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Trump Administration Pushes Back on California's Fuel Economy Scheming

Since at least March 2018, the Trump administration and the state of California have been engaged in a legal and political struggle over the stringency of motor vehicle fuel economy standards and, more importantly, the legality of California’s power to set and enforce such standards. Last week the Trump administration opened two new fronts in this contest of wills and war of words.

On September 6th, the general counsels for the Department of Transportation and Environmental Protection Agency cautioned California Air Resources Board (CARB) Chairman Mary Nichols that her agency’s July 25th “framework agreement” with Ford, Volkswagen, Honda, and BMW “appears to be inconsistent with federal law.” The agreement commits automakers to achieve tougher fuel economy/greenhouse gas emission standards than those proposed in the administration’s Safer Affordable Fuel-Efficient (SAFE) Vehicle rule.

The Trump officials explain that “Congress has squarely vested the authority to set fuel economy standards for new motor vehicles, and nationwide standards for [greenhouse gas] vehicle emissions, with the federal government, not with California or any other State.” Indeed, the Energy Policy and Conservation Act (EPCA) “expressly preempts states from setting fuel economy standards for motor vehicles or taking any other action ‘related to’ the regulation of fuel economy.” Due to the “direct, scientific link” between motor vehicle carbon dioxide emissions and fuel economy (75 FR 25326-27), “any effort by California to adopt or apply” motor vehicle greenhouse gas emission standards “clearly implicates EPCA’s preemption provision.”

In short, the automakers’ commitments under the framework agreement “have not been issued pursuant to federal law” and CARB’s actions to elicit and coordinate those commitments “appear to be unlawful and invalid.” The Trump officials conclude by warning of “legal consequences” if CARB persists in defying “the limits placed in federal law on California’s authority.”

California and its allies will no doubt protest that in July 2009, the EPA granted California a waiver permitting it to implement AB 1493, the state’s motor vehicle greenhouse gas emissions statute. However, the EPA may lawfully grant a waiver only for legally valid standards—standards not already voided by other federal statutes. AB 1493 and the associated regulations were voided by EPCA and therefore invalid from the get-go. As the SAFE Vehicle rule explains, “When a state establishes a standard related to fuel economy, it does so in violation of EPCA’s preemption statute and the standard is therefore void ab initio [from the beginning]” (83 FR 43235). For further discussion, see pp. 9-28 of the Competitive Enterprise Institute’s comment letter on the rule.

As to the second front, also on September 6th, the Trump Justice Department launched an antitrust investigation of the four automakers who cut the fuel economy deal with California. The Wall Street Journal reports that “Justice Department officials believe the agreement could effectively restrict competition by potentially limiting the types of cars and trucks the auto companies offer to consumers, according to people familiar with the department’s thinking.” The Journal continues: “Such an impact of the deal—potentially cutting production of sport-utility vehicles and crossovers that burn more gasoline—could cross legal lines, the people said.”

The New York Times similarly explains that DOJ is investigating whether “the four automakers violated federal antitrust laws by reaching a deal with California, on the grounds that the agreement could potentially limit consumer choice. . .”

The irony of the situation may elude those directly involved, so I will spell it out for them. What DOJ rightly suspects about the automakers’ deal—that it will restrict competition and consumer choice—applies in spades to the corporate average fuel economy (CAFE) program itself and the associated greenhouse gas emission standards.

Fuel economy/greenhouse gas standards restrict competition and consumer choice by limiting the types of cars and trucks automakers offer to the public. For example, the CAFE program destroyed the market for station wagons, which had been popular family cars from the 1920s to the 1960s. More recently, the Heritage Foundation estimates, CAFE standards increased the cost of new motor vehicles by $4,000-$7,100 during 2007-2016, pricing many middle-income households out of the market for new cars.

If automakers colluded to achieve such results on their own, the antitrust police would prosecute them to the hilt. However, because Congress and federal agencies created the CAFE cartel, the anti-competitive, anti-consumer impacts of the CAFE program are hailed as triumphs of energy security and climate change mitigation.

The Competitive Enterprise Institute has long argued that antitrust is a relic of the smokestack era, stifling innovation in both product development and business organization. Moreover, as Milton Friedman observed long ago, where government abstains from picking market winners and losers, most monopolies are short lived, because if the firm succeeds in raising prices, its windfall profits or “rents” invite competition by new entrants into the field.

With few exceptions (such as when a firm or group of firms has sole access to a natural resource), collusive arrangements such as production cartels don’t last unless government props them up. Friedman believed eliminating import barriers was the best cure for monopoly, as it would expose domestic firms to global competition.         

Only Congress can abolish the CAFE cartel it created in 1975. In the meantime, the Trump administration is taking significant steps to terminate California’s unlawful role as cartel leader and enforcer. Auto executives who believe they must cut a deal with California lest their companies be subjected to conflicting fuel economy standards lack courage and vision. By supporting the President, they can help him win the battle with California. And once he wins, the regulatory sword of Damocles that has been hanging over their industry since the start of the Obama administration will turn to smoke, never to return.