Could Trump's Emissions Plans End Up Hurting The Auto Industry?

At the face of it, President Donald Trump might seem a champion for the auto industry. The president during his recent visit to
America's auto capital, warmed the hearts of the automakers by announcing he would revisit his predecessor former President Barack Obama's emission control rules.

The Rules

The Obama administration drew up standards in 2012 to increase the fuel economy of cars and light-duty trucks to 54.5 miles per gallon by 2025. The new standards were meant to save 163 billion–170 billion gallons of fuel and generate more than $450 billion in net economic benefits.

The Environmental Protection Agency and the National Highway Traffic Safety Administration were vested with the responsibility of monitoring fuel mileage. Subsequently, the EPA adopted fuel and vehicle standards, referred to as Tier 3 standards, in 2014, due to come into effect in 2017. This was an improvement over the standards proposed in 2000 called Tier 2 standards.

The standards have a bearing on oil companies and automakers. Automakers were required to improve emission control technologies such as usage of catalytic converters, to reduce harmful tailpipe pollution.

Where Automakers Stand Vis-à-Vis The Rules

A mere 4 percent of the vehicles of today would meet the 2025 standards, according to a New York Times article quoting automakers. Earlier last month Auto Alliance, an alliance of 12 automakers, wrote to the EPA, requesting it to withdraw the standards.

The letter stated that conventional vehicles make up 96.5 percent of the new light-duty vehicle fleet, and none of these conventional vehicles are compliant with the fuel economy standards envisaged in 2012. The letter also said automakers have to expend more than $200 billion between 2012 and 2025 to achieve compliance. The issue becomes graver because consumer preference has now shifted toward SUV and pick-ups, away from fuel-efficient small cars.

This explains why automakers are clamoring for a repeal of the emission control standards.

Trump's Trump Card For Manufacturing Growth

The president's promise concerning a repeal of the fuel economy standards has come with a trade-off for automakers. In return, the automakers are expected to invest in domestic manufacturing, moving jobs back to the United States — a favorite theme for Trump.

What Lies In Wake Of The Repeal

Upon adoption of emission control norms, automakers began making small, painful steps toward achieving compliance. They invested heavily in energy efficient vehicles, with their R&D expenses ballooning over the years. The increase in R&D expenditure was also necessitated by technology companies foraying into car marking due to their quest to evolve self-driving technology.

General Motors Company GM, Volkswagen AG (ADR) VLKAY and Toyota Motor Corp (ADR) TM collectively spent $27.4 billion on R&D between 2007 and 2012, up 13 percent, according to an FT report. This compares to combined annual revenue growth of 8 percent for these companies over the same period.

The report also went on to outline the fact that global patent filings for low-emission engine technology by automakers had doubled in 2012 from five years ago.

Automakers may now be forced to rethink on their thrust on electric vehicles and self-driving technology. With the interest waning, investments these companies already committed to the projects may not yield the desired returns.

However, California has a waiver under the Clean Air Act, which allows the state to have its own emission control norms. The state also has a waiver for a program that encourages automakers to sell zero-emission vehicles. So far, Trump has not spelled out his intention regarding California's prerogative.

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