Bit by bit, President Trump is starting to rewrite the multitude of policies the Obama administration put in place to fight global warming. Today’s target is a big one: the fuel economy standards for cars and light trucks.

In 2011, the Obama administration began crafting sweeping new rules that would steadily increase the efficiency of US passenger vehicles through 2025. By the final year, the Environmental Protection Agency expects new cars and light trucks sold in the US to average roughly 36 miles per gallon on the road, up from 25 mpg today.

These rules are hardly an ideal climate policy, since they only apply to new cars (not the millions of cars already on the road), and since they’ve been undercut by cheap oil and the growing popularity of SUVs. But it’s one of the few federal programs aimed at greening the US transportation sector, which accounts for one-third of carbon dioxide emissions. And the car rules were a centerpiece of President Obama’s climate agenda, along with the Clean Power Plan (which Trump is planning to dismantle):

So that brings us to today’s news. Obama’s vehicle standards are largely locked in through 2021, but they can still be altered for 2022 to 2025. As one of its final acts, Obama’s EPA raced to finish a scheduled “midterm evaluation” that concluded the standards should be kept in place without changes through 2025. But the Department of Transportation hasn’t yet signed on, giving Trump an opening to revisit the rules.

At an event with automakers in Michigan, Trump is announcing that he’ll tell the EPA to redo that midterm evaluation. Once that's done, the EPA could work with the Department of Transportation to develop new — and possibly less stringent — vehicle standards for 2022 to 2025. US automakers have asked Trump to rethink Obama’s proposed rules, which they call overly aggressive and costly to meet. Depending on what tweaks are ultimately made, this could increase US carbon emissions.

"I think every [automaker] that produces SUVs and pickups will benefit from a rollback," Sergio Marchionne, CEO of Fiat Chrysler, told reporters at the Geneva Motor Show.

Except there’s a major twist here. Technically, if the federal government goes too far in weakening Obama’s fuel economy standards, California has a waiver under the Clean Air Act allowing the state to maintain its own, stricter car rules that other states can adopt — a messy possibility that automakers hate. On top of that, California has a waiver for a program pushing automakers to sell more “zero-emissions vehicles” (mainly electric cars). New York and eight other states have also adopted this ZEV mandate, and it’s a major impetus for US electric car sales.

In the months ahead, Trump could conceivably ask EPA head Scott Pruitt to look into rescinding California’s waivers if the state won’t play along. This isn’t part of today’s announcement, and it’s wildly unclear if the courts would even allow this, but Trump’s reportedly mulling such a step. If he does go after the waivers, that could potentially put a major damper on electric car sales in the years ahead. It’s a big deal, so let’s take a closer look at how this all works.

How Obama’s vehicle rules work (and why they’re so absurdly complex)

If you want to understand Obama’s fuel economy standards, it’s important to realize that these are basically three different rules rolled into one — which makes any changes ... complicated. Here are the key players involved:

The Department of Transportation is required to set Corporate Average Fuel Economy (CAFE) standards for new cars and trucks under a 2007 energy bill signed by George W. Bush. That bill directs CAFE levels to rise on a fixed schedule through 2020 and then tells the agency to set fuel economy standards at a “maximum feasible level” each year after that, based on what’s technologically and economically practical. The Environmental Protection Agency is, separately, required to regulate greenhouse gas emissions from new vehicles under the Clean Air Act, thanks to a 2007 Supreme Court decision and a follow-up 2009 agency determination that greenhouse gases endanger public health and welfare. (It’s unlikely Pruitt can repeal this requirement.) California, meanwhile, is allowed to develop its own vehicle emissions rules that are stricter than the federal government’s — so long as it receives a waiver from the EPA. (This waiver program exists because when the Clean Air Act was written in the 1970s, California’s smog problem was especially bad.) In 2004, California passed a big climate change law and asked for an EPA waiver to develop its own greenhouse gas standards for cars — standards that other states could adopt as well. That waiver was initially denied under Bush, but later granted under Obama.

As you might suspect, it’d be a nightmare for automakers if all three entities issued vastly different rules. So in 2011, the Obama administration brought everyone together to hammer out a single, relatively coherent set of fuel economy standards for cars and light trucks that would rise continuously between 2012 and 2025. As part of that deal, all entities agreed to conduct a midterm review by 2018, to see if the rules needed adjusting at all.

