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Fuel-Economy Standards, Corporate Penalties, and a Very Costly Rollback

February 20, 2020

Strong fuel-economy standards pay crucial dividends in consumer savings and pollution reduction. Under the Obama administration, the Department of Transportation and the Environmental Protection Agency promulgated pivotal regulations that would increase fuel-economy and reduce vehicle emissions. These regulations promised trillions in consumer savings as well as significant cutbacks in oil demand. They were also designed to keep U.S. vehicles on track to compete with more fuel-efficient vehicles from international manufacturers.

In response to a bi-partisan 2015 statute directing agencies to update their monetary penalties to reflect inflation, the administration also worked to ensure corporate accountability by increasing the penalties automakers pay when their fleet doesn’t meet the fuel-economy standards. Prior to 2015, these penalties had gone decades without being adjusted for inflation.

The Trump administration has aggressively targeted both of these initiatives. In 2018, EPA and the National Highway Traffic Safety Administration proposed to slash the standards and, the next year, revoked California’s authority to keep the stricter Obama-era car emissions policies in place.

Penalty rates have garnered far less attention than the rollback of the standards themselves, but they play a crucial role in automakers’ behavior. Profit margins tend to be greater on less fuel-efficient vehicles, meaning many automakers would rather pay fines – even amounting to billions of dollars – than build more efficient fleets. The mistake of setting penalties just a little too low can be magnified by automakers’ decisions to produce millions of cars with worse fuel-economy.

And the Trump penalty appears to be way too low to motivate compliance.

Here’s a breakdown of the reduced penalty and how it will likely affect cars, consumers, and our climate.

The reduced penalty

After Congress’s penalty-rate statute in 2015, the agency updated the fuel-economy penalty to $14 per every 0.1 miles per gallon a car exceeds the standard. The Trump administration reduced it back down to $5.50, which happens to be:

  • The same penalty set in 1997
  • Only 50 cents above the original $5 penalty set in the 1970s

Effects on gas mileage

A nearly 60% penalty decrease is unequivocally a huge drop in the incentive for automakers to make cleaner cars. Our analysis found that this will lower the average passenger car fuel-economy by:

  • More than 2 MPG by 2022
  • Almost 5 MPG by 2032

Far-reaching impacts

Over the next several years, drivers will be filling up their tanks a lot more – so much that an additional 54 billion gallons of fuel will be consumed from now until 2032. (NHTSA doesn’t dispute this figure.) The resulting impacts on consumers and our climate are substantial:

  • $120 billion in consumer costs over the next fifteen years
  • $25 billion in global climate costs (from effects such as sea-level rise and serious health impacts)

Our work

We have been active on this issue, consistently participating in administrative and court proceedings to critique the Trump administration’s penalty repeal. Our comments and petition look at NHTSA’s faulty economic analysis, which fails to justify or even consider the forgone benefits of a reduced penalty. Advocacy groups and states have also sued the Trump administration, sparking an ongoing legal battle in which we’ve been involved. Our amicus briefs in two separate lawsuits in 2018 and 2019 argued that reducing the penalties is flawed and unlawful. In the 2018 lawsuit, a federal appeals court vacated the agency’s penalty reduction only days after argument. The 2019 suit is pending.

Filed under Climate Change and Energy Policy, News, Jobs and Regulation, Safety and Consumer Protection