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The Impact of Regulation on Automobile Innovation

International car manufacturing plant in Tuscaloosa County, Alabama. Original image from Carol M. Highsmith’s America, Library of Congress collection. Digitally enhanced by rawpixel.

From the time I worked at EPA four decades ago until the present day, I have been interested in the use of public policy to influence the behavior of organizations and individuals to reduce damage to our environment. EPA’s main approach as a regulatory agency has been to utilize command and control regulation: telling someone what they must do. EPA has grant and emergency response programs, but its main business is rule-making. Regulation is a blunt instrument of influence—but one that has a place in effective governance. It is often over-used and misused, and in this day of inexpensive information and communication, it still seems to be designed for an era of fax machines and computer punch cards. Rules can be custom-tailored to maximize benefits and minimize costs, but our regulatory structure too often assumes “one size fits all.” My view has long been that regulation needs to be improved rather than eliminated.

In one of the first books I co-authored (Environmental Regulation Through Strategic Planning, 1991), Shel Kamieniecki and I discussed regulatory strategy, which conceptualized command and control regulation as one of many methods that can influence behavior. We wrote that regulatory strategy encompassed tools of influence ranging from command-and-control rules to tax deductions and could also include grants, subsidies, training, and even exhortation to encourage specific behaviors. Command and control regulation is one element of a regulatory toolbox—it is not the entire set of tools. One of the problems with rulemaking and implementation is that it takes years for rules to be finalized and then enforced. Moreover, the style of American regulation provides companies with many years before they are required to fully comply with rules. There are faster ways to influence behavior, and if rapid change is required, rules may need to be proposed to set goals, but then other tools must be deployed to provide incentives and positive reinforcement as quickly as possible. Companies are influenced by proposed rules and often make investments to prepare for eventual compliance.

There is an assumption that regulation impairs innovation and business growth, and this has been backed up by academic literature, anecdotal evidence, and, of course, political ideology. The argument is that dealing with a product’s externalities costs money, and if profits could be made doing that, companies would already be doing it. However, back in 1991, Harvard economist Michael Porter wrote that regulation could stimulate innovation. His hypothesis has been tested by economists ever since, with evidence pointing in every direction. The many small-scale empirical measurements favored by economists are inconclusive, but if one takes a less analytic but more historical look at the auto industry since the 1960s, one sees constant industry opposition to regulation and equally constant innovation to comply with the rules that are inevitably adopted. The political rhetoric of “job-killing regulation” should be reversed and called “job-creating regulation.” This takes place despite the determined opposition of the industry and its lobbyists. In 2017 I wrote about the “can’t do” approach of the auto industry:

“Over half a century ago, the American auto industry fought against seat belts. In 1970, they fought against the requirement that they install catalytic converters to reduce air emissions. They have opposed airbags and other safety standards as well. Today, they continue to fight against reducing emissions and improving fuel economy.”

We are seeing this once again with reflexive opposition to EPA’s new proposed emission standards that are designed to work alongside subsidies to accelerate the demise of the internal combustion engine. As Coral Davenport reported recently in the New York Times:

“The Biden administration on Wednesday proposed the nation’s most ambitious climate regulations to date, two plans designed to ensure two-thirds of new passenger cars and a quarter of new heavy trucks sold in the United States are all-electric by 2032…While major automakers have invested heavily in electrification, they are apprehensive about customer demand for the pricier all-electric models, the supply of batteries and the speed with which a national network of charging stations can be created. Autoworkers fear job losses, since electric vehicles require fewer than half the number of workers to assemble than cars with internal combustion engines. Labor unions are particularly concerned because many new electric vehicle plants and battery factories are being built in southern states that are politically hostile to unionized labor and where wages are relatively low.”

The union issues are more legitimate than industry opposition but could be addressed by public policy to encourage industry siting in pro-union states. Auto industry opposition to regulation is an old story. In retrospect, opposition to safety regulations—seat belts and airbags—was foolish as the industry learned that people would pay more for safer cars. In fact, safety became a feature that auto salespeople began to use in their sales pitches. While industry is correct to cite the challenges of rapid change, they are underestimating their ability to meet those challenges. Even the issue of price is something that can be addressed as the market for electric vehicles grows.

Over the past half-century, the need to innovate to comply with changing rules has changed the conservative culture of auto design by introducing greater engineering talent into the industry. The experience of Tesla, which viewed electric vehicle design as an electronic, data, and software exercise rather than one of mechanical and operational engineering, resulted in an incredibly innovative vehicle design. Early problems with Tesla manufacturing demonstrated the need for mechanical and operational engineering along with the company’s computer and electric engineering talent. But the “can-do” problem-solving culture of Tesla worked to correct early manufacturing problems. In the traditional auto companies, the engineers brought in to meet environmental and safety regulations turned to other tasks once they addressed the need to comply with regulations. As I observed back in 2017:

“Air pollution and safety regulations have provided opportunities for engineers to examine every aspect of the automobile and the result has been a modern auto filled with electronics and computer controls and lighter, more durable materials. The self-driving car is a direct outcome of efforts to provide more conventional autos with sensors, cameras and controls that help avoid accidents. Cornell Professor [the late] Ann Johnson’s 2016 paper on automobile innovation presents persuasive evidence of the key role that regulation has played in driving technological innovation in the auto business and she concludes that:

“In the case of automotive innovations, it is clear that high emissions standards did force the development of new technologies by jumpstarting a quest to improve the car, to make it less environmentally taxing and harmful to human health… Technology-forcing regulations can be effective and the opposition of industries affected by them is usually temporary, only a factor until new technologies are available.”

As Davenport notes in her New York Times reporting, Tesla will have no problem complying with the proposed EPA rules since the only cars they make are electric vehicles. I am far from certain that the new EPA rules will ever be formally promulgated, but the message to the auto industry will still be communicated: The age of the internal combustion engine is coming to an end.

It would be unwise to assume that the current technology of electric vehicles will remain stagnant. Just as motor vehicles became less mechanical and more electronic over the past several decades, we can expect innovations in battery design and vehicle charging. The reliance on expensive minerals and toxic chemicals will be reduced, and the overall price of these vehicles will also be cut. In the United States, our pattern of land use development and our lifestyles are built around personal transportation. In my own lifestyle, I live in Manhattan most of the year, but in the summer, I weekend in Long Beach, New York. I garage my car for most of the year but drive a lot in the summer. I prefer mass transit, but it is not practical on Long Island. I see the difference between the two lifestyles, and I am convinced that most of America will never rely on mass transit. That means that the transition to environmental sustainability in America requires rapid, widespread adoption of electric vehicles. It will take a generation to accomplish this transition, and the sooner it starts, the better.

Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.

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