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The Autobahn to Car Consumer Hell Is Paved with the Best Intentions

Summary:
After bailing out two of the “Big 3” Detroit automakers, President Obama called in his markers during the summer of 2011. That’s when his administration announced an agreement with major car manufacturers to increase federal fuel economy standards to 54.5 miles per gallon (MPG) by 2025. At the time, fleet averages (including cars and light-duty trucks) were about 27 MPG; doubling that figure in 14 years was a tall order requiring technological breakthroughs that might or might not happen. Accordingly, the 2011 agreement included an escape hatch. The plan stipulated for a “mid-term review” process, by which regulatory agencies could revisit their fuel efficiency targets and change course if necessary. Under the agreement’s terms, the mid-term review was due by April of 2018. All the parties

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After bailing out two of the “Big 3” Detroit automakers, President Obama called in his markers during the summer of 2011. That’s when his administration announced an agreement with major car manufacturers to increase federal fuel economy standards to 54.5 miles per gallon (MPG) by 2025.

At the time, fleet averages (including cars and light-duty trucks) were about 27 MPG; doubling that figure in 14 years was a tall order requiring technological breakthroughs that might or might not happen.

Accordingly, the 2011 agreement included an escape hatch. The plan stipulated for a “mid-term review” process, by which regulatory agencies could revisit their fuel efficiency targets and change course if necessary.

Under the agreement’s terms, the mid-term review was due by April of 2018. All the parties to the original accord understood that the mid-term review would entail a process that unfolded up to the 2018 deadline in order to best inform the final decision with the latest data.

If Hillary Clinton had won in 2016, the process would have occurred as initially expected. But then Trump won, and the Obama administration scrambled to finish a mid-term review during the outgoing president’s lame-duck session.

After a six-week rulemaking conducted with breakneck speed, Obama’s agencies completed their mid-term review with only eight days to spare before Trump occupied the White House. To no one’s surprise, the Obama administration affirmed its original 54.5 MPG (by 2025) target.

About a month after President Trump took office, his administration announced it would reconsider Obama's lame-duck determination. Ultimately, the Trump administration proposed to freeze the fuel efficiency standards at their 2021 targets through 2025. That proposal, however, has yet to be finalized. When it is made final, it will be challenged in court by progressive state attorneys general and environmental groups.

With this context in mind, let’s turn to Europe, which has more stringent fuel efficiency standards than we do. To be precise, the European Union regulates tailpipe emissions of greenhouse gases, the control of which is effectively coterminous with the regulation of fuel efficiency.

Current regulations for the EU translate to fuel efficiency standards that are roughly commensurate with what the Obama-era standards would have required by 2023, based on my eyeball approximation of this New York Times chart comparing the two regimes.

So, how’s that working out for Europeans?

Not well, according to last Thursday’s fascinating Big Read in the Financial Times by Peter Campbell. The sub-headline says it all: “rather than embrace the new technology, consumers seem more interested in larger, petrol-fueled cars.”

The article starts with a charming story about how the European Union's regulatory framework affected a recent automobile purchase in Spain:

When Blas Arambilet tried to buy an electric car in April, something strange happened.

Months after ordering a white Kia e-Niro from his local Barcelona showroom, he received a call from the dealership. Kia could not deliver the car this year, a salesman explained, because it needed to book the sale in 2020 in order to help meet tough new targets for [fuel economy].

In sum, car companies are delaying delivery of their least polluting cars, and their purpose is to game compliance with the European Union’s fuel economy regulations. Perversely, emissions-conscious consumers—the very buyers whom the EU’s fuel efficiency rules are supposed to favor—are the first to feel the unintended consequences.

But it’s not just environmental-minded buyers who stand to lose out. According to the Financial Times, sports car enthusiasts might be denied their need for speed:

[Daimler] is expected by many dealers to cut production of its most polluting models. In its crosshairs is the Mercedes AMG range, its highest specification models that have supercar acceleration and the body of a family saloon. A reduction of 75 percent in the availability of some [of these] models . . . is expected by several retail executives . . . 

More broadly, the general car-buying public is in for a bumpy ride. Per the FT:

“There is going to be an imbalance between what consumers want and what manufacturers want to sell them,” say Robert Forrester, chief executive of the dealership group Vertu . . . [V]anishingly few buyers are turning to electric cars . . . [they're instead] switching to heavier sports utility vehicles.

For their part, carmakers are playing a dangerous game of chicken with regulators. The FT reports that manufacturers would be on the hook for $27 billion in fines were they to sell the same mix in 2021 as they did last year.

In an understatement, one anonymous industry insider told the newspaper that “the regulation is not aligned with what is happening in the market.”

Inconvenient delivery dates for super fuel-efficient cars are merely the first mile of a long and uncomfortable road trip, but what's the destination? A dramatic and government-imposed scarcity of what the Financial Times calls “American-style SUVs”—that is, the cars that buyers want—seems likely unless either consumer preferences or EU regulators pull a u-turn. 

Because these “American-style SUVs” engender higher profit margins, they are essential to many automakers’ bottom lines. To the extent manufacturers are not permitted to sell these “gas guzzlers,” there will be pileups in the sector, in the short term at the very least, as the industry is compelled to change lanes to a new business model.

The upshot is that consumers and automakers will be left in the dust if EU regulators keep their pedal to the metal with fuel efficiency requirements that remain grossly out of “alignment” with what buyers want. Could it happen here? 

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