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Few observers were surprised when the U.S. Environmental Protection Agency announced earlier this week that it would scale back emissions and fuel efficiency standards for new vehicles. What remains unknown, however, is how far the agency will scale back the Obama-era regulations or to what extent it will try to curtail individual states’ rights – under the Clean Air Act – to enforce stricter rules, as EPA Administrator Scott Pruitt has implied he will do.

The Obama-era rules would have required automakers to increase new cars and trucks’ average fuel economy to 54.5 miles per gallon by 2025. California has pledged to maintain the stronger standards.

SIEPR Senior Fellow Charles Kolstad and Michael Wara, a senior research scholar at the ºÃÉ«App Woods Institute for the Environment, discuss how the EPA decision might unfold and how it might affect the U.S. economy.

Apart from environmental concerns, doesn’t it make sense to reduce fuel efficiency standards when oil prices are relatively low, as they are now?

Kolstad: The fuel efficiency of our fleet changes very slowly and does not track the annual ups and downs of the oil market. We should be basing our fuel efficiency regulations on what we perceive as the long-run trends in oil prices, not short-term fluctuations. Reduced demand due to fuel efficiency standards, along with increased supply due to fracking, is a primary reason gasoline prices have been low the last few years. OPEC will love it if we weaken our fuel efficiency standards, increasing demand for oil. Many people think it is in our national interest to decrease our demand for oil without sacrificing our quality of life – just what the fuel efficiency standards seek to do.

What does this announcement mean for U.S. automakers?

Wara: Car sales in the U.S. fell last year – the first year they’ve done so since the recession. U.S. automakers’ biggest market and largest growth potential now is China, a country with growing demand for electric vehicles. The EPA’s action will deprive U.S. automakers of incentives and an opportunity in the U.S. to innovate and develop compelling electric drivetrain platforms that can be marketed on a global basis. Foreign manufacturers are already making that move. We will sell fewer cars in Europe and China as a result. Pruitt’s actions limit the market for U.S. vehicles, meaning cars in the U.S. will likely cost more and be of lower quality. Also, fewer people will work in the U.S. auto industry because it will make fewer vehicles for a smaller market.

How do our fuel efficiency regulations compare to those of other countries? Does it matter?

Kolstad: Automakers such as Ford, GM, Toyota and Volkswagen are global.  They face tough fuel efficiency standards in the European Union and China, as well as the U.S. and many other countries. Weakening fuel efficiency standards in the U.S. does not help U.S. automakers compete globally. Rather, weaker standards make it more difficult to manage our national demand for foreign oil. Businesses generally favor regulations that are consistent and stable.

What does this announcement mean for California?

Wara: It means that California is going back to the future on climate policy. Under Obama, California and the EPA collaborated to develop a single national standard for tailpipe greenhouse gas standards. Both sides compromised to get to a deal. Undoing that deal means we are back in a world where there will be two sets of standards: one for California and the states that opt into its rules, and the other for the remaining two-thirds of U.S. auto sales. If Pruitt tries to revoke California’s ability to enforce stricter standards, he will have an uphill battle.

Longstanding legal precedent and EPA interpretation support California’s right to set its own standards because of its air quality challenges. The Supreme Court decided over a decade ago that greenhouse gases are covered under these rules. Administrator Pruitt will have to explain why over 40 years of EPA policy should be overturned now. He will also have to convince a court that his reasons relate to the language of the statute and earlier court decisions, not his beliefs regarding the reality of human-caused climate change.