Automakers Plan for Their Worst Nightmare: Regulatory Chaos After Trump’s Emissions Rollback

Source: By Coral Davenport, New York Times • Posted: Thursday, April 11, 2019

Richard Vogel/Associated Press

WASHINGTON — As the Trump administration prepares to drastically weaken Obama-era rules restricting vehicle pollution, nervous automakers are devising a strategy to handle their worst-case scenario: a divided American auto market, with some states following President Trump’s weakened rules while others stick with the tougher ones.

The effort is increasingly urgent because the Trump administration has now settled on the key details of its rollback plan, according to two people familiar with the matter. The new rules would all but eliminate the Obama-era restrictions, essentially freezing standards at about 37 miles per gallon, compared to 54.5 miles per gallon required by the current rules. The policy makes it a near-certainty that California and 13 other states, collectively representing roughly one-third of the United States auto market, will keep enforcing the stricter rules, splitting the national auto market in two.

Although Mr. Trump has billed his rollback as a boon to the auto industry, automakers say the split-market outcome would be a logistical and financial nightmare for them. Their current strategy centers on selling completely different kinds of cars in different parts of the country — chiefly hybrids or electric vehicles in states like California, and less efficient SUVs (which American car buyers love) in other states.

But automakers recognize it would be easy for some buyers to simply cross state lines to buy what they want.

“We could see a scenario where there are limited choices for consumers in the high-fuel-economy states, or a stampede at the border to buy cars in the states that follow the federal standards,” said Gloria Bergquist, a vice president at the Alliance of Automobile Manufacturers.

In that case, Ms. Bergquist said, states with stricter standards might have to create new rules against buying cars from other states. “Because this is all such new territory, no one’s quite sure how this is going to work,” she said. “We’re trying to figure it out. But it’s going to be a headache.”

Automakers have told White House officials that they dread this split-market outcome, but it appears increasingly likely because California and the 13 other states that follow its strict state pollution rules have said they plan to sue the White House in order to keep the current standards in place.

The industry had initially asked Mr. Trump to loosen the auto pollution rules, which were among Mr. Obama’s signature policies aimed at fighting climate change. However, the companies also asked that Mr. Trump strike a deal with California and the other states to maintain a single national standard. But the White House has stopped negotiating with California.

The plan, which is being jointly written by the Environmental Protection Agency and the Transportation Department, would require automakers to raise the fuel economy of their fleets by about 1 percent annually between 2021 and 2026, according to these people. That would be a sharp reduction from the 5 percent annual increase now required.

In addition, the Trump plan would also give automakers credits for using cleaner technologies, like more modern refrigerants in air-conditioners, something that most already do. The Trump plan would also revoke the legal right of California and other states to set their own, stronger standards, setting up the legal clash between the federal government and the states.

The plan is expected to be published in the next few months, at which point it formally goes into effect.

The president has made it clear he wants automakers to publicly support the rollback when it is announced. “Every administration wants the industry to stand with them in the Rose Garden,” Ms. Bergquist said. “But regulatory certainty is really important for automakers.”

If the nation’s auto market does get split in two, the challenge for automakers will come specifically in figuring out how to sell a radically different mix of cars in different states. For example, in states like California, automakers would have to demonstrate that the average mileage of all the cars they sell is much higher (about 54 miles per gallon by 2025) than in states like Utah, where the new Trump standard of about 38 miles per gallon would be in effect.

But because Americans have shown a growing preference for SUVs over thriftier vehicles like electrics, manufacturers might have to significantly cut prices on electric vehicles in the high-mileage states, a potentially money-losing proposition for them, while raising the prices of gas-guzzlers. Meanwhile, auto lots in low-mileage states might hold a completely different mix of cars at different prices.

Representatives of Ford and General Motors, who spoke on condition of anonymity because the administration’s final plans have not been made public, said their companies felt torn between backing the Trump plan, which could hurt their bottom line, or opposing it and siding with California, which could bring retaliation from Mr. Trump.

In particular, automakers fear that the administration would retaliate against them by imposing trade sanctions like tariffs on auto imports. That could raise the cost of American vehicles, many of which are manufactured overseas.

A recent a draft report from the Commerce Department concluded that auto imports threaten national security, according to one person who viewed it. A final version of that report has been sent to the White House, and while it has not been made public, the conclusion that auto imports are a national security threat would pave the way for Mr. Trump to impose tariffs on auto imports.

“They will have to choose between Trump and California,” said Margo T. Oge, a former senior E.P.A. official who works on auto pollution policy issues.

“If you go with Trump, it solves the short-term temper tantrum and the threat of trade wars on the horizon,” she said. “But that is also taking a big legal risk. Because in the long term, California could win the legal fight to keep its state standards. Trump is right now, but California is forever.”

Mr. Trump has frequently turned to tariffs on foreign products as a wide-ranging source of leverage to try to exact concessions from both foreign governments and multinational companies.

A senior White House official, who spoke on condition of anonymity because he was not authorized to speak on the record, said the White House still hoped to have the auto industry’s backing and was unaware of plans to use trade sanctions as leverage or punishment.

“The auto industry is important to the White House,” the official said. “The agencies are still working through the rule-making process and no final decisions have been made.”

In interviews, California officials who requested anonymity because they were not authorized to speak on the record, noted that California already has in place border laws requiring vehicles brought into the state to meet certain pollution standards.

“California is prepared to strike at any blow dealt our way and regardless of what comes next, we have laws in place to keep our state moving forward,” the state’s attorney general, Xavier Becerra, said.

Although officials at the E.P.A. and the Transportation Department have largely settled on the top-line numbers of the plan, they are months from completing the accompanying legal and technical documents required to justify such a major rule change, according to three people familiar with the plan. Those people noted that the process of creating the documents was stalled by the 35-day government shutdown earlier this year.

Those document delays mean the final plan is unlikely to be made public until at least late spring or early summer, these people said.

The release date is significant because it would prompt the expected legal battle, which is likely to end up before the Supreme Court. But if the plan isn’t released until this summer, it means the legal challenges aren’t likely to reach the Supreme Court during Mr. Trump’s first term in office.

The risk is that, should a Democrat defeat Mr. Trump in his re-election bid, the new administration could simply decline to defend the plan in court.

“The longer they wait on this, the easier it will be for the next administration to undo it,” said Jody Freeman, a professor of environmental law at Harvard University who served as legal counsel in the Obama administration.

Ana Swanson contributed reporting from Washington, and Hiroko Tabuchi from New York.