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Did Trump Kill the Electric Truck? New CAFE Rules Reshape Fight Over Price and Environment

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In April, 2020, the EPA and NHTSA finalized updated rules regarding Corporate Average Fuel Economy (CAFE) and greenhouse gas emissions making large changes to the standards based during the Obama administration. With much of the country engulfed in the COVID-19 pandemic, the news of the passage went largely leading some analysts to speculate this was done on purpose. However, after reading through the majority of the 1,975 pages of the Safer Affordable Fuel-Efficient (SAFE) Vehicles document, the answer to did Trump kill the electric car is more controversial than ever. Here’s why.

Before we dive into the SAFE Vehicles standard, it is important to understand the history behind CAFE. It was first enacted by the United States Congress in 1975 in response to the 1973–74 Arab Oil Embargo which saw many Americans desperate for a drop of gas. The aim was to improve vehicle’s fuel economy for the U.S. to then be less dependent on foreign oil.

Through the subsequent decades every U.S. President has had their say in the rules through the appointment of the top EPA and NHTSA officials. This has largely led to the President’s name being associated with the latest updated ruling like in this case with President Trump’s SAFE Vehicles standard. While the standard is really a joint collaboration between the EPA and NHTSA as mandated by Congress, the fact is the standard is largely the result of the politician’s political leanings.

Now President Trump didn’t go cavalier in calling for a review of the CAFE standards. In fact, on March 15, 2017, he reinstated the original mid-term review timeline as set by the CAFE standards laws. This created some controversy since he also stated, “[i]f the standards threatened auto jobs, then commonsense changes’’ would be made in order to protect the economic viability of the U.S. automotive industry,” during a speech made in Detroit, Michigan according to a Whitehouse.Gov briefing statement.

The result of this caused the EPA would re-examine the CAFE rules for model year 2022-2025 light-duty vehicles as well as work with NHTSA.

In August of 2017, the EPA opened up a public commenting period on a proposed rule which was then finalized after public comments were included and items were changed.

The resulting rule lead to a wide variety of news headlines declaring Trump is rolling back the Obama standards. While the Obama-era standard pushing automakers to achieve 55 MPG by 2025 across their fleets has indeed dropped to 40 MPG by 2026 (33.2 mpg in the real world since lab testing is 20% higher). This significant drop came about after the EPA expanded into analysis and future projections to include more lifestyle concerns including items like time spent fueling, congestion, etc… as well as incorporating new automotive market realities that dramatically differ versus 2012 standards.

Why Make Changes?

Without a doubt, the Obama CAFE standards were some of the most far reaching CAFE standards in recent times and resulted in a fundamentally different automotive market. Prior to the rules, the automotive market was filled with large, heavy SUVs with V8 engine emitting massive amounts of CO2 into the atmosphere.

Setting new CAFE standards seemed vital to not only getting the air quality cleaned up, but also to provide a further break from the OPEC controlled oil supply the U.S. was still utilizing during and even post the Iraq Wars.

The subsequent 2012 rules, like the SAFE vehicles rules, placed future projections on the automotive market in order to set future vehicle projections. However, it was a different time back in 2012.

Fewer than half as many fleets earned surplus credits for over-compliance in MY 2017 compared to MY 2011—and this trend is persistent. The story varies from one manufacturer to another, but it seems sufficient to state the obvious—when the agencies conducted the analysis to establish standards through MY 2025 back in 2012, most (if not all) manufacturers had healthy credit positions. That is no longer the case, and each successive increase requires many fleets to not only achieve the new level from the resulting increase, but to resolve deficits from the prior year as well. The large sums of credits, which last five years under both programs, have allowed most manufacturers to resolve shortfalls. But the light truck fleet, in particular, has a dwindling supply of credits available for purchase or trade. The CO2 program has a provision that allows credits earned during the early years of over-compliance to be applied through MY 2021. This has reduced the compliance burden in the last several years, as intended, but will not mitigate the compliance challenges some OEMs would face if the baseline standards remained in place and energy prices persisted at current levels.”

