On April 2, 2018, Environmental Protection Agency (EPA) Administrator Scott Pruitt announced that greenhouse gas emission standards for model year (MY) 2022-2025 light-duty vehicles are not appropriate and should be revised. This decision sets the stage for potential legal challenges by several states, chief among them California. Whether such challenges will materialize will likely depend on the actual standards set by EPA, in conjunction with National Highway Traffic Safety Administration (NHTSA), after a rulemaking process. It could be a contentious process.

California Air Resources Board (CARB) Chair Mary D. Nichols described Pruitt's announcement as a “politically motivated effort to weaken clean vehicle standards with no documentation, evidence or law to back up that decision … we will vigorously defend the existing clean vehicle standards and fight to preserve one national clean vehicle program.” New York Attorney General Eric Schneiderman accused EPA of “cooking the books” and vowed to “stand ready to take legal action.” Also unclear is whether the Trump EPA will attempt to revoke the waiver that California enjoys under the Clean Air Act, an action that would result in immediate legal action by California.

The Clean Air Act and Greenhouse Gas Emission

When Congress amended the Clean Air Act in 1970, it empowered EPA to set national standards on air pollution. But, California had already been contending with smog for decades. Thus, in recognition of its unique status, the Clean Air Act allows California to seek a waiver of the preemption that prohibits states and local jurisdictions from enacting emission standards for new motor vehicles and engines. EPA must grant the waiver, unless the Administrator finds that California was arbitrary and capricious in finding that its standards are as protective as federal standards, or if the state does not need such standards to meet compelling and extraordinary conditions, or a third factor. Only once has California's waiver been (temporarily) denied.

Any other state can choose to adopt California's standards as set by CARB. A dozen other states have done so.

A 2007 decision by the United States Supreme Court in Massachusetts v. EPA, 549 U.S. 497 (2007), required EPA to regulate greenhouse gases if the agency found that the emissions endangered public health or welfare. In 2009, EPA issued an Endangerment Finding that motor vehicle greenhouse gas emissions contribute to climate change and thereby threaten public health and welfare. Thereafter, EPA and NHTSA established the first national program to reduce greenhouse gas emissions and improve fuel economy for new light-duty motor vehicles, MY 2012-2016.

The 2012 Rulemaking established the national program for federal greenhouse gas emission and corporate average fuel economy (CAFÉ) standards for MY 2017-2025 light-duty motor vehicles. If automakers complied with the rules solely by improving the fuel economy of their engines (rather than, for example, by utilizing credits), new light-duty motor vehicles would average approximately 50 miles per gallon by 2025.

However, as part of that Rulemaking, EPA was required to perform, by April 1, 2018, a Mid-Term Evaluation of the greenhouse gas standards established for MY 2022-2025. The purpose of the Mid-Term Evaluation is to confirm that the more stringent standards for MYs 2022-2025 can actually be achieved and remain appropriate under Section 202(a) of the Clean Air Act.

Different Administrations, Different Evaluations

During its waning days in office, the Obama Administration took steps to perform this Mid-Term Evaluation. In July 2016, EPA, NHTSA and CARB jointly issued a draft Technical Assessment Report examining a wide variety of issues relevant to the 2022-2025 standards. In late 2016, then EPA Administrator Gina McCarthy proposed to determine that the MY 2022-2025 standards remained appropriate. Among the factors cited by McCarthy was that automakers could meet the standards at lower costs than predicted in the 2012 Rulemaking, that the standards would save consumers money and provide health benefits, that automakers could meet the standards with available technology, and that automakers outperformed the standards for MY 2012-2015. On Jan. 12, 2017, Administrator McCarthy signed her Final Determination to maintain the greenhouse gas standards for MY 2022-2025 light-duty vehicles.

On Jan. 20, 2017, the White House issued a memorandum to the heads of all executive departments and agencies instituting a freeze on regulatory activity, pending review by the Office of Management and Budget Director. Auto industry trade groups requested that President Trump's EPA withdraw the Final Determination from Administrator McCarthy. Among other concerns, some automakers argued (through a trade association) that EPA issued the Proposed Determination without coordination with NHTSA and demanded comments by Dec. 30, 2016, despite the fact that the Proposed Determination was not published in the Federal Register until December 6. One trade association described the Final Determination as the “single most important decision that EPA has made in recent history.”

On March 15, 2017, President Trump announced a restoration of the original Mid-Term Evaluation timeline. The President stated that if “the standards threatened auto jobs, then commonsense changes would be made in order to protect the economic viability of the U.S. auto industry.” On March 22, 2017, EPA announced the reconsideration of the January 2017 Mid-Term Evaluation Final Determination (the McCarthy Determination) for MY 2022-2025 light-duty vehicles.

On Aug. 21, 2017, EPA published a notice in the Federal Register, inviting comments over a 45 day period. EPA received more than 290,000 comments.

On April 2, 2018, EPA Administrator Scott Pruitt signed a Notice withdrawing the January 2017 McCarthy Determination and finding that the current greenhouse gas emission standards for MY 2022-2025 for light-duty vehicles are not appropriate and should be revised. In other words, the Trump EPA Administrator came to the opposite conclusion from the Obama EPA Administrator, a little over fourteen months later.

