 through 2025.

EPA and the National Highway Traffic Safety Administration took the first step in this review—which they deemed a “de novo” rule-making—in July by publishing a draft technical assessment report for public review. The agencies set a goal of making a preliminary determination next year and issuing a final rule by April 2018. Yet EPA has decided to jettison the formal rule-making process and this week proposed ratifying the standards that were set in 2012. The agency failed to consult the Office of Management and Budget as required—or account for reality.

Boosting mileage mandates could compromise safety and increase costs and pollutant emissions. EPA forecasts that fewer than 1% of gasoline-burning vehicles would hit the 2022 target, and none would meet the 2025 requirement even with meticulous design features that reduce weight and drag. The average 2025 vehicle would have to be as efficient as today’s Toyota Prius.

The standards in effect mandate that auto makers mass produce electric cars regardless of consumer demand. U.S. manufacturers that profit mainly from trucks will get hit hardest by the mandate: The more gas-guzzlers they sell, the more electric cars they have to produce. Trucks and SUVs have been flying off lots due to low gas prices, and last year light-duty trucks made up about 60% of domestic auto makers’ sales.

Electric cars are uneconomical to produce in the U.S., so auto makers have moved production to Mexico where labor costs are low. They’ve also raised prices on SUVs and trucks to make up for losses on electric cars. Fiat Chrysler CEO Sergio Marchionne has said the company loses $14,000 per Fiat 500e. According to Bloomberg News, GM will take an $8,000 hit on each of its new Chevy Bolts.

The alternative is to buy regulatory credits from the electric-car makers. Last quarter Tesla grossed $139 million from the sale of regulatory credits (which are also needed to comply with California’s electric car mandate) or about $6,000 per car delivered, which allowed the company to post a profit for only the second time. In effect the EPA is requiring truck drivers in Decatur to enrich Elon Musk.

EPA has provided a truncated 30-day window for public comment—Merry Christmas!—before finalizing the rule. The agency circumnavigated the Administrative Procedure Act that controls formal rule-making by deeming the regulation a proposed determination with a “technical support document.” By this sleight-of-diction the agency also claims it can evade the Congressional Review Act, which allows a simple majority in both chambers to overturn a rule within 60 legislative days.

A Trump Administration could withdraw the regulations and restart the rule-making process, but the EPA has gummed up the works and put auto makers in a tailspin. Good riddance, Administrator Gina McCarthy.

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