Listen: Rumored weakening of tailpipe emissions rule would move US in wrong direction, analyst says

Dave Cooke:

The auto industry has for more than six decades used the same playbook to fight against regulations ranging from safety to tailpipe emissions, to fuel economy standards. They say, "We can't do it. We'll go bankrupt. The technology's not ready," et cetera. And every time they've managed to achieve the standards set forth.

Jasmin Melvin:

Welcome to the Capitol Crude Podcast. I'm Jasmin Melvin. The Environmental Protection Agency recently announced plans to scrap carbon emissions limits for existing gas generation from its pending emissions role for power plants. This coincides with media reports from unnamed sources that the Biden administration will be weakening a number of its proposed environmental and climate regulations, including climate disclosures to the SEC and EPAs vehicle tailpipe emissions role.

On the motor vehicles front, the EPA last April pitched its strongest ever limits on greenhouse gas emissions from passenger cars and trucks. That rule affecting vehicle model years 2027 through 2032, is expected to be finalized in the coming weeks. As proposed, the rule could prompt a substantial increase in the adoption of electric vehicles, with the EPA initially projecting that EVs would account for as much as 67% of new cars and 46% of trucks and SUVs sold in the US by 2032. But reports have surfaced that the EPA may be planning to soften that regulation. Dr. Dave Cooke, Senior Vehicles Analyst with the Union of Concerned Scientists, joins the podcast to share why he believes any weakening of the car rule would be a bad idea. He pushed back on critics' assertions that the proposal was unachievable and gave his take on the importance of vehicle electrification for meeting broader climate goals.

Stick around after the interview for Chris van Moessner with the Market Minute, a near term look at oil market drivers. Now here's my conversation with Dave Cooke.

A number of industry groups and unions have arrayed against the proposed tailpipe emission rules. This includes the United Auto Workers, automotive dealers, the American Petroleum Institute, as well as corn growers and various biofuel groups. They've all written letters to the Biden administration cautioning against what they've occasionally called an EV Mandate. Most of these groups say they agree with the goal of reducing emissions, but think that the Biden administration is going too far too fast. What's your take on those arguments? Is the proposal unachievable as critics say?

Dave Cooke:

So first, let's just be clear. No matter what the Biden administration finalizes, it won't be an EV mandate. EPA sets technology neutral greenhouse gas emission standards. It doesn't dictate what technology is used to meet them. And analysis shows that you could meet any of the proposed standards with nothing but plugin hybrids, for example. We also know that EPA left a lot of efficiency technology options on the shelf when it comes to gasoline powered vehicles.

In fact, that's why we know that not only is EPA's proposal achievable, but the administration could actually set a standard even stronger than what's proposed and industry would have no issue meeting it with a range of technology options, including, but not exclusive to electrification. And as we transition to an electric passenger vehicle market, we need to be driving efficiency improvements on the gasoline fleet too. So we think that's a really critical piece of the puzzle.

Jasmin Melvin:

Any thoughts on what's behind all the criticism, then?

Dave Cooke:

Well, I think each of the groups you mentioned has their own angle. More of our transportation dollars go to the oil industry than goes to roads. So, obviously they have a pretty vested interest. Biofuels has unfortunately aligned themselves with the petroleum industry instead of trying to replace them.

And we know obviously that the automakers have never met a standard that they didn't want to weaken. And when it comes to the UAW, obviously the UAW listens very closely to its employers, not that they don't also fight them too. But obviously, they're hearing the same stuff. And there's a lot of pressure on unions, union members, when the automakers get involved and get activated. And that's, frankly, just been par for the course for decades. So I don't think there's any one rationale. It's pretty much just that industry doesn't like regulation.

Jasmin Melvin:

Now, zero emission vehicles accounted for, I think around ballpark 9% of total light duty vehicle sales in the US last year, which is still a relatively low number, but that represented annual growth of about 52%. Do you see that type of rapid growth rate continuing and how does that play into the administration's drive to have EVs overtake internal combustion engine vehicle sales?

Dave Cooke:

So mathematically it doesn't really make any sense for that kind of growth to continue. If we kept up that rate, a hundred percent of new vehicle sales would be electric within five years. And that's just not what anyone has ever predicted or what we need to address climate change. Technology adoption generally follows an S-curve, and that means that you have exponential growth in the early years, which then softens more towards linear growth in the middle.