With the 2012 rules making it more and more difficult for automakers to achieve, there were other shortcomings that started to become apparent.

Obama-Era Rules Shortcomings

While the Obama CAFE targets did their job in motivating the automotive industry to dramatically improve fuel economy or pay a fine, some of the projections and shortcomings have become apparent.

First, through Congress’s suggestion, the Obama rules established a new way to calculate fuel economy targets through the idea of a vehicle’s footprint (wheelbase by square feet). Essentially, the larger the vehicle, the less fuel efficient it would need to be. This was based on the assumption consumers would always opt to purchase the more fuel-efficient vehicle when presented a choice and this assumption was made through the lens of high gas prices at the time and post the GM and Chrysler bankruptcy largely attributable to not building small fuel-efficient cars. To be clear, the vehicle’s footprint model wasn’t an issue and it is still be used in the current SAFE vehicles rule. Instead, it was the assumption on consumers opting for the most fuel efficient vehicle that proved faulty. We will get to that.

Second, the cost of the new technology being passed along to the consumer wasn’t part fo the equation. The rules, at the time, assumed automakers would develop new technology and simply pass that new technology down to the public which would gladly pay for the increased price in order to save fuel at the pump. This assumption just hasn’t happened with automakers all stating to the EPA during recent hearings consumers aren’t willing to pay for the increased technology. This can also be seen in the stagnant sales of electric vehicles in the past decade much to the chagrin for EV advocates and scientists.

“In their NPRM comments, manufacturers expressed concern that CAFE standards had already increased to the point where the price increases necessary to recoup manufacturers’ increased costs for providing further increases in fuel economy outweigh the value of fuel savings. The agencies do not agree that this point has already been reached by previous stringency increases, but acknowledge the reality of diminishing marginal returns to improvements in fuel economy.” 

Third, the mathematical equations used by the Obama standards didn’t factor in consumer demand for other vehicle attributes like performance.

“However, the agencies also believe it is important to be transparent about analytical limitations. For example, EPA’s Science Advisory Board stressed that the agencies account for “evolving consumer preferences for performance and other vehicle attributes,” yet due to limitations on the agencies’ current ability to model buyers’ choices among combinations of various attributes and their costs, the primary analysis does not account for the consumer benefits of other vehicle features that may be sacrificed for costly technologies that improve fuel economy. The agencies’ analysis assumes that under these final standards, attributes of new cars and light trucks other than fuel economy would remain identical to those under the baseline standards, so that changes in sales prices and fuel economy would be the only sources of benefits or costs to new car and light truck buyers. In other words, the agencies’ primary analysis does not consider that producers will likely respond to buyers’ demands by reallocating some their savings in production costs due to lower technology costs to add or improve other attributes that consumers value more highly than the increases in fuel economy the augural standards would have required. The agencies have long debated whether and how best to model the consumer benefits of other vehicle attributes, and note that they have made considerable progress.10 However, despite these potential analytical shortcomings, the agencies reaffirm that today’s analysis represents the most complete and rigorous examination of CAFE and CO2 emission standards to date, and provide decision-makers a powerful analytical tool—especially since the limitations are known, do not bias the central analysis’ results, and are afforded due consideration.”

New Trump CAFE Rules Mark Massive Changes

With the knowledge gained from the Obama era rules, the Trump rules aim to address these shortcomings as well as make future predictions on fuel economy.

Before, we get to the new rules, we should discuss what they assume is going on and will continue.

First, the new rules take into account that automakers have made a myriad of different improvements to their vehicles through new “basic engine” technologies. These technologies are Variable Valve Timing (VVT), Variable Valve Lift (VVL), Stoichiometric Gasoline Direct Injection (SGDI) and basic Cylinder Deactivation (DEAC) – note there is a more advanced Cylinder Deactivation discussed in the document.

Through the use of these basic engine technologies as well as reductions to friction, engines are more efficient than they were a decade ago.

