March 23, 2017
Rolling Back Fuel Efficiency Standards Is Bad for Everyone -- Including Automakers
(I posted this last week on HBR.org. I've seen many other articles with similar perspectives, including a great piece in the NY Times today about how regulations can drive innovation, particularly in autos and EVs. That larger point here is that rolling back fuel efficiency is incredibly short-sighted and self-defeating.)
The CEO of a large industrial company recently described the Trump administration as “the most pro-business since the Founding Fathers.” It’s a popular perception in the business community, with or without the hyperbole, and the stock market is reacting accordingly. While some might be enthused by the potential for corporate tax reform or a (promised) $1 trillion infrastructure investment plan, it’s more likely they’re referring to the historic rollback of regulations in the works across many sectors, from fossil fuels to mining, guns, and finance. It’s taken as an article of faith that this is good for business. But slashing our health, environmental, and societal protections is only “pro-business” in the narrowest of terms, and only in the short run.
Sure, regulations can be excessive and unwieldy. In many areas of business, they’ve grown and metastasized. They do cost real money and can slow innovation. But they’re generally there for a critical reason. Well-designed guidelines for business protect our shared resources and people (and ecosystems) who can’t defend themselves.
The idea that these protections are anti-business stems from a huge misperception that business operates outside of a world that needs clean air and water or a stable climate to function. Or that it can thrive without a healthy, educated population, with access to safe food and drugs. William Ruckelhaus, the former head of the EPA under GOP presidents Nixon and Reagan recently pointed out that “a strong and credible regulatory regime is essential to the smooth functioning of our economy.”
Let’s explore the impacts of one of the most prominent examples of regulatory retrenchment in the works: the rollback of auto fuel efficiency standards. In a speech in Detroit on Wednesday, President Trump indicated he would – as the automakers had asked – have the EPA and U.S. Department of Transportation review the previously agreed-to fuel efficiency marks. The process will take some time, but it’s clear that they will weaken the rule that automakers’ fleets hit a target of 54.5 miles per gallon by 2025. As Trump put it, “the assault on the American auto industry is over.”
A weakening of efficiency standards may save the automakers some money in the short-run***, and the press is certainly calling it a “victory” for the auto giants. But it likely won’t be in the long run. Specifically, it will diminish their competitiveness, as the rest of the world has continued to raise its standards — China, Japan, and the EU all have equivalent or higher targets. As the majority of the world’s car markets continue to demand more efficient vehicles, how does it help U.S. automakers to slow down their progress?
It’s also a bad deal for everybody else. What about the suppliers that make parts for more efficient or electric vehicles? And industries beyond the auto value chain, where most companies want to see continued advancement in fuel efficiency? Logistics giants like FedEx and UPS spend literally billions of dollars on fuel, so they care deeply about using new technologies and improving fleet efficiency. In fact, the entire economy depends on increasingly efficient movement of goods and people. CEOs from some of the biggest food businesses have spoken out about threats to their supply chains from volatile energy prices and a changing climate (brought on, in part, by auto emissions). And when it comes to consumers, they spend less on gas in more efficient vehicles, saving money while also living better with good air quality. All told, EPA analysis pegs the net benefits to society of the higher standards at $100 billion.
Ultimately, the current emissions standards, which the automakers publicly signed onto several years ago, would produce the single largest reduction in greenhouse gases in history. This matters to all businesses, including carmakers, and for reasons they may not fully realize at the moment. To be blunt: People living in places that are regularly flooded may not buy a lot of cars. If climate change destabilizes the world, the economy and business will sink with it.
(***Important side note on the costs to the industry. The Auto Alliance cites EPA estimates of "$200 billion between 2012 and 2025 to comply." That sounds scary. But, a few things are worth noting.
1. The costs to comply with regulations have very often turned out to be grossly exaggerated as companies innovate.
2. The Alliance says part of that cost is because "manufacturers will have to rely on much more expensive electrified technologies." But those techs are dropping in price extremely fast -- battery prices are down 50% since 2014.
3. Even if the cost is $200 billion, why would that be borne entirely by the industry? How much gets passed to consumers depends on many factors, including elasticities of demand (to get on economically wonky on you).
4. And even if it were all on industry, $200 billion is not as much as it sounds. This is a $2 trillion/year industry. That $200 billion is less than 1% of revenue over the 13 years.
5. And if some costs are passed on to consumers, they also SAVE from higher fuel efficiency. Thus the EPA's NET estimate of a benefit to society.)
(This post first appeared in Harvard Business Review.)