The April 2, 2018 Notice

In his explanations, Pruitt focused on the “significant” record developed since the January 2017 McCarthy Determination. The April 2, 2018 Notice states as follows: “Many of the key assumptions EPA relied upon in its January 2017 Determination, including gas prices and consumer acceptance of advanced technology vehicles, were optimistic or have significantly changed and thus no longer represent realistic assumptions.”¹

The Notice puts particular emphasis on his view of the additional cost imposed on consumers of the greenhouse gas standards. The Notice states that “the Administrator has also considered that the reach and success of the 2012 rulemaking is significantly limited when consumers cannot afford new cars.” Also of concern to the Administrator is his view of the effect on the auto industry of the current standards, noting the “challenges to auto manufacturers due to feasibility and practicability.”

Specifically, the Administrator assessed the factors as follows:

The availability and effectiveness of technology and the appropriate lead time for introduction of technology/The feasibility and practicability of the standards

The Administrator found that the January 2017 McCarthy Determination was “optimistic” in its assumptions and projections with respect to the availability and effectiveness of technology and the feasibility and practicability of the standards. According to the Administrator, the January 2017 Determination was completed at a time when it appeared that the majority of major car manufacturing companies were “over-complying” with greenhouse gas compliance requirements and building up credits.

The Administrator points to newer data indicating that, starting in MY 2016, many companies have had to rely on “banked” credits for the first time in order to achieve compliance. If they run out of such credits at a time when the standards become more stringent, it could impact their ability to comply.

The Administrator also noted that consumers have not flocked to fuel-efficient vehicles, including electric vehicles, particularly in light of decreased gas prices. Should consumers not be willing to make such choices, automakers may not be able to meet the current standards, according to the Administrator.

Moreover, Pruitt is more skeptical than McCarthy of the availability of new technology to assist in meeting current standards. According to the April 2 Notice, EPA intends to explore “new analytical tools” to “look at new vehicle sales and fleet turnover as part of its decision-making record for the new rule.”

The cost on the producers or purchasers of new motor vehicles or new motor vehicle engines

In the April 2 Notice, EPA raised concerns regarding the impact of current standards on the cost of new motor vehicles or new motor vehicle engines for both producers and purchasers. As noted above, Pruitt stressed the “disproportionate negative impact on low-income households” of potentially more expensive vehicles. However, the Administrator also cites other studies, which find that the standards will have a larger proportionate benefit for low-income households. EPA concludes that affordability concerns and their impact on new vehicle sales must be more thoroughly assessed.

The impact of the standards on the reduction of emissions, oil conservation, energy security, and fuel savings by consumers

In assessing this factor, the Administrator stated a “strong basis for concern” that the current emission standards may not produce the same level of benefits as was projected in the January 2017 Determination. As support, the Administrator again cited changes in consumer preference—if consumers retain older cars rather than purchase new cars, then the effectiveness of the program in decreasing greenhouse gas emissions is decreased. If the lower price of gas causes consumers not to purchase a fuel efficient vehicle, or consumers decide to drive more because they have greater fuel efficiency (the rebound effect), then the previously anticipated benefits of the current standards may not be realized.

The impact of the standards on the automobile industry

The Administrator found that the standards “potentially impose unreasonable per vehicle costs, which will result in fewer sales, thereby “significantly” impacting automakers and dealers. However, competing analyses on whether and how currents standards would impact employment were also cited, and the Administrator vowed to include a job gains/losses analysis as part of adopting new standards.

The impact of the standards on automobile safety

The Administrator briefly stated that safety might be an issue with the current standards, because consumers might remain in older, less safe vehicles rather than buy new safer vehicles (presumably because of cost).

The impact of the greenhouse gas emission standards on the CAFÉ standards and a national harmonized program

The single area of agreement among most commenters appears to be that it is highly preferable to have one national program, harmonizing federal and California standards. EPA agrees.

Impact of Finding

EPA's revised determination, while perhaps not surprising in light of other environmental positions taken by the Trump Administration, cannot truly be assessed until the federal government sets replacement standards after the upcoming notice and comment rulemaking process. Until then, the current standards remain in effect and there is no change in the legal rights and obligations of any stakeholders.

Because of California's unique position with respect to the Clean Air Act, and its history of aggressive environmental protection, it will likely be a particularly vocal participant in the upcoming rulemaking process, and the one that could cause Trump's EPA the most problems. Not only is California the most populous U.S. state and a massive car market by itself, but, as noted above, a dozen states follow California's standards. Approximately 1/3 of the country's auto market follows California standards. Pruitt has criticized this power wielded by a single state.

One option that Pruitt has signaled he may be willing to consider is revoking the waiver granted to California under the Clean Air Act. That action would not only be unprecedented, but would immediately result in lawsuits. Although lawsuits are nothing new between the Trump Administration and California, it is a course of action that would potentially put automakers in even more regulatory limbo than they are in now.

One way to potentially bypass this conflict is for the standards to be retained, but with additional flexibility for compliance—for example, with respect to the credits that might apply to achieve compliance—a middle ground approach. Whether that middle ground is possible remains to be seen.

Endnotes:

[1] The quotations included herein are to a prepublication version of the Notice.

Belynda Reck is a partner in Reed Smith's Los Angeles office, where she specializes in environmental and products liability law.