Second, the analysis sees: “Manufacturers have accomplished a portfolio-wide improvement by improving the combustion efficiency of engines (through direct injection and turbocharging), migrating from four and five speed transmissions to 8 and 10 speed transmissions, and electrifying to varying degrees. All of this has increased both production costs and fuel efficiency during a period of economic expansion and low energy prices.”

These powertrain improvements means in the future the average full-size truck fuel economy now will likely keep growing like the chart above and the middle of the pack will become the worst fuel efficient truck in the future. (The circles represent single models above and below the “whiskers” aka top and bottom lines of the chart).

Third, the analysis sees the EV sales assumptions made by the Obama era standards just didn’t pan out. This is due to consumers simply not utilizing them as much as expected and other hurdles the analysis found:

Therefore, at present EVs hold potential in offering significant time savings but only to owners with driving patterns optimally suited for EV characteristics. If fast-charging technologies emerge and a widespread network of fast-charging stations is established, it is expected that a larger segment of EV vehicle owners will fully realize the potential refueling time savings benefits that EVs offer. This is an area of significant uncertainty.”

With slow EV sales, plug-in hybrids and hybrid sales, the new rules aim to take into account what Americans are really buying, full-size trucks, large SUVs and crossovers.

What the New Rules Actually Do

The new rules do make significant changes to the Obama era rules by reducing the fleet targets, agreeably even lower than automakers say is possible, to a 1.5% improvement each model year up to 2026. This is an increase from the initial stated goal of a 0 percent increase.

“Standards that increase at 1.5 percent per year represent a reasonable balance of additional technology and required per-vehicle costs, consumer demand for fuel economy, fuel savings and emissions avoided given the foreseeable state of the global oil market and the minimal effect on climate between finalizing 1.5 percent standards versus more stringent standards. The final standards will also result in year-over-year improvements in fleetwide fuel economy, resulting in energy conservation that helps address environmental concerns, including criteria pollutant, air toxic pollutant, and carbon emissions.”

Why lower the targets? The SAFE vehicles rules weighed the increased costs of developing technologically advanced powertrains versus what consumers had to pay for them as well as the total costs of fuel savings over the time of ownership. For the analysis, they looked at societal benefits, environmental benefits and consumer benefits to these advanced powertrains.

First, each application of an advanced powertrain added hundreds to a thousand to the price of new vehicles. In the analysis, this was thought to lead more consumers to not purchase vehicles with the higher-priced powertrains since the cost/benefit was not there and it was simply math of diminishing returns. The agency came up with this example:

“In mpg terms, a vehicle owner who drives a light vehicle 15,000 miles per year (a typical assumption for analytical purposes) 31 and trades in a vehicle with fuel economy of 15 mpg for one with fuel economy of 20 mpg, will reduce their annual fuel consumption from 1,000 gallons to 750 gallons—saving 250 gallons annually. If, however, that owner were to trade in a vehicle with fuel economy of 30 mpg for one with fuel economy of 40 mpg, the owner’s annual gasoline consumption would drop from 500 gallons/year to 375 gallons/year—only 125 gallons even though the mpg improvement is twice as large. Going from 40 to 50 mpg would save only 75 gallons/year. Yet each additional fuel economy improvement becomes much more expensive as the easiest to achieve low-cost technological improvement options are chosen. In CO2 terms, if a vehicle emits 300 g/mi CO2, a 20 percent improvement is 60 g/mi, so the vehicle would emit 240 g/mi; but if the vehicle emits 180 g/mi, a 20 percent improvement is only 36 g/mi, so the vehicle would get 144 g/mi. In order to continue achieving similarly large (on an absolute basis) emissions reductions, the percentage reduction must also continue to increase.”

Also, they theorized this reluctance to purchase the more expensive, and more fuel efficient powertrain, would also lead to less of these kinds of vehicles being sold on the used car market. Thus, the amount of real greenhouse gas reduction would be further reduced through consumers opting to keep their older and more polluted vehicle longer rather than purchase a newer vehicle since the new vehicle price keeps growing.

