The Trump administration’s recent EPA proposal delivered on its promise of rolling back the Obama-era fuel economy regulations by freezing federal fuel economy requirements at their 2020 levels for six years, rather than letting them rise to 50 mpg by 2025. Revisions to the CAFE standards are always going to create controversy, but they can also be used as an opportunity to maintain regulatory certainty and establish flexible policy tools to lower costs and achieve environmental gains. Unfortunately, the EPA’s new proposal does none of the above. The new proposal ignores innovative policy tools relevant to fuel economy regulations, and will reduce the effectiveness of existing flexibility mechanisms.
Perhaps one of the most promising policy tools for improving fuel economy regulatory schemes is a feebate program. A feebate policy sets a pivot point at a certain fuel economy standard level, whereby manufacturers would get a rebate to the extent they outperform the current standard, or pay a fee to the extent they under-comply. The feebate system establishes a fixed value for reductions in fuel consumption and is revenue neutral, as the funds gathered through the fees are used to pay the rebates. It is important to note that the pivot point should be adjusted to represent the average fuel economy standard to ensure that the program remains revenue neutral.
Figure 1: Generalized Depiction of an Idealized Feebate Program
The main difference between the current tradable CAFE credits and a feebate system is how they perform under the assumption of technological progress. As cheaper technologies enter the market, making it more cost-effective to adhere to the fuel standard, the price of tradable CAFE credits would plummet. With a feebate, on the other hand, there would be continued incentives to improve and go beyond the standard. Introducing flexibility mechanisms in conjunction with CAFE standards, or replacing these standards with a comprehensive feebating program, should be considered as a viable solution to addressing the wide range of inefficiencies in current automobile regulations.
Unsurprisingly, nowhere in the almost 1,000-page proposal from the EPA is the word feebate even mentioned and there is no indication that similar mechanisms will be implemented under the new proposal . Furthermore, the tradable CAFE credit program will certainly lose its effectiveness. The freezing of fuel economy standards at 2020 levels will shrink the demand for new credits, ultimately forcing new credits to become extremely cheap.
The lack of innovative policy tools—as well as the reduced effectiveness of existing flexibility mechanisms—in the EPA’s new fuel economy regulation sends a clear message of support to hardline conservative groups, with very little consideration given to what consumers or the automobile industry might want.