When the Trump administration decided in April to roll back Obama-era fuel economy standards, California and a coalition of other states decided they weren’t going to take the decision lying down.
Under the 1963 Clean Air Act, California has the right to set tighter air pollution rules for vehicles than the federal government, owing to the Los Angeles Basin’s notoriously poor air quality. This right gave California a seat at the table as the past two administrations debated the issue, and a compromise was reached in both cases. Neither President Bush nor Obama—nor the auto industry—wanted to end up with separate standards for the nation and the state of California.
But now, California and the Trump administration seem sufficiently far apart that California may well choose to exercise its authority and try to go its own way, likely by enforcing the original Obama administration fuel economy targets through 2025 for new vehicles sold in the state. Thirteen other states and the District of Columbia currently adopt California’s clean air regulations and would likely follow suit, as the Clean Air Act permits states to follow California’s lead rather than federal regulations. Colorado just announced that it will soon become state number fourteen.
If California does indeed break with the feds, and the courts uphold that decision, automakers will be confronted with two fuel economy standards: one for California and the coalition of affiliated states, and a weaker standard everywhere else. The automakers have encouraged the parties to find a compromise that avoids this outcome, citing the additional cost of complying with two standards. Meanwhile, environmentalists are pushing California and the other states to break away, believing that reducing emissions in some states is better than reducing no emissions at all. Yet, despite the costs to automakers and consumers imposed by the regulatory split, it is likely that enactment of stricter standards by California and the other states will actually result in zero reductions in carbon emissions, at least in the near-term.
Why? The key to the story, explained at length in an excellent paper by Larry Goulder from Stanford, Arthur van Benthem from UPenn and Mark Jacobsen from the UC-San Diego, is that rather than produce more fuel-efficient cars for the California market, automakers will be able to instead reshuffle their existing production mix. More efficient cars will be sold in California and its allied states with the tougher standard, less efficient cars will be sold everywhere else, and overall fuel economy will not change at all.
To unpack that, let’s suppose that the federal fuel economy standard is 30 MPG (roughly the fuel economy required by the 2020 federal standard, which the Trump EPA wants to freeze in place through at least 2025). And suppose that California and its allied states, containing about 40% of the U.S. population, mandate a standard of 36 MPG (the original 2025 Obama EPA standard). This policy would clearly lead to a more fuel-efficient vehicle fleet in California-led states.
But what would happen in the non-participating states? Thanks to the large increase in fuel economy by California and friends, it becomes possible for the vehicle fleet in the other states to become less efficient, while still holding the automakers in compliance with the overall U.S.-wide 30 MPG standard. Specifically, when California vehicles increase their fuel economy to 36 MPG, the fuel economy of vehicles in non-participating states can fall to 27 MPG, and the U.S. average would then just meet the 30 MPG federal standard. Crucially, overall U.S. fuel use—and carbon emissions—in this scenario would not change at all: 100% of the emissions reductions in California would “leak” away to the other states.
It seems likely that this scenario would play out because automakers have no incentive to reduce fuel economy beyond what is mandated by the standards. We need only look to the past to see that this is the case. In 2017, the U.S. fleet-wide fuel economy was only about 25 MPG—and that was with standards in place pushing up the baseline of what consumers are willing to pay. So if automakers don’t need to sell 30 MPG vehicles in non-California states in order to comply with federal fuel economy rules, they won’t. Instead, they’ll meet consumer demand in those states by lowering fuel economy just enough to meet the fleet-wide standard, or until they reach the profit-maximizing level of fuel economy.
Thus, California’s action is unlikely to change overall U.S. passenger vehicle gasoline use or carbon emissions. Because carbon is a global rather than local pollutant, there is also no benefit to the reallocation of carbon emissions from California to the rest of the United States. And because smog-forming emissions are generally regulated per-mile rather than per-gallon, there would be little or no local pollution co-benefit either.
The current mix of states in the California coalition isn’t enough to produce a net savings in carbon emissions. But, I calculate that if environmentalists have enough fight in them to increase the California coalition so that 54% or more of the U.S. population follows the tougher standards, U.S. emissions would be reduced. For instance, if a coalition with 60% of the population enforced a 36 MPG standard, and fuel economy in non-participating states fell to no less than 25 MPG, then U.S. average fuel economy would reach 30.6 MPG—just inching past the federal standard. Total U.S. carbon emissions would therefore fall slightly. Yet still, the leakage of carbon emissions to other states would be severe. For every 100 tons of carbon abated by the California coalition, 80 countervailing tons would be freshly emitted in the other states.
It is true that there are costs to bifurcated state and federal fuel economy regulation, though they are not likely as large as the automakers imply. Costs arise because even while the California coalition’s standards won’t affect automakers’ total manufacturing costs, they still impose a substantial reshuffling of vehicle sales across the country. This uneven allocation of fuel economy is both inequitable and inefficient. For a given level of carbon reduction, it is better to spread compliance costs evenly across the country rather than focus on a few states. Instead, efficient vehicles will be sold overwhelmingly in participating states, so their residents bear a disproportionate burden of emissions reduction costs. A large number of these consumers will need to be induced to buy a vehicle that is more fuel efficient than what they would have bought otherwise. These purchases mean less value for the consumer (since the efficient vehicles will either come with costly technology or diminished other features, such as horsepower), reduced profits for the automaker (since selling a large number of fuel efficient cars within a state may require heavy discounting), or both.
Given these costs and the potential for little or zero emissions reduction, what then are the arguments for moving forward with stringent state standards? One possible rationale is technology forcing: automakers will need to make technological advancements in order to satisfy the strict California standards, and those advances may spill over to sales in other states, improving fuel economy there. This benefit does not address the core problem of a binding federal standard, however, as also asserted by Goulder, Jacobsen and van Benthem. As long as the federal standard binds on non-participating states, fuel economy improvements will always be offset by increased sales of inefficient vehicles. Still, there may be longer-term climate benefits to state-driven innovation, since reductions in the cost of providing fuel economy will make it easier, politically and economically, for a future administration to tighten the federal standard if it wished.
Another reason for California and allied states to push forward is political: the threat to set their own fuel economy standards is a bargaining chip in their negotiations with the Trump administration over what should happen to the federal standard. Threatening to disrupt the U.S. auto market—even if doing so leads to little or no direct environmental benefit—may be a useful tactic for influencing the federal standard. But it is risky. If the Trump administration calls California’s bluff, California’s own citizens will pay the price, in exchange for an uncertain and possibly minimal gain in the broader battle against climate change.