Business In Gear

Trump backpedals on fuel economy: Why that's not the end of electric cars.

The Trump administration promises to review Obama-era fuel-economy standards that helped spur the electric car market. But federal policies aren't all that matters.

A Chevrolet Bolt EV battery pack is removed for testing after undergoing charging and discharging cycles at General Motors Warren Technical Center's Advanced Energy Center in Warren, Mich., in November 2016.
Duane Burleson/AP/File
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When he addresses auto executives in Ypsilanti, Mich., on Wednesday afternoon, President Trump will talk about the promise of the manufacturing sector and of American jobs. But he also is expected to deliver the news carmakers have been yearning to hear: That his administration will reconsider expensive Obama-era regulations aimed at cutting air pollution from cars.

The Obama-era target was for the industry to achieve average fuel economy of 54.5 miles per gallon for its 2025 fleet, a big jump from today’s 35.5 m.p.g. standard.

One implication of the Trump administration move, if it results in loosening the standard, is straightforward: Tailpipe fumes are a major source of greenhouse gas emissions, and automakers would no longer face as much pressure to reduce those emissions from gasoline-burning vehicles. (That could mean slightly cheaper cars but higher gas-pump costs for drivers.)

A less obvious outcome: Changing the standards would affect the electric and hybrid car market, where growth has been spurred by billions in investments from car companies scrambling to meet growing vehicle efficiency requirements in the US and abroad.

If federal pressure waned, and incentives for buyers were withdrawn, how big a blow would it be to the nascent electric car industry in the US?

Some impact, surely. But one reason that it’s hard to predict is that, by some indicators, regulations have already done the job of kickstarting this sector.

State and local policies matter, not just federal ones. The market is global, not just in the US. In fact, China is the biggest market for electric vehicles today. And not least, key technologies such as batteries are improving, promising to drive down costs.

All this gives some promise that the electric car market can keep growing with or without national incentives.

“It’s like pushing a boulder over the hill and then letting it roll down by itself,” says Salim Morsy, a transportation analyst at Bloomberg New Energy Finance (BNEF). “Even if regulations disappear, we’ve kind of reached critical mass.”

Battery technology and manufacturing capacity is at a point where prices of cars should drop significantly without government incentives, Mr. Morsy projects. Batteries make up a third of an electric car’s price, so the more batteries that are produced, the cheaper plug-in cars will get.

Morsy expects battery production to quadruple over over the next several years.

Companies including BYD, Samsung, and LG make electric car batteries. Tesla and Panasonic started producing lithium-ion batteries in January at the electric-car maker’s Gigafactory outside Reno, Nevada. By 2018, Tesla will produce 35 gigawatt hours per year of batteries, which is “nearly as much as the rest of the entire world’s battery production combined,” according to the company.

Ramped up production is expected to drop a battery’s price to $109 per kilowatt hour in 2025 from $275 in 2016. In 2010, 1 kilowatt hour cost $1,000. Battery efficiencies, estimates BNEF, will lower the price of a small, fully electric car to $25,000 by 2020. That’s more than $10,000 below the price of the new Chevy Bolt, $37,495, and the forthcoming Tesla Model 3, the company’s cheapest electric car. The Model 3 is expected to start at $35,000, before federal incentives, when it comes out in 2018.

There are other indications, besides technology advancements, that the electric-car market can avoid being squelched by weaker federal regulations. It would be hard for car makers to stop developing fuel efficient cars given that at least a dozen US states, including the biggest US electric car market of California, have their own strict emissions rules, as do many countries including China, Norway, and the Netherlands.

But some of these other rules are also under threat. China is considering rolling back regulations in response to pressure from automakers. And there is speculation that the Trump administration could attempt to revoke the legal waiver that has allowed California to enforce its own emissions rules. Though the state has braced for a fight. According to the Sacramento Bee, California has hired former Attorney General Eric Holder in anticipation of legal challenges.

“While federal government may abandon climate change, regional governments won’t,” says Ryan Popple, chief executive of Proterra, a company that sells electric buses to US cities with the promise that they will help keep their air clean, and over time save taxpayer money on gas costs. “It’s not like a change in administration has caused Seattle, Chicago, or Miami to stop worrying about climate change.”

Indeed, 30 cities have sought to show their support for fuel-efficient cars in light of Trump’s potential fuel-economy rule changes. Led by Los Angeles Mayor Eric Garcetti, city leaders from New York to Chicago told car companies they are collectively interested in exploring the costs of buying 114,000 municipal electric vehicles, including police cars, street sweepers, and dumpster trucks. That number is equal to 72 percent of US electric cars sold in 2016.

“If you build it, we will buy it,” said Chris Bast, Seattle’s climate and transportation policy adviser, in an interview with Bloomberg.

The electric car industry is tiny, but growing. Already, almost every car maker – from Aston Martin to Volkswagen to General Motors and Jaguar – is developing plug-in vehicles.

In the US, electric car sales make up less than 1 percent of the market. They reached nearly 160,000 in 2016 out of 17.5 million cars sold. This was a 37 percent increase from the previous year.

Development and sales have been growing since the Obama administration reached an agreement with automakers in 2012 to upgrade the average fuel efficiency of their entire fleets of cars and trucks annually, reaching the 54.5 m.p.g. target by 2025.

But automakers have complained that the standards are too strict and expensive. They also say there isn’t enough consumer interest, given relatively low gasoline prices.

“We are committed to continued gains in fuel efficiency and carbon reduction,” car executives wrote in letter to Trump in February, as Bloomberg reported. “At the same time, ignoring consumer preferences and market realities will drive up costs for buyers and threaten future production levels.”

Automakers also are upset because the EPA cut short a planned review of the 2012 emissions standards that was to last until April 2018. Carmakers in February appealed to EPA’s new administrator, Scott Pruitt, to reopen the review process.

“Given that the agencies’ actions on this matter would affect billions of dollars of investments on the part of automakers as well as the types of vehicles that would be made available to customers for years (if not decades) to come, it is critically important that the agencies get it right,” wrote John Bozzella, head of Association of Global Automakers, in a February 12 letter to Mr. Pruitt.

A senior White House official, previewing the Trump administration plan in a call with reporters on Tuesday, said “we’re going to spend another year looking at the data in front of us, making sure everything is right, so that in 2018 we can set standards that are technologically feasible, economically feasible, that allow the auto industry to grow and create jobs.”