Why Lower Fuel-Economy Standards May End Up Hurting U.S. Automakers

Years from now, the United States may look back on August 2, 2018, as the day it lost the e-mobility race – and perhaps any hope of regaining its leadership in the global automotive industry. On that day, the Environmental Protection Agency announced its plan to freeze the nation’s fuel economy standards at the 2020 fleet-wide level of 36.9 miles per gallon instead of letting it gradually increase to 51.4 mpg by 2025.

While some may think that the elimination of regulation frees industries to be more competitive, that’s certainly not the case for the auto industry – at least, in this instance. Providing consumers fuel economy is part of being competitive in today’s market, given the cost of gasoline and people’s environmental concerns. Reducing requirements is likely to make U.S. car makers less cutting edge – and their cars less attractive to consumers. Besides failing to reduce greenhouse-gas emissions and air pollutants like nitrogen dioxide, cars with lower fuel economy are more expensive to operate because they consume more gasoline – obvious facts that appear lost on policymakers, but may not be missed by car buyers. Even customers who opt for bigger vehicles don’t want to spend unnecessarily on fuel.

The auto industry also is very much a global one, and cars with lower mile-per-gallon ratings that can be sold in the United States may not meet the standards of nations still intent on reducing auto emissions and lowering the planet’s climate risk. They may not even meet California’s standards or those of several other large states, which have said they will create their own, more stringent rules if the EPA proceeds with its rollback.

Short-term thinking

The EPA decision reflects a short-horizon outlook on business, aimed at quick profits for industry and overlooks the prospect of a long-term decline in competitiveness and the impact on customers. While other countries are passing future bans on internal combustion engines, the U.S. industry has focused on encouraging the obsession Americans have with pickups and SUVs. It produces quarterly profits, but at the cost of market share: American-produced cars commanded close to 70% of the global market in the 1960s; by 2025 that percentage will fall below 15%. U.S. carmakers are even abandoning production of sedans and crossovers, in favor of pickups and SUVs. Yet, American pickups are hardly ever sold outside of North America.

One cannot blame this collapse of market share on strict regulation – Europe and Japan have had higher fuel economy standards. In fact, the U.S. lost considerable share to the Japanese in the 1970s and 1980s in part because of their vehicles’ higher performance on fuel. And it’s not because of unreasonable labor – European unions are far more powerful than their U.S. cousins.

The regulation rollback comes at a particularly inopportune time for automakers that are already struggling with how to prioritize investments among a multitude of pivotal technologies, including autonomous functionality and connectivity. And while not having to invest in improving fuel economy may provide more money for EV research, the industry and policymakers are doing little to get Americans interested in buying electric cars. Innovative companies like Tesla are looking to build capacity outside the U.S. – in Europe and China where government policy encourages consumers to buy EVs. If anything, the U.S. industry needs a timetable from the government to switch to EVs, as other countries have provided, and consumer incentives to make the transition a profitable one.

China Goes Global

Very soon, Western automakers will also have to compete against China, which is taking its attractively priced EV production global. China, which is fighting air pollution at home and is a signatory of the Paris Climate Accord, has been encouraging a switch to EVs domestically through a “Made in China 2025” incentive program. Well-placed to take a leadership role in EVs, it serves as an example of how nations can produce industrial growth by providing timetables for needed change and backing them up with policy.

Even the U.S., industry hasn’t embraced the EPA plan. In response to the announcement, General Motors reaffirmed the company’s commitment to “zero crashes, zero emissions, and zero congestion” and the need for a 50-state national regulation on fuel efficiency. “The pathway to that vision includes continually improving fuel economy and our commitment to an all-electric future,” the statement read.

Months earlier, Ford Motor Co. chairman Bill Ford wrote in a post on the online publishing platform, Medium, that his company didn’t want a rollback and supported “increasing clean-car standards through 2025 … The cost of believing [climate change] is not real is just too high,” he said in the post.

A global approach

What’s needed are clear, long-term strategies and – ideally, consistent regulations across the globe – to create a level playing field and minimize wasted effort in political infighting. In the United States, driving for a common set of rules on fuel economy, as GM CEO Mary Barra has called for, is a first step.

Most important, American policymakers must understand the need to equip the industry with the tools to survive in a rapidly evolving global market. Domestic industries that do not adapt to a changing ecosystem will almost certainly be marginalized globally.