CSIS Simon Chair Blog
April 7, 2010
by Christopher Sands
On April 1, the United States and Canada did something unprecedented, and it was not an April Fool’s joke: the two countries announced simultaneously a new set of vehicle emissions standards, coordinated to be identical in both countries.
The new standards mark a shift away from the prior model in the United States that required manufacturers to meet Corporate Average Fuel Economy (CAFÉ) standards, which were measured by taking the average of the fuel economy of the vehicle models in particular categories (e.g. compacts, light trucks and sport utility vehicles, etc.) on offer in a given year. CAFÉ standards were applied to the model offerings, and not weighted to sales. In a given year, the average fuel economy of all vehicles sold by a manufacturer might be higher, particularly in years when minivans and trucks were popular. The rationale behind this system was to place the burden on the manufacturer to design and offer more fuel efficient vehicles while still allowing consumers to purchase what they wanted.
Beginning in 2011, regulation will be based on the composition of the vehicles actually sold by a manufacturer in a given year. The average fuel economy of vehicles sold (separated into specific vehicle categories, as before) will be compared to the government’s standard. Manufacturers whose sold fleet exceeds the government’s target will be required to purchase off-sets to account for the carbon emissions for which the vehicles they have sold will produce above and beyond the government’s allowance.
If this sounds like cap-and-trade for cars, that is because it will be exactly that, and by design. The U.S. Environmental Protection Agency and the U.S. Department of Transportation collaborated to design a system for limiting motor vehicle emissions that would be consistent with the system for capping emissions in other sectors of the economy. Just as cap-and-trade systems for power plant emissions do not tax electricity consumers directly (unlike a carbon tax, which would be more direct and transparent), the new vehicle emissions regulations will affect consumers indirectly, in the form of higher prices.
The Obama administration estimates that the cost of compliance with the new regulation for manufacturers will be $52 billion, and will likely add $926 on average to the price of a new vehicle as manufacturers pass on the emissions tax to car and truck buyers. These are preliminary estimates for the United States alone, not accounting for the additional costs accrued by compliance in Canada.
One of the most positive aspects of the new regulation for auto makers is that the new vehicle emissions regime will be uniform across the United States and Canada as well. A number of U.S. states have moved to regulate motor vehicle emissions above and beyond U.S. federal standards, most notably California.
The promise of the North American Free Trade Agreement (NAFTA) for companies in the United States, Canada and Mexico was the chance to profit from the economies of scale possible in a region with more than 450 million consumers. To obtain the maximum advantage from such a large market, products would ideally be as uniform as possible for consumers in all three countries.
For certain products, this only required trilingual packaging and instruction manuals. For others, the potential for scale economies was limited by federal, state/provincial and even local rules and regulations. In 2005, the federal governments of the three NAFTA countries established the Security and Prosperity Partnership (SPP) of North America to foster contact between the federal bureaucracies that they hoped would lead to streamlining of the regulation and inspection requirements imposed on people and goods crossing their shared borders.
The SPP became a lightning rod for critics of further North American economic integration, and in 2009 the three governments quietly abandoned the 20 SPP working groups. Yet contacts continued among counterpart officials in the three governments. For many, the SPP had led to a change in perspective and greater sensitivity to the effect that unilateral regulation had on trilateral trade, and the importance of that trade in a recessionary economy.
When the Obama administration reached agreement with California and other states that it would increase federal standards for vehicle emissions, it warned that it would block independent state regulation. The Canadian federal government, which together with Ontario had established automotive policy bona fides by investing billions of Canadian taxpayer dollars alongside the U.S. federal government’s own bailout investments to avert bankruptcy filings by General Motors and Chrysler, worked with the United States to understand the design and objectives of the new standards as they were being developed. The coordinated announcement by the two governments of identical standards was a demonstration that regulatory coordination had not ended with the termination of the SPP working groups.
There is already opposition to the announced standards in the U.S. Congress, where Senator Jay Rockefeller (D-WV) and Senator Lisa Murkowski (R-AK) have sought to block the U.S. EPA from regulating carbon, and see the new vehicle emission standards as part of a regulatory power-grab by the EPA.
And consumers may not like the higher vehicle prices that would result from the new standards beginning in 2011, despite the potential fuel savings over the life of the vehicle; the higher up-front cost will be a barrier to entry for low income prospective car buyers. Given that the beneficial reductions in overall carbon emissions that the new standard is intended to achieve will depend on how quickly new cars replace old ones in the fleet of vehicles on U.S. and Canadians streets, it is too soon to tell whether the costs of the new approach will be matched by significant benefits quickly enough to have an affect on climate change.
Canadians unhappy with the new vehicle emissions regulations will be tempted to blame the United States for imposing them – de facto if not de jure – on their smaller Canadian neighbors. Yet the highly-integrated automotive manufacturers operating in both countries, including General Motors, Ford, Toyota, Honda, Chrysler and others, could hardly compete if the approach to regulation by the two federal governments was radically different. The shift to a cap-and-trade for cars model by both countries will greatly simplify compliance costs for manufacturers.
However the overall costs of the new approach – which could exceed initial estimates depending on consumer reaction to them – and the question of tangible benefits for the atmosphere that result from the change will spark public debate in Canada. Unlike the United States, where the new standards have emerged from a period of comment and criticism over several months, in Canada the announcement of the new standards, which signals a 60-day notice and comment period following publication of the new rules in the Canada Gazette (Canada’s equivalent of the U.S. Federal Register) comes as a rather complex surprise.
Still, the adoption of tandem regulatory standards by the United States and Canada in the area of new vehicle emissions is itself a milestone on the road toward deeper North American economic integration. Regardless of the fate of the new standards in practice, the process of developing them in the absence of the SPP shows that the federal regulatory and enforcement networks the SPP fostered have continued to produce, albeit thus far without word to date of Mexican involvement, or reaction.
Christopher Sands is a Senior Fellow at Hudson Institute.
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