The Future of Electric Vehicles is uncertain….yet…..still kind of certain.

At a speech in Detroit in early March, President Trump announced that he would instruct the EPA to re-evaluate conclusions it posted last fall regarding mpg standards on personal vehicles and light trucks.  The comments were in response to a lobbying effort by American automakers, efforts that were supported by U.S. based executives from foreign automakers.

The mpg standards in question were set by the EPA during the last week that President Obama was in office and effectively locked in benchmarks for the years 2021 through 2025.  The way the standards are set is that the average mpg of all cars sold by any manufacturer in any given year – the average mpg for the whole fleet – must meet the benchmarks set.  The process of the evaluations, conducted by the EPA, DOT and California EPA, was begun in 2011 to assess environmental, public health, and automotive technological factors.  The evaluations are set to take place every few years and new standards are set based on those evaluations.  The first set of standards went into effect in 2013, have increased every year since, and are set to continue increasing.

The continuous increase in these standards is becoming problematic for major U.S. automakers as their electric vehicle (EV) offerings are limited and gas prices are low.  EV sales, with high mileage on zero gallons, would keep the average fleet mpg low while the low cost of gas is leading consumers to purchase higher mileage vehicles.  Automakers have been making the case to the White House that the benchmarks are going to be difficult to meet.

President Trump signaled with his speech that he is prepared to reduce automotive regulation and create manufacturing jobs.  The current regulations incentivize automakers to push EV sales.  Whether the current regulations are reversed or not remains to be seen.  Undoing them is not as simple as stating the intent to undo them.  One way or another, the future of EV sales will be affected by this.  There are a multitude of political and economic factors in California, China, and Europe that will affect the future of EV adoption rates in North America.

California

Despite President Trump’s signal to automakers in the U.S. that he wants emissions standards lowered, California may keep that from happening.  As California cities had recognizably terrible air quality, the state started regulating emissions before President Nixon even established the EPA.  As such, it has often been granted a waiver from federal regulations to set its own air quality standards.  This waiver was requested – and denied – in 2007 under President Bush but was granted when re-requested under President Obama.

California, especially Los Angeles, has a history of air pollution unlike that of the rest of the nation.  The temperature and wind patterns that exist for cities that have a coast on one side and mountains on the other effectively trap air.  For LA, which had over 2 million cars on the road by 1950, trapped exhaust was causing health problems as early as 1940.  It was research done in LA that showed the contribution that car exhaust makes to air pollution and to public health.  Today, LA is down to 40% of what it’s pollution levels were just 40 years ago but still has some of the highest small particle count in the U.S.  Because of this, California sees EV development as vital to public health.

If current EPA head Scott Pruitt moves to lower emissions standards, California EPA standards will likely be more stringent than federal ones.  This is a problem for automakers, as the Clean Air Act allows states to default to California standards without seeking federal EPA approval.  Currently, 9 states default to California standards.  This means that 10 states, making up 35% of the nations’ population, will have a set of vehicle emissions standards that are different from federal ones.  Automakers want to avoid this but the path to one single standard is not yet clear.

If California is left to set its own standards, the nation is likely to follow.  The Trump administration may try to strip California of its waiver, but California would challenge this in court.  During his confirmation hearing in the Senate, Pruitt acknowledged the right of California to be granted waivers to set emissions standards separately and avoided directly stating that he planned to rescind its waiver, but it was clear that democratic senators believed this would happen.

The federal EPA, under Pruitt, may try to argue that the data is not conclusive and that the standards set should thus be rescinded.  A federal court would most likely require the federal EPA to explain why the data and conclusions were satisfactory to the same EPA under Obama, and to the DOT and California EPA.  The other direction that may be tried by the Trump administration is to argue that the mpg standards overreach and hurt the automotive industry.  In this case, a federal court is likely to question why the data shows that now but didn’t then.  Either way, federal courts are likely to defend precedent and procedure over outcomes.  The politics of the White House changed in January, but judges interest in precedent probably (hopefully) has not.

What this means is that California’s standards, both emissions and MPG, are likely to set investment, incentive and consumer trends for the rest of the country, anchoring North America to standards set under the Obama administration.

This is extremely important for the future of EV sales due to California’s Zero Emission Vehicle (ZEV) program.  The program, part of California’s regulations, require that all automakers selling within the state sell electric cars and trucks.  The exact numbers of sales required by each automaker is tied to the total volume of sales within the state.  The ZEV program is in place in the 9 states that default to California’s EPA regulations.  The current requirement for automakers is 3% of total sales are EVs, but rises to 22% by 2025.  Automakers that surpass the requirements in any given year can count the excess towards future requirements or sell the credit.  The goal of the ZEV program is to drive the sale of 1.5 million EVs in California and another 1.5 million in the Northeast (Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Rhode Island, and Vermont all default to California) by 2025.