The resulting vehicle standards are incredibly complex — in part to make compliance easier. They apply to entire fleets, so automakers can build some cars that get poor mileage and some that get great mileage, as long as it all averages out. The rules are also “footprint-based,” which means larger vehicles face looser standards (though standards for all vehicles rise over time). If American consumers unexpectedly start buying bigger SUVs, then fleetwide fuel economy naturally goes down. Automakers can also get credit for things like improving the efficiency of the air conditioners or by selling more electric vehicles.

But despite the loopholes, these rules have encouraged automakers to build more efficient cars, by using lighter materials, by harnessing advanced engine technologies such as gasoline direct injection, and by selling more hybrids. Today, the average fuel economy of new vehicles is around 25.1 miles per gallon on the road, up from 20.8 mpg in 2007.

(Notice that fuel economy has stagnated since 2014; that’s when oil prices crashed and Americans began buying larger cars and more SUVs. That shift in vehicle mix has temporarily counteracted the efficiency improvements.)

In late 2016, both Obama’s EPA and California’s Air Resources Board raced to finish their scheduled midterm evaluations of the rules before Trump took office. Both agencies concluded, after rifling through various technical studies, that automakers were more than capable of meeting Obama’s proposed standards through 2025 — even with low oil prices — and that no changes were necessary. If anything, the EPA argued, the standards could even stand to be even stricter.

By 2025, the EPA noted, new cars and light trucks on the road would average about 36 miles per gallon on the road under Obama’s proposed rules (you sometimes see this reported as 54.5 mpg, but that’s a different metric). The standards would add about $875 to the average sticker price of new models, but consumers would save roughly three times that much in lower fuel costs over the lifetime of their vehicles.

Why Trump wants to revisit the rules (and why they’re hard to change)

Many automakers, however, would prefer looser rules from 2022 to 2025, since it already costs billions of dollars to comply and the standards only get tougher over time. And once Trump got elected president, they saw an opening.

In a February letter to the Trump administration, the Auto Alliance trade group argued that Obama’s proposed 2022-2025 vehicle standards would be far too difficult to meet, requiring automakers to produce large numbers of hybrids and electric vehicles that consumers are less keen on buying in this era of low oil prices. This situation, they argued, risked “driving up vehicle prices and depressing auto sales.”

What’s more, the Auto Alliance argued that Obama’s EPA moved too hastily to finish its midterm evaluation before Trump came to office — way ahead of the 2018 deadline — and hence didn’t have time to consider forthcoming technical evidence from the auto industry showing Obama’s standards were unduly burdensome.

As such, the trade group asked the EPA to withdraw Obama’s midterm evaluation and write a new one in conjunction with the Department of Transportation, which has not yet signed on to final standards. Presumably, automakers aim to lobby for rules between 2022 and 2025 that are easier to meet.

So that’s what Trump is doing today — he’s telling the EPA to revisit that midterm review. That part is simple enough. Experts say there’s no serious legal hurdle for the EPA to redo its review and take into account new information.

The hard part comes if the EPA and Department of Transportation later decide to rewrite the fuel economy standards for 2022-’25 to be less strict. They can’t just abolish the standards altogether, because of the underlying laws involved. Instead, they might try to relax the schedule for efficiency improvements, or make compliance easier by giving automakers more credit for non-engine improvements. Yet any changes would require the EPA to write a new regulation, which has to go through the formal rulemaking process and could be challenged in court.

Bob Sussman, a lawyer who was senior policy counsel at the EPA under Obama, explains that Trump officials would have to make a detailed case that the Obama-era standards are too costly to meet — say, because they depend on selling large numbers of electric vehicles that consumers are unwilling to buy. “It’s not an easy case to make,” Sussman says. “It’s very fact-intensive and highly technical.”

Assuming the EPA and the Department of Transportation can pull that off, however, there’s still another potential hurdle. Remember, California received a waiver from the EPA to pursue its own stricter standards if the federal government pulls back — and states like New York would likely adopt California’s rules. Automakers loathe this possibility, because it would mean a messy patchwork of standards across different states.

So that brings us to the waiver issue...

