California and Automakers Confront Trump’s EPA

In President Trump’s ghost-written Art of the Deal, he or somebody once wrote: “Leverage: don’t make deals without it.” Maybe someone on California’s Governor Gavin Newsom’s staff read the book and realized that the largest state in America had the largest car market in the United States. California also has clear authority under the U.S. Clean Air Act to exceed federal air quality standards. Even our increasingly conservative U.S. Supreme Court can read, and the automakers bet that California would win the battle with Trump’s EPA over auto gasoline mileage standards. California had leverage and used it to cut a favorable compromise with four auto manufacturers over auto mileage standards. As Coral Davenport and Hiroko Tabuchi reported in the New York Times last week:

“Four of the world’s largest automakers have struck a deal with California to reduce automobile emissions, siding with the state in its fight with President Trump over one of his most consequential regulatory rollbacks. In coming weeks, the Trump administration is expected to all but eliminate an Obama-era regulation designed to reduce vehicle emissions that contribute to global warming. California and 13 other states have vowed to keep enforcing the stricter rules, potentially splitting the United States auto market in two. Four of the world’s largest automakers have struck a deal with California to reduce automobile emissions, siding with the state in its fight with President Trump over one of his most consequential regulatory rollbacks… Under the agreement, the four automakers, which together make up about 30 percent of the United States auto market, would face slightly looser standard than the original Obama rule: Instead of reaching an average 54.5 miles per gallon by 2025, they would be required to hit about 51 miles per gallon by 2026. The Trump administration has said it plans to roll back the Obama-era standard to about 37 miles per gallon.”

Like any effective compromise, opponents on both sides of the issue responded by opposing the deal. Some environmentalists thought California gave away too much and the Trump Administration announced it would stick to its plan to roll back the standards and ignore the deal. But the compromise will be hard to ignore and will force technological innovation on the entire auto industry. Ford, Honda, BMW and Volkswagen will now be motivated to introduce more fuel-efficient cars as quickly as they can. The key to reaching auto gas mileage goals will be to improve the technology and competitiveness of electric cars and hybrids. Californians like their SUVs and cross-overs, but presumably won’t mind buying motor vehicles that are less expensive to operate. These standards are technology-forcing. They create incentives within these organizations to innovate.

Assuming the innovators are successful, the cars produced by these four companies will be better than the ones manufactured by their competition. The motor vehicle business is global and China and Europe are both encouraging the development of electric cars. Auto manufacturers have every incentive to develop and market vehicles that not only serve a single American market but can be sold worldwide. As David Shepardson of Reuters observed this past April:

“Demand for electric vehicles remains low in the U.S. market, but industry executives … said they are pushing ahead with billions of dollars in investments even while preaching patience. Officials said their companies are charging ahead with a flurry of new electric vehicle (EV) models, citing rising regulatory requirements globally…Industry executives said they face hurdles to selling EVs — persistently low fuel prices, lack of consumer education, lower residual values, higher upfront costs because of battery packs and consumer concerns about the availability of charging infrastructure.”

The companies see problems selling electric cars but are moving ahead anyway. While the Trump Administration does not see the urgency of the climate crisis and many auto manufacturers would like to develop these new technologies at their own pace, regulatory moves from China to California are forcing the issue. The auto manufacturers feel the pressure and have been smart enough to respond to it by investing in electric vehicles. The deal with California is simply additional evidence of the reality of climate change and the industry’s understanding of that reality. The right-wing American politics of climate denial is a global outlier and these companies are fully aware of climate reality.

That doesn’t mean that the California deal does not carry risk for auto-makers. While all these companies manufacture cars in the U.S., three of them are “foreign” in origin. BMW makes cars in South Carolina; Honda in Ohio, Alabama and Indiana, VW in Tennessee. Modern motor vehicles are made of parts manufactured all over the world. Trump’s misunderstanding of global supply chains is obvious and the threat to these companies would be retaliatory and misguided tariffs. The President doesn’t like being made to look like a fool or a loser, and California’s auto deal makes him look like both. He may well retaliate by imposing tariffs. This could be a teachable moment for the auto industry and President Trump, but my guess is that none of the automakers are looking for the role of Presidential trade tutor.

This deal is driven by a political consensus in California about the need to reduce their dependence on fossil fuels. As I wrote this past June:

“California is not going to compromise on cars. Lots of older Californians remember smog so thick you could not see the mountains surrounding Los Angeles from within L.A. They do not want to go back to those bad old days. All Californians, young and old are experiencing droughts and forest fires and don’t think that global warming is a hoax. They are committed to renewable energy for their homes and want their cars to eventually run on renewables as well. It’s a state built around the automobile and that is not going to change soon or possibly ever… Less polluting motor vehicles are not a luxury for that huge state and they know it.”

The auto industry also has little choice but to develop cars that can run on renewable energy. This deal is based on more than leverage but on mutual self-interest. The industry does not want to build three models of each car to comply with different rules in different places and when confronted with that unprofitable option will be compelled to produce a car that meets the most rigorous standards. With or without a deal, American cars were going to be built to meet California’s standards. If that rigor can be relaxed a bit, but still advanced, then everyone benefits from a deal.

The only folks who do not benefit from a deal are the ideologues in Trump’s EPA. They, like the president, are creatures of the anti-regulatory extremist base of the Republican party. The auto industry made a serious mistake when they appealed to the administration for regulatory relief from the Obama-era auto mileage standards. They received more relief than they bargained for, and the Trump team’s extreme deregulation proposal delegitimized any modification of the standards. It pushed California to end talks at compromise with Trump’s EPA. In essence, California found a better deal with the automakers than they could get from Trump.

It will be interesting to see if the other automakers join these four and sign on to California’s compromise. However, even if they don’t formally agree it makes sense for them to comply anyway. The alternative is to market one car in parts of America and another in other parts. Thirteen states have already agreed to follow California’s mileage rules. Consumers have no reason to buy cars that use more fuel if they can buy more efficient models. When the dust settles, we will once again find that California is leading the way to our environmental future.