Next, they theorized they would actually see a real benefit to saving lives through adopting a less stringent fuel economy standard. The theory goes that if they could slow the price increase on new vehicles, that would make those vehicles more appealing to consumers on the used market and eventually retire the older fleet of less safe vehicles.

Now, this is based on the fact new vehicles are much safer than older vehicles since newer vehicles have more standard safety equipment like air bags, rear back-up cameras and many other features. The analysis assumes through lowering the cost of new vehicles and subsequently used vehicles, it will save 3,300 lives.

“This rule reflects the Department’s No. 1 priority — safety — by making newer, safer, cleaner vehicles more accessible for Americans who are, on average, driving 12-year-old cars. By making newer, safer, and cleaner vehicles more accessible for American families, more lives will be saved and more jobs will be created,” Secretary of Transportation Elaine Chao said in a statement announcing the rule.

The analysis of the new rule suggests as many as 2.7 million more Americans will buy vehicles through an estimated $1,400 average reduction on vehicle prices leading to the conclusion Chao came to on saving lives and also creating the jobs to build those new vehicles.

Finally, the new rule withdraws California’s exception to create their own rules allowing for one national standard.

What about the Environment?

While the initial thinking is this would harm the environment, the EPA says that is simply not the case in the Federal Register laying out this proposal. In fact, the rules do indeed keep raising the bar for automakers and this will lead to reduction in fuel savings and CO2 emissions. Yes, that’s correct and even the proposed rule document says “perhaps somewhat counter-intuitively” as even the writers acknowledge the strange fact.

The NHTSA’s Environment Impact Statement says the change would result in 3/1000ths of a degree Celsius increase in global average temperatures in 2100 relative to the 2012 standards.

What about CO2 emissions? They say the result is really minimal as well according to their research.

In the notes, they argue the 2012 final rule’s impact on Climate Change was also small in magnitude as shown on a final environmental impact study accommodating the rule.

What About Electric Trucks?

If you have made it this far, you might be wondering why our headline asked if Trump killed the electric truck. Like most things, there are several ways to look at it.

On the one hand, the new SAFE vehicles rule extends the EV vehicle credit through model year (MY) 2026, however, it doesn’t expand the program beyond the manufacturer cap of 200k vehicles. This means companies like Tesla won’t be able to provide a tax rebate to people who purchase their vehicles. With the reported average reserve price of a new Cybertruck at $62k, (see this Carbuzz story) and now with no chance of rebates, the cost/benefit of that vehicle is going to be very difficult to achieve meaning wide scale adoption is even more in question.

Also, the forth coming 2022 GMC Hummer will also be impacted since GM is nearing the end of its ability to offer tax rebates to buyers.

This means smaller companies like Rivian, Lordstown, etc… could reap some additional sales since their buyers would qualify for the rebate. However, it remains to be seen if they can build economics of scale to reduce costs and even then, when they do achieve economics of scale like others, the tax credits go away.

On other hand, the lack of extension or expansion could have dire consequences on the EV market as witnessed in China when the government stopped offering credits. In October, 2019, the Chinese market saw a 45% drop in sales marking four straight months of declines.

This massive drop has Beijing considering extending the EV subsides.

There is also a part of the rule that eliminates a credit for full-size trucks that are either hybrid or over-performing by a certain amount relative to their targets starting in model year 2022. This credit applied to 10 g/mi for mild hybrids or 15% over target (MYs 2017-2021) and 20 g/mi for strong hybrids or over target by 20% (MYs 2017-2025). The EPA said no trucks were really meeting this criteria.

In many ways, the new SAFE vehicle rules slow down the rapid pace of new powertrain technology allowing all consumers to eventually catch up to afford to purchase new safer and less polluting vehicles much like the controversial Cash for Clunkers program did. However, it will likely slow down innovation from the automakers and makes the U.S. behind on pollution standards. It will also mean the likely slow down on the growth of EV sales and cause real issues for that marketplace. Ultimately, President Trump helped some and harmed others when this takes effect. The last part is important since this is surely going to be tied up in court for some time.

Click here for the PDF of the final rule.

 

 

 

 

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