So it's really just basic math, that we're not likely to see that level of growth moving forward. But we also don't need to, for electric vehicles to surpass gasoline powered vehicles in the timeframe of this rule. In fact, Jesse Jenkins out of Princeton wrote up a good piece recently on exactly this question, comparing future growth scenarios to where we are. And frankly, we're right on target of where we need to be.

Jasmin Melvin:

And when we're discussing decarbonization of US ground transportation, how important is electrification to that effort?

Dave Cooke:

Well, it's not just important for decarbonizing transportation, but for addressing climate change, period. Transportation is the largest source of greenhouse gas emissions in the United States and passenger vehicles represent the biggest single source within that. And at this point, there's no real alternative. Hydrogen is a fossil fuel with virtually all of it today produced from natural gas.

And you even have the few hydrogen stations, folks like Shell, pulling out and reducing the number of fueling stations in California, which is basically the only place where it's available. And biofuels long gave up on being a real alternative in the passenger vehicle market when they started working with the petroleum sector rather than trying to replace them. And battery electric vehicles are here today, so why not take advantage of it?

Jasmin Melvin:

But are there any policy downsides to electrification, either long or short term? And are there ways the government could support electrification beyond these emissions rules?

Dave Cooke:

Well, so this is a transition. It takes time. The standards are obviously one critical piece of that, but they do only affect new vehicle sales. I do think you're already seeing government support for making that transition just. So under the Biden administration, we passed the Inflation Reduction Act and the Bipartisan Infrastructure Law. Both of those together not only have incentives for electrification, but also for onshoring the supply chain needed, which ensures that we are making the transition in a just manner, building out the supply chain in the US.

Under the Bipartisan Infrastructure Law, we are building out the infrastructure side of things through the Joint Office of Energy and Transportation. And obviously we need to be driving down emissions of the power sector as well as we make this transition. EVs can help reduce the need for fossil fuel peaker plants and otherwise support a transition to a cleaner grid. But the clearer we can be with clean energy targets and strong greenhouse gas emission rules on the power sector, the better. So I think this is all part and parcel of a long transition. Government has been involved in making that case and in supporting this transition. And I think we are on that path. And I think that is the important thing when you're looking at the long-term trajectory of greenhouse gas emissions in the US, particularly in the transportation sector.

Jasmin Melvin:

All right. You touched on earlier why you think we're seeing this criticism from certain lobby groups, but do you think those naysayers arguments have been politically persuasive? There have been media reports that the EPA may be planning to soften its tailpipe emissions role, specifically with a less aggressive timeline. Do you think the critics have persuaded the administration and we could see significant changes in the final rule?

Dave Cooke:

I don't see why the arguments would be persuasive, honestly. The auto industry has for more than six decades used the same playbook to fight against regulations ranging from safety to tailpipe emissions to fuel economy standards. They say, "We can't do it. We'll go bankrupt. The technology's not ready," et cetera and every time they've managed to achieve the standard set forth. Besides, automakers stood up with President Biden when he signed the executive order in his first year, targeting half of all new passenger vehicle sales be electric by 2030.

And since then we've passed the BIL and IRA to grease the skids for exactly that. They're not really in a position to argue with the stick when they've already gotten all of the carrots. I do expect to see changes in whatever's finalized. No rule goes through this process without some give and take, some points being addressed. So it seems likely that the agency will improve its modeling to better represent how manufacturers are likely to meet whatever stringency of the rule that it finalizes. And honestly, that will likely mean a projection of fewer electric vehicles than was in the proposal. But that doesn't mean that EPA can't still set a rule consistent with what is needed to address climate change.

Jasmin Melvin:

Okay. And delving a little bit more into the kind of changes that you're expecting, are those changes in line with possibly some of the alternatives that were already put forth in the rulemaking? Can you touch on what those alternatives look like and what you think we may see or what you think the EPA could go with as it prepares to finalize the regulations?

Dave Cooke:

Yeah, so there are a whole host of alternatives always raised in any regulatory process. In addition to the proposal, as I mentioned before, EPA sets greenhouse gas emission standards. So they offered it in their proposal, a weaker alternative that had a target of 10 grams per mile higher emission standards in 2032. They also had a more stringent alternative, alternative one, which targeted 10 grams per mile lower than the proposal in 2032. And then alternative three, which has gotten a lot of hype for its industry support, which targets the same grams per mile as the proposal in 2032, but takes a lot slower path to get there. But the agency under the regulatory process just needs to show that it reasonably fell out of the rulemaking process under the Administrative Procedures Act. So it doesn't have to stick to just those four, limited, the proposal and those three alternatives.