Altogether, the state of California (probably) and the states that default to California standards are likely to anchor standards to those set under Obama and drive the sale of EVs.  The major automakers, which have historically sold new models through a heavy marketing push, will be pressured to push the sale of hybrids and EVs.  As the technology develops and prices drop, the ZEV program and mpg standards may become irrelevant as EVs become price competitive with combustion engines.  However, the fight over mpg standards may greatly affect that timeline.

China & Europe

Air quality is a huge problem for cities in China.  In recent months, residents of northern Chinese cities have endured some of the worst stretches of pollution-induced haze in history.  Blocking out the sun for days at a time (8 days in 70 cities in December and January) and with an airborne fine particle count over 5 times that of any US city, China is facing a health crisis that will likely cripple multiple generations of urban dwellers.  While the causes of the pollution are not completely known, the primary sources are thought to be coal, dust, and vehicle emissions that are putting black carbon, sulfates, and nitrates (the cause of acid rain) into the air.

China has worked hard to reduce the amount of pollutants it produces and has managed to bring down the average particulate count in the air every year since 2013.  With that comes a push to reduce vehicle emissions by switching to emissions free (electric) vehicles.  China is already the world’s largest automobile producer and consumer of EVs.  It is also the largest producer of the lithium-ion batteries that power cell phones and EVs.  These serve as a very lucrative export but will also go a long way to help China become a leader and exporter of emissions-free mobility.  Chinese companies are already beginning to shape the North American market through partnerships with Mexican automakers.

Last year, Chinese consumers purchased over 400,000 EVs.  To date, sales of EVs in China outnumber those in the rest of the world combined and China plans to have 5 million EVs on the road by 2020. Multiple Chinese companies are selling short-range (around 60 miles per charge) EVs at very low cost in China’s urban areas.  With the subsidies that make these automobiles more attractive to commuters, these cars can be bought for as little as the equivalent of about $8,700.  That price is, depending on the model,  1/5th to 1/10th the price of a Tesla in China.  It is low even when compared to the Bolt EV by GM, which sells in the U.S. for around $30,000 after government subsidies kick in.  As an additional incentive, several of China’s largest cities have begun making the applications for license plates to combustion automobiles more cumbersome, but not for EVs.

As China moves to EVs, so does Europe.  Last summer, Germany passed a non-binding resolution – a letter to the EU – suggesting that the EU move to incentivize zero-emissions vehicles so that all newly registered vehicles are zero-emission by 2030.  These are similar to the steps that Norway, a non-EU country, announced last summer as well.   Neither is set to ban the sale or production of combustion engines, but have set 2050 as a target by which personal mobility be emissions free.  In anticipation of this, German auto manufacturers have already begun investing in lower emissions technology, with even Porsche unveiling its first hybrid at the 2016 L.A. Auto Show.

The move towards EVs in Europe is in large part due to the VW emissions scandal, which prompted a closer look at all auto emissions, unveiling the fact that virtually all manufacturers were gaming the system in some way.  As data on the health hazards of auto emissions continues to mount, Europe is eyeing EVs as a sure bet to eliminate the health hazards of combustion emissions.  The causal relationship between combustion engine exhaust and human health hazards has been established for over a half century.  The European Environmental Agency estimates that air pollution causes over 400,000 deaths in Europe annually and that road transportation emissions account for 50% of those deaths.  Research done at MIT calculated that from 2008-2015, the time frame over which VW was lying about its diesel emissions, a total of 1,200 more premature deaths occurred than would have had VW actually been in compliance with emissions standards.

The combination of Europe and China incentivizing EV purchases will drive research and production that produce economy of scale and ultimately bring down the costs of EVs.  Even if the Trump administration moves to lower emissions standards in the U.S., improvements in the range and cost will increase EV demand.

Manufacturers may be able to fight increasingly stricter standards here in the U.S., but eventually developments overseas will drive changes in the automotive market here as well.  Automakers the world over probably see this coming, but are hoping that those increased standards don’t happen here at the same rate as they anticipate elsewhere.  The American market is lucrative and the ROI on personal vehicles with combustion engines is higher than for those of EVs.  Not being forced into shifting to EVs would allow automakers to develop the technology without absorbing losses.  At the same time, this would delay achieving economy of scale.

In the end, California will probably be the factor that holds the U.S. on its current course.  China and Europe will direct its manufacturers in the direction of heavy EV investment and this will, in the long run, influence the American market to higher EV adoption.

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