How an Executive Order Could Transform the Auto Industry

February 3, 2009

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During his first week in office, President Barack Obama announced a major move aimed at improving fuel economy and lowering tailpipe emissions. Here's what it could mean for automakers.

A week ago, President Barack Obama ordered the Environmental Protection Agency (EPA) to review its decision that prevented California from setting its own standards for greenhouse-gas emissions released from automobiles. Should the EPA grant California, more than a dozen other states and the District of Columbia permission to set a standard for tailpipe emissions, automobile manufacturers will have to retool quickly to begin producing and selling vehicles that get higher mileage than the national standard, and on a faster phase-in schedule.

Given Obama's executive order, the agency is expected to reinstate the law.

Because it hinges on tailpipe emissions rather than fuel economy per se, California's proposal comes under the auspices of the EPA. Under the 1970 Clean Air Act, the state has the right to set tighter emissions standards than the federal government if it gets a waiver from the EPA. While California has applied for this waiver dozens of times before, and it's always been granted, the state's most recent waiver request was denied by the Bush administration on grounds that new national fuel-economy standards made California's new rules unnecessary.

Obama has now directed the EPA to reassess that decision.

California's plan would effectively preempt the federal regulation by raising the standard to 32.3 mpg by 2016 and 39.2 mpg by 2020. California would not set its own fuel-efficiency standards. Rather, it and a number of other states that would likely follow would set new air pollution standards that are stricter than the federal government's.

"California's standard [...] would require SUVs, minivans and cars starting in model year 2009 to reduce their emissions of greenhouse gases by 30 percent by 2016," says the Associated Press.

The Clean Air Act stipulates that other states can choose to follow either California or federal emissions standards, though they cannot set their own. According to the AP report, 16 states and the District of Columbia already have adopted or are considering adopting California's standards. The states are Arizona, Connecticut, Florida, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, Utah and Colorado.

If California is granted the waiver, cars in all these states would have to meet the new de facto 39.2 mpg fuel-economy standard.

So how are industry groups and automakers responding?

Opponents say it will be a disaster, with different mileage standards in different states costing too much money — estimates have put the added cost of a vehicle at $1,000-$5,000 — and resulting in too many layoffs in an economy already wracked by recessionary unemployment.

Industry groups argue that the president should stick to the strong national emissions standard of 35 mpg by 2020 that has already been agreed upon.

The Alliance of Automobile Manufacturers advocates the 35 mpg standard by 2020. In a statement last week, the group said it "supports a nationwide program that bridges state and federal concerns and moves all stakeholders forward, and we are ready to work with the Administration on developing a national approach."

"A separate waiver for California would lead to a patchwork of greenhouse gas reduction laws when climate change is a global issue and should be addressed on a national level," the National Association of Manufacturers said in a statement.

Automakers "began fighting" the rules "before they were even written" and claim they would "require a wholesale downsizing of the U.S. automobile fleet," according to an Agence France-Presse report. They say the California rules would place undue financial burdens on the industry.

"Asking carmakers to comply with California's rules would be tantamount to forcing a cancer patient to 'finish chemo and then go run the Boston Marathon,'" a spokesperson for General Motors Corp. told the Los Angeles Times before Obama issued the directive.

Not every automaker was initially as riled up.

The vice president for government affairs at Honda told the L.A. Times he believes carbon-based standards are inevitable. He went on to say that Honda has been preparing for the Obama administration to grant the waiver by making plans for a fleet far more efficient than even that called for under the California rules. "We're setting a pattern for the future," he said. "Any company that is not assuming a constant rate of improvement in fuel economy and carbon emissions is making a big mistake."

Cash-strapped automakers then seemed to follow suit and, soon after Obama's order, even welcomed the move saying they are ready to work with the new administration. General Motors Co. last week said it is working aggressively on technology that "matches the nation's and consumers' priorities to save energy and reduce emissions."

"We look forward to contributing to a comprehensive policy discussion that takes into account the development pace of new technologies, alternative fuels and market and economic factors," GM said in a statement. (Source: The New York Times)

Automakers now say the review should help free up money for additional research and development, with a heavy emphasis on fuel-efficient technology.

Environmental advocates who have long challenged the automakers' opposition to the proposed California standards say such regulations will help the companies produce vehicles that consumers want.

Mary Nichols, chair of the California Air Resources Board, the agency responsible for setting the standard, told National Public Radio last week that directing the EPA to review the requests "sets the country on a path to transform domestic auto manufacturing to keep up with the needs of 21st century." She pointed out that the states that follow California's lead now include a large portion of the driving public.

As for costs passed on to consumers, the California Air Resources Board says that, as gas bills fall with cleaner cars, the average low-income household could save about $300 a year under the state's regulations.

In a separate action last week, Obama directed the Transportation Department to enforce stricter fuel-efficiency standards for 2011 model-year automobiles. The Congressional mandate dealt directly with fuel economy by raising the Corporate Average Fuel Economy (CAFE) standards from the 27.5 mpg average that's prevailed for some 25 years. It would boost the fleet average to 35 mpg by 2020, with a phase-in beginning in 2011.

The two directives were the first official memorandums issued by the new president.

"Let me be clear, our goal is not to further burden an already struggling industry. It is to help America's automakers prepare for the future," Obama said. "The days of Washington dragging its heels are over."

It won't be easy for the U.S. auto industry, already on life support, to shift quickly to more fuel-efficient models after years of resisting them. Moreover, the timing couldn't be worse for U.S. automakers, whose 2008 sales in the U.S. incurred the steepest decline in 29 years.

Resources

From Peril to Progress: President's Full Remarks WhiteHouse.gov, Jan. 26, 2009

Obama Moves Toward Regulating Greenhouse Gases by Dina Cappiello The Associated Press, Jan. 27, 2009

California Emission Waiver Looms for Carmaker by Ken Bensinger The Los Angeles Times, Jan. 19, 2009

NAM Opposes Separate Waiver for California Fuel Efficiency Rule The National Association of Manufacturers, Jan. 26, 2009

Automakers Urge Department of Transportation to Finalize Fuel Economy Standards Through 2015 The Alliance of Automobile Manufacturers, Jan. 29, 2009

Statement from ... CEO of the Alliance of Automobile Manufacturers on President Obama's Statement on California's Proposed Emissions Standards The Alliance of Automobile Manufacturers, Jan. 26, 2009

Automakers Take a U-turn and Welcome Tighter Emission Standards Agence France-Presse, Jan. 26, 2009

GM Looks to 'Policy Discussion' on States; Emissions Maneuvering by Bill Visnic Edmunds Auto Observer, Jan. 26, 2009

Detroit Calls Emissions Proposals Too Strict by Nick Bunkley The New York Times, Jan. 26, 2009

Detroit Auto Show: Automakers Bank on Innovation by Nathan Bomey Michigan Business Review, Jan. 15, 2009

Big 3's Hybrid Message: We Will Survive; We Will be Green by Alisa Priddle, Robert Snell and Bryce G. Hoffman The Detroit News, Jan. 12, 2009

Calif. Official Weighs In On Obama Order National Public Radio, Jan. 26, 2009

Clearing the Air on California Emissions by Steve Hargreaves CNNMoney.com, Jan. 29, 2009

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