The Trump administration is close to an official announcement freezing fuel economy standards for U.S. cars and light-trucks at their 2020 levels (roughly 35-37 miles per gallon), rather than continuing to increase them to around 50 mpg by 2025.
The end of Obama-era standards should not be interpreted as either a terrible idea for the environment or a victory for automakers and polluters. Instead, it’s an opportunity to end a regulatory system that failed to deliver on its promises for decades. Congress’ intent when it passed the 1975 Corporate Average Fuel Economy (CAFE) Act was to reduce the amount of fuel used in the nation’s passenger automobiles. But the legislation never lived up to its ambitions.
While this announcement will likely lead to years of legal challenges, possibly ending in the Supreme Court, the EPA could ease the automakers’ compliance challenges in the meantime by expanding use of its emissions credit trading system, which has been in operation since 2012. Credit trading among manufacturers makes for marginal emissions reductions at the lowest cost.
Unfortunately, the emissions market has two big flaws that keep it from working properly. There are two separate credit markets — one run by the Department of Transportation and another run by the EPA – that carmakers must participate in when there should be only one marketplace, and there is a general lack of transparency, which keeps market transactions secret. This undermines price discovery and makes for very illiquid markets. Credit trading for the 2016 model year, for instance, was less than 1 percent of available credits.
The good news is that it’s possible to combine the credit markets and improve transparency through executive branch rulemaking. The Trump administration should take advantage of this to move U.S. emissions policy forward in a way that advances the interests of consumers, domestic automakers, and the environment alike.