It can do anything in between. It could go even stronger than alternative one. There's a wide range of options. It just has to be well justified within the record. I think one of the things we are really concerned about is that alternative three, which has gotten a lot of press, is actually really detrimental to the progress that we need to see when it comes to meeting our greenhouse gas targets. So we cited analysis in our comments that showed that alternative three would achieve just two thirds the greenhouse gas reductions by 2032 that the proposal would and the margins on meeting the Paris targets, which are our 2030 target, are already dreadfully slim.

So pace really matters and slowing the rate of improvement of the biggest rule on one of the biggest sources of emissions would make meeting those climate targets virtually impossible. And frankly, alternative three is far too slow. It would also put the US out of step with China and Europe when we need to also be ensuring that the next generation of technology is being built here. So pace matters. It's not just about that final target in 2032, but about how you get there and what signals you're sending to industry. And that's where we really need to be looking at what is EPA finalizing? How is it projecting manufacturers get there?

Jasmin Melvin:

If you're saying alternative three is not sufficient, can you talk about what do you see as the impacts and what additional benefits do you believe would come from the tailpipe emission standards, if the EPA sticks to its original proposal? What would we see on the ground under those parameters?

Dave Cooke:

When we look at this, we look at it from, "Are these rules doing enough to address climate change?" So when it comes to the proposal that could keep us on pace, I think in the later years in particular, it's not nearly as aggressive as it needs to be. And frankly, we think that the same could be said for alternative one, which is the most stringent alternative that EPA looked at. It has a rapid rise in stringency in the early years and in part that's because in those first few years of the program, they're still in the process of phasing out a lot of the loopholes that we have under the current standards. And so those flexibilities don't really result in real tons of emissions reductions. Those loopholes really artificially inflate the perceived emissions reductions or the reductions according to the standards. And so it's not actually a rapid reduction in those early years in terms of real world emissions reductions from the fleet.

And instead, what we need to see is that same level of emissions improvement as we see in those early years, needs to actually carry in through 2032. And that's why we actually were calling for a standard even more stringent than alternative one, because alternative one isn't going to get you on the trajectory to targeting a hundred percent new vehicle sales be electric by 2035, which is what we think is consistent, most consistent, with actually addressing climate change. So we think there's a range of opportunities for EPA to strengthen the rule. And stringency on the greenhouse gas side is certainly one of them.

Jasmin Melvin:

So we've heard that March would be a likely timeframe for when the final rule would be issued. Is that in line with what you've heard?

Dave Cooke:

Yeah, I think we are expecting the rule to be finalized by the end of the month or so. It might slip into April, but it's not going to slip much past the beginning of April, I wouldn't think. There are a number of rules that the administration is trying to get out the door in this next month and a half, two month period, owing to the timeline for the Congressional Review Act. And so we know that this is a really critical rule. They're going to make sure this gets out the door before that timetable really kicks in. So we know that this rule is going to come out. If it doesn't come out in March, it'll come out in early April.

Jasmin Melvin:

Okay. So I'll be interested to hear what you think of it when we do see that final rule. Thank you so much, Dave, for joining me on the podcast.

Dave Cooke:

Yeah, thank you so much for having me.

Jasmin Melvin:

Now here's the Market Minute with Chris van Moessner.

Chris van Moessner:

Crude oil futures have rallied to four-month highs amid heightened geopolitical risks and growing expectations that the OPEC Plus group will extend production cuts into the second quarter. The current OPEC Plus cuts, including Saudi Arabia's, one million barrel per day additional voluntary cut, are set to expire at the end of March but a group has signaled that a decision on their extension could come as soon as this week.

Meanwhile, geopolitical risks of supply remained at the forefront amid the apparent collapse of ceasefire talks in Middle East and a fresh round of US sanctions against Russian shippers seen late last month. Increasingly tight forward supply outlooks have been reflected in a widening of backwardation along crude oil forward curves. The front month versus six month calendar spread for both ICE Brent and NYMEX WTI has opened to the widest since mid-October. And that was a Market Minute.

Jasmin Melvin:

Thanks, Chris. Well, that's it for today, but don't be shy about letting us know what topics you want to know more about. Get in touch. Kate and I are on Twitter, so drop us a line @JasminMelvin or @KateAnnWinston. And if you like what you hear, please consider leaving a review on your favorite podcast app. Capital Crude is produced by Jasmin Melvin and Kate Winston in Washington DC. Thanks for listening, and we'll see you next time.