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A U.S. Appeals Court Overturns a Trump Administration Bid to Roll Back Fuel Economy Penalties

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【Summary】A U.S. appeals court on Monday overturned the Trump administration’s July 2019 rule seeking to suspend a regulation that more than doubled penalties for automakers failing to meet current fuel efficiency requirements. The hike in penalties was adopted in 2016 by the Obama administration to encourage automakers to produce more fuel efficient vehicles. However the increase was met with resistance from automakers citing it would increase industry compliance costs by $1 billion annually.

Eric Walz    Aug 31, 2020 12:50 PM PT
A U.S. Appeals Court Overturns a Trump Administration Bid to Roll Back Fuel Economy Penalties
Rush hour traffic backs up near San Francisco. (Photo: Getty Images)

A U.S. appeals court on Monday overturned the Trump administration's July 2019 rule seeking to suspend a regulation that more than doubled penalties for automakers failing to meet current fuel efficiency requirements, Reuters reports.

The U.S. Court of Appeals for the Second Circuit in a 3-0 decision on Monday said the National Highway Traffic Safety Administration (NHTSA) did not make a timely decision to reconsider the penalties.

The NHTSA declined to comment.

Automakers are fined for not meeting fuel economy standards for their fleets in the U.S., but the fines have not increased in over 40 years. So in 2015, Congress ordered federal agencies to adjust a wide range of civil penalties such as fuel efficiency to account for inflation. 

In response, NHTSA issued rules to eventually raise fines to $14 from $5.50 for every 0.1 mile per gallon of fuel that new cars and trucks consume in excess of the required Corporate Average Fuel Economy (CAFE) standards.

Environmental groups urged the Trump administration to retain the increase, as U.S. fuel economy fines have lost nearly 75% of their original value because fines had only been increased by 50 cents from $5.00 to $5.50 over the past 40 years.

Automakers argued the increases would dramatically raise costs, since they would also boost the value of fuel economy credits used to meet requirements.

The NHTSA CAFE Program

NHTSA's CAFE program requires manufacturers of passenger cars and light trucks for sale in the U.S. to meet so called CAFE standards, expressed in miles per gallon (mpg). The CAFE program is intended to reduce the nation's energy consumption and fight climate change by increasing the average fuel economy of cars and light trucks. 

As part of the program, the NHTSA establishes separate passenger car (including domestic and import passenger cars) and light truck fleet standards "at the maximum feasible average fuel economy level that it decides the manufacturers can achieve in each model year."

Once an automaker's CAFE standard is calculated for each of an automaker's passenger and light truck fleets, the NHTSA compares it to the fleet's actual mpg performance against the applicable standard. An automaker that's producing more gas guzzling vehicles, such as pickup trucks and full-size SUVs, has a harder time meeting the CAFE standard.

If a manufacturer's actual average mpg level for a given fleet does not meet the applicable standard, then the manufacturer is deemed to have a "shortfall" for its fleet, which results in the $5.50 civil penalty for each 0.1 mile over the CAFE standard for each vehicle sold that does not meet the requirements.

In October, Fiat Chrysler Automobiles (FCA) said it faced a $79 million U.S. civil penalty for failing to meet 2017 fuel economy requirements after paying a $77.3 million penalty for 2016 requirements. 

FCA faces similar fines in Europe, since its does not produce enough fuel efficient vehicles to meet the European Union's emissions target of 95 grams of CO2 per kilometer average across an automaker's entire fleet.

For automakers like Tesla that produce only electric vehicles, the standard is more easily met in the U.S. Tesla for example, earns a credit for each 1/10 of an mpg higher than the fleet's standard mpg and the actual average mpg. Tesla's credit is calculated as the number of tenths of an mpg (1/10 mpg) times the number of vehicles produced. 

However, in lieu of the $5.50 civil penalty for failing to meet CAFE standards, automakers can instead use credits earned from more fuel efficient vehicles to satisfy the shortfall. The credits can also be carried forward. 

Credits earned in a particular model year can be carried forward and applied for up to five model years after the year in which the credits were earned. The credits earned are also transferable to rival automakers.

Over the past several years, Tesla earned "hundreds of million of dollars" from selling its CAFE credits to other automakers, including General Motors and FCA. In its 2020 second quarter earnings report released in July, Tesla reported $428 million in revenue from sales of the credits, accounting for 7% of its total revenue in Q2, CNBC reported.

In addition, the regulatory credit sales to other automakers were even greater than the company's free cash flow and amounted to four times Tesla's $104 million of net profit in Q2.

In California, and at least 13 other states, any vehicle manufacturer who wants to sell their cars in that state must sell a certain amount of electric, hybrid electric or other zero emission vehicles (or ZEVs). However, automakers without enough of these vehicles in their lineups can buy credits from a rival car company.

Some luxury automakers selling higher-priced and more profitable vehicles have opted to pay the fines rather than meeting the U.S. fuel efficiency requirements, including Mercedes Benz and Jaguar Land Rover.

In addition to the Trump administration's attempt to suspend the increase in civil penalties for failing to meet fleet average fuel economy, it's seeking to lower the proposed increase in fuel economy that automakers are incrementally adopting each year.

The new regulations are known as the "Safer Affordable Fuel-Efficient (SAFE) Vehicles" rule and meant to dismantle the previous Obama era fuel economy rules for motor vehicles announced in July, 2011.

The plan also includes the Trump administration's proposition to take away California's ability to set its own emissions regulations. This caveat was introduced in September, 2019 setting up a court battle with the state of California and the federal government. Thirteen other states have also adopted California's more strict emission standards over the years, including Washington DC.

In a statement at the time, California attorney general, Xavier Becerra said the Trump administration wants to "make these penalties meaningless."

The new rules allow automakers to build less fuel efficient (and some say less competitive) cars, SUVs and pickup trucks at a time where global warming from greenhouse gases has climate scientists around the world concerned. 

It would also conflict with the rest of the auto industry's global push toward electrification, which is being spearheaded by electric automaker Tesla. The California company has since become the world's most valuable automaker by far with a market cap exceeding $400 billion.

In May, a group of 23 states challenged the administration's decision in March that requires automakers to achieve a 1.5% annual improvement in fuel economy through 2026, which will result in fuel economy improvements of 7.5% by 2026 for automakers. 

The decision is much less than the 5% annual increases for cars and 3.5% for SUVs and light trucks adopted under the Obama administration. The yearly increases were set to begin in 2021.

resource from: Reuters

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