The fuel economy and greenhouse gas emission standards debate deepens and becomes more complex.
Forgive the Lord of the Rings parody in the title, but I couldn’t help thinking about that line when it was announced a couple of weeks ago — that four automakers had reached an agreement with the California Air Resources Board.
The agreement commits the companies to greenhouse gas emission standards that are less stringent than those agreed to by the Industry, the federal government in the U.S., and California back in 2010, but which were more stringent than U.S. President Donald Trump’s proposal to hold fuel economy improvements required of companies to about 1 per cent, per year, between 2020 and 2025.
Why, you might ask, would four automobile companies commit to more stringent greenhouse gas emissions targets for their vehicles than are likely to be regulated by the Trump Administration? This is a good question which requires a good — albeit complex — answer.
I certainly cannot speak for the companies, but I can speak to the circumstances that might lead companies to be proactive in trying to find a solution to what will inevitably be more stringent GHG standards, no matter which way you cut it.
This issue goes back to 2010, when the Obama administration negotiated GHG targets with California and the industry, which resulted in the standards being set for the 2020-2025 period. This created an aggressive but certain plan going forward with respect to GHG emission standards, the federal portion of which Canada effectively copied as its own.
When the Obama administration was preparing to leave office, it effectively cut short the mid-term review process which was designed to assess whether or not the market, vehicle sales, and technology applications to improve fuel economy and reduce greenhouse gases, were occurring in the same manner in which the regulators anticipated they would be when the regulations were first put into place. The targets were declared achievable for the industry.
However, one of the first things that the Trump Administration did when it came into power was order a further review of the appropriateness of the GHG emissions reductions targets. The analysis of the data undertaken by the Trump administration led to the conclusion that the targets previously deemed achievable were, in fact, too aggressive and needed to be rolled back.
At this point, we don’t know what the final rule will look like, but the suggestion has been that the targets in the final rule will be frozen at 2020 levels through the 2026 model year.
This outcome was unacceptable for California, which desired to retain the existing standards and set in motion a series of activities that may result in years of litigation between California and the federal government over the stringency of the standards and, ultimately, California’s right to impose greenhouse gas standards that are more stringent than those of the federal government.
For OEMs assessing this situation, it became readily apparent to all involved that certainty around GHG emission standards was not something that was going to be quickly obtained, given the current environment.
While some have suggested that the automakers pushed the Trump administration hard for more lenient targets, the reality is that all manufacturers have spent hundreds of billions of dollars investing in advanced fuel saving technologies, light-weighting and advanced propulsion, and powertrain development — and all with the goal of attempting to meet very aggressive GHG emissions targets.
As a result, Canada’s GHG emission standards for light-duty cars and trucks actually incorporate by reference the U.S. federal standards. This means that, barring any additional regulatory action by the Canadian government, wherever Trump lands on U.S. federal GHG standards, Canada will necessarily follow.
Manufacturers rightly had some expectation that they would be in a position to earn a return on this investment as vehicles were required to meet more stringent standards.
Against this backdrop, it is reasonable to assume that these four manufacturers who worked with California to sign the “Framework Agreement on Clean Emission Standards” looked at the regulatory quagmire and opted to try and be proactive — to take matters into their own hands and negotiate standards that were acceptable to California, while also providing the companies with more flexibility and a longer period of time to meet similar standards to those originally negotiated.
This agreement provides these four companies with something that has been absent for the past four years, and that is regulatory certainty. This appears to have been a more significant factor in their decision-making, rather than taking the risk of committing to offering vehicles across the U.S. that meet California standards, while their competitors (which have not signed onto the agreement) may have less stringent standards to meet.
The book on this topic is still being written, and it will be interesting to see how this unconventional move by four companies and California plays out in the marketplace.
Finally, what does this all mean for Canada? It was convenient when there was a like-minded politician in the White House that thought it was important to act on climate change, and which negotiated the historic agreement between the industry, California, and the federal government for the original 2025 standards.
As a result, Canada’s GHG emission standards for light-duty cars and trucks actually incorporate by reference the U.S. federal standards. This means that, barring any additional regulatory action by the Canadian government, wherever Trump lands on U.S. federal GHG standards, Canada will necessarily follow.
However, adding to this complex story — Canada and California signed a Memorandum of Understanding in late June that committed the two parties to work together and find ways to reduce emissions from light duty cars and trucks.
In this context, depending on who wins the upcoming Canadian federal election in October, it is not beyond the realm of possibility for Canada and California to come to some sort of arrangement, whereby Canada as a nation would commit to the same standards as negotiated by the four automakers under the ambit of the Framework Agreement on Clean Emission Standards.
Nothing’s for certain yet, with respect to what the federal standards will be up to 2025 and where the other vehicle manufacturers are in their assessment of the Agreement signed between California and the four companies. Will other companies join the Agreement? Who knows? But it will continue to make the GHG standards debate that much more challenging as we move forward.
