Given the direction of previous Trump administration environmental decisions, the Environmental Protection Agency’s April announcement halting the continued escalation of Obama-era Corporate Average Fuel Economy standards for cars and light trucks is a bit of a poker tell. The announcement signals an increasing likelihood that, at some point this summer, the EPA will freeze fuel economy standards around their 2020 levels (38-39 miles per gallon) for the entire model-year fleet of cars and light-duty trucks, rather than continuing to raise them to 54 mpg by 2025.

At the outset of the Trump administration, American carmakers complained vigorously about struggling to meet the rising mandate after 2020, arguing that it couldn’t be done without losing large amounts of money and perhaps undermining the fleet’s safety features. That said, any plateauing of standards for cars and trucks over the next several years should not be interpreted as either a terrible idea for the environment or a victory for automakers and polluters. Instead, it’s an opportunity to end a terrible regulatory system that failed to deliver on its promises for decades.

Congress’ intent back when it passed the 1975 Corporate Average Fuel Economy Act was to reduce the amount of fuel used in the nation’s passenger automobiles by setting increasingly higher fuel-economy standards for each model year. But the legislation never lived up to its ambition of permanently lowering fuel use. The standards don’t cause drivers to use less fuel or make fossil-fuel use more expensive. Instead, the standards are industrial policy masquerading as environmental policy.

The car industry is also hamstrung by three separate regulators — the Department of Transportation, the EPA, and the California Air Resources Board — all of which have authority over automakers based on different statutes. Thirteen states and the District of Columbia voluntarily follow California’s tighter emissions rules, creating a Balkanized regulatory environment. As a result, the U.S. auto industry has become more like a ward of the state than an industry, more influenced by government decisions on its emissions profile than by market forces. When consumers are forced to buy more fuel-efficient vehicles, the cost-per-mile of driving falls because the new cars use less gas. And since driving becomes cheaper, users end up driving more than they would have if their vehicles were less fuel-efficient. Economists call this phenomenon the Jevons paradox or, more simply, a “rebound effect.” The Jevons paradox occurs any time technological progress (like fuel-efficient vehicles) makes the use of a resource (like fossil fuels) more efficient, but instead of decreasing how heavily people consume that resource, they end up consuming more of the resource (e.g., people drive more) because its price drops. This is why the per capita vehicle miles travelled in 2017 (10,065 miles) was higher than it was a decade ago, even as the fleet’s average miles per gallon increased from roughly 23 mpg to more than 36 mpg over the same period.

One way the EPA could ease the compliance challenges automakers face while also looking out for the environment is by expanding use of its emissions credit trading system, which has already been in operation since 2012. The system worked well for a while, as companies like Ford, GM, and Chrysler began to sell more lower-mileage pickups and SUVs, and purchase pollution credits from companies like Honda and Toyota. Credit trading among manufacturers allows for marginal emissions reductions at the lowest cost.

Unfortunately, the emissions market has two big flaws that keep it from functioning properly. There are two separate credit markets — one run by the Department of Transportation that measures in miles per gallon and another run by the EPA that measures in grams of carbon per mile. Such regulatory duplication not only creates major inefficiencies, it doesn’t even pass the common sense test.

A second problem is a general lack of transparency, which keeps market transactions secret. This undermines price discovery and makes for very illiquid markets. Credit trading for the 2016 model year, for instance, was less than 1 percent of available credits.

The good news is that it’s possible to combine the credit markets and improve transparency through executive branch rulemaking, thereby bypassing a fight over a contentious issue in Congress. Congress is going to have to weigh in on the failures of the CAFE system at some point, but this congressional session is probably not the time. Meanwhile, the Trump administration can, and should, work on the edges to move U.S. emissions policy forward in a way that can advance the interests of consumers, domestic automakers, and the environment alike.


Image credit: Mikbiz