Buried in the national news about the debt ceiling fiasco during the last week of July was an announcement that the Obama Administration had reached an agreement with the State of California and a number of automakers on consensus fuel economy standards for U.S. cars and light trucks. These new standards will cover cars and light trucks for Model Years 2017-2025, requiring performance equivalent to 54.5 mpg in 2025. As Professor Brandon Hofmeister writes in this two-part guest post series, the fuel economy deal is a major policy development with implications for reducing greenhouse gas emissions, the future of the automotive industry, and executive agency practice for implementing federal statutes. Today’s post will provide some background on the issue, explain why the future of climate policy is in sector specific regulation, and address some of the questions surrounding the effectiveness of automobile fuel economy standards. The next post will cover the auto politics behind the deal, the administrative process issues that are being raised in Congress, and the implications for auto sector jobs.
Professor Brandon Hofmeister teaches Energy Law, Civil Procedure and The Regulatory State at Wayne State University Law School. He most recently served as special counsel for energy and climate policy in the office of Michigan Governor Jennifer Granholm. In that capacity, he was the governor’s primary adviser on energy and climate issues, and a member of her nine-person executive team. He was a key member of the team that formulated and executed Gov. Granholm's successful strategy to attract the electric vehicle and advanced battery industry to Michigan. He also served as a Chevening fellow (University of Edinburgh), working alongside energy policy decision-makers from countries around the world. Earlier, he was deputy legal counsel to Governor Granholm, and a law clerk to U.S. District Judge John Corbett O’Meara. He earned a J.D. from Harvard Law School and an A.B. from Harvard College. Professor Hofmeister’s most recent publication was "Bridging the Gap: Using Social Psychology to Design Market Interventions to Overcome the Energy Efficiency Gap in Residential Energy Markets," 19 Southeastern Environmental Law Journal 1 (2010) (available online through SSRN).
The Future of Climate Policy – Sector Specific Regulation
When the Clinton White House couldn’t get a universal coverage health care bill passed early in their first term, they decided to instead chip away at covering the uninsured in an incremental fashion. So, for example, they targeted poor children - a relatively easy first step - and passed a major federal block grant program to provide health care for poor children.
Given the current political atmosphere, there seems to be almost no hope for a comprehensive economy-wide climate regulatory policy in the short-term, and little hope even in the medium- or long-term. Accordingly, the way to move the ball down the field on climate policy is likely going to be an incremental approach that targets specific sectors. While a national greenhouse gas regulatory scheme would potentially be more efficient and more effective overall, we don’t necessarily need a national cap-and-trade program to make progress on mitigating climate risk. We’re living in a world of second (or third or fourth) best solutions to the climate change problem.
The fuel economy standards are a case in point. They didn’t require legislation – so they are relatively low-hanging fruit for the administration’s climate goals. These standards will likely have a bigger impact on greenhouse gas emissions from automobiles in the next decade than any slight increase in fuel prices resulting from a gradual cap-and-trade program might have. According to the White House talking points, “[t]he standards will reduce carbon dioxide pollution by over 6 billion metric tons – equivalent to the emissions from the United States last year, or what the Amazon rainforest absorbs in three years.” This is a big step forward in climate mitigation.
The Effectiveness of Automobile Fuel Economy Standards
The new U.S. standards are not quite as aggressive as the 2009 standards adopted by the European Union. Regulation 443/2009/EC established fleet-wide carbon dioxide emission limits of 130 g/km (or 209 g/mile) by 2015 and 95 g/km (153 g/mile) by 2020. These are more aggressive than the U.S. targets of 250 g/mile by Model Year 2016 (summer of 2015) and 167 g/mile by 2025, but I still think they will make for a massive transformation in the U.S. passenger vehicle fleet and a significant reduction in greenhouse gas emissions.
That is, of course, if the proponents of the so-called “rebound effect” are wrong about its application to automobiles. What’s the rebound effect, you say? Well, I’m not exactly sure how the Obama Administration calculated its greenhouse gas savings estimates, but I imagine they include an assumption that vehicle miles travelled will not increase significantly over the next 15 years. Proponents of the rebound effect suggest that this assumption is faulty – that if we make it cheaper to drive our cars, we will simply drive more and thereby offset any savings in emissions reduced. The hypothesis has some intuitive appeal, but it has been incredibly difficult to test its validity. My own take is that there’s probably some degree of rebound effect that results from efficiency standards, but the key is what the degree of the effect is. I don’t think there’s a linear relationship such that every ounce of fuel saved will simply be replaced by increased consumption. My guess is that the more important limitation on vehicle miles travelled is the speed limit – people simply don’t want to be stuck in a car for hours on end even if they can drive twice as far on the same amount of fuel. Maybe the increase in fuel economy standards over the next decade will give some smart economics graduate students a data set to test the applicability of the effect. There are a lot of variables involved, but some good research here would be quite useful to all of us who believe energy efficiency is a critical component to sound energy and climate policy.
Some have also criticized the new standards because “extra credits” for hybrids and electric vehicles will likely chip away at the overall mpg figures – possibly getting down to as low as 40 mpg on average. I’m less concerned with this because I’m a strong supporter of giving auto companies incentives to build electric vehicles. If we are going to meet the massive reductions in greenhouse gasses that many scientists are recommending (80% reduction by 2050), I don’t see any way to get there without almost completely de-carbonizing passenger transportation. There are likely to be continued emissions from land use changes, agriculture, heavy industry, etc. So we need to simultaneously reduce emissions in both the transportation and electricity-generating sectors. I think the most feasible way (note – I’m not saying it’s easy or inexpensive) to decarbonize transportation is to electrify the passenger vehicle and gradually decarbonize the electricity sector. So to help reach this long-run objective, I’m OK with giving auto companies incentives to electrify more of their vehicles, even if it comes at the cost of shorter term fuel economy. Hopefully increasing EV scale can drive down the price of batteries that are the biggest long-term barrier to vehicle electrification.
In the next post, Professor Hofmeister continues his analysis of the fuel economy deal, looking at auto politics, administrative process, and auto jobs implications.