Trump may be setting the stage for a big showdown with California

If California becomes too troublesome here, Trump could in theory ask Pruitt to rescind the state’s waivers under the Clean Air Act in the months ahead. Trump hasn’t said he’d do this yet, but he’s reportedly considering it. Rescinding a waiver has basically never been done before — and there are two options here:

Pruitt could try to rescind the waiver California got to establish its own fuel economy standards for cars and light trucks. If he did this, all states would simply have to follow the federal rules — even if the Trump administration weakened them.

Much more drastically, Pruitt could try to rescind a second waiver California received in 2013 to create its zero-emissions vehicle (ZEV) program, which requires a certain percentage of automaker sales in the state to be zero-emissions vehicles — such as electric cars or hydrogen vehicles. Currently, nine other states have adopted this ZEV mandate, and it’s a key driver of electric vehicle sales.

If Pruitt attempted to do this — which, again, is not something that’s been proposed for now — he’d immediately be challenged in court by California, setting the stage for a major showdown. The Trump administration might argue, as the Bush administration did, that the waiver program was meant to help California solve local pollution problems unique to the state — such as severe smog in cities like Los Angeles. It was never intended to address a global problem like climate change.

For now, environmental groups feel confident California would prevail. “EPA would need to contradict the extensive evidence in the record supporting California’s current waiver, a difficult feat, and one likely to be rejected in court,” write Irene Gutierrez and David Pettit of the Natural Resources Defense Council. “Courts look with skepticism on agency policy reversals contradicting earlier factual findings.”

So it’s possible that Trump won’t even try to go after California — and instead, the EPA and Transportation Department will just try to work with the state to develop rules that everyone’s happy with. But it’s also possible we’ll see a showdown.

If California’s ZEV program gets killed, that would be a huge blow to electric cars

There are a few ways to think through what would happen if Trump were to weaken the fuel economy standards and/or rescind California’s waivers.

If the standards for cars and light trucks get relaxed, then oil consumption and greenhouse gases will very likely go up. In its midterm review, the EPA estimated that Obama’s proposed 2022-’25 standards would reduce US oil consumption by roughly 1.2 billion barrels over the lifetime of the vehicles and reduce US carbon dioxide emissions by 540 million metric tons. A weaker rule would achieve fewer savings. (For context, the US consumes about 7 billion barrels of oil each year.)

The flip side, says Sam Ori, executive director of the Energy Policy Institute at the University of Chicago, is that the bulk of the savings from Obama’s fuel economy rule have come from the standards that are already locked into place. That’s at least 3 billion barrels of oil over the lifetime of the vehicles, by some estimates. “That’s not going away no matter what the Trump administration does,” Ori says.

But on the off-chance that Pruitt goes even further and manages to rescind the waiver for California’s ZEV program, that could potentially be a much bigger deal, particularly for the electric car market. “The ZEV mandate is what’s driving most of the growth we’re seeing in electric vehicles,” says David Cooke of the Union of Concerned Scientists.

If the ZEV rules get repealed, that would be a big blow to the electric vehicle market, says John Graham, the former administrator of the Office of Information and Regulatory Affairs under George W. Bush who worked extensively on fuel-economy issues. “Tesla’s business model would be hurt without the California ZEV regulation because Tesla generates significant revenue from the sale of ZEV credits to other vehicle manufacturers,” Graham tells me. “Several manufacturers have stated publicly that they would not be offering plug-in electric vehicles were it not for the California requirements.”

Any ZEV rollback would also be a major setback for California’s climate ambitions. The state currently has about 230,000 zero-emission vehicles and plug-in hybrids registered — about half the national total. But the state’s ambitious plan for cutting emissions calls for putting 1.5 million of those cars on the road by 2025, and 4.2 million on the road by 2030. That’s extraordinarily difficult to do if the mandate gets repealed.

To be sure, rescinding the order wouldn’t mean the death of all electric cars. “Some manufacturers (e.g., Nissan, Tesla, and GM) would probably continue to offer electric vehicles, even without the ZEV requirements,” says Graham. And, of course, other countries like China and Norway continue to aggressively push pro-electric-car policies, which will influence the types of cars automakers produce.

And over time, if the technology continues to improve, electric cars should catch on even without mandates. “In the long run,” says Graham, “if battery prices continue to decline rapidly, the electric vehicle will not be dependent on the ZEV waiver, as it will be able to compete in the marketplace on its own virtues.”

Still, the long run can take an awfully long time to arrive. So, for now, this will be worth watching closely.

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