Decreased Fuel Economy Standards: A Threat to EVs?

On March 31, President Trump announced that he would be rolling back the fuel economy standards previously set by the Obama administration to ultimately encourage EV production.  Trump claims that this move will strengthen the auto industry, improve vehicle safety, and boost the economy during this time of economic uncertainty caused by the COVID pandemic.  These claims are mostly unfounded. 

For reference, Obama’s previously set guideline was that the average economy of an automaker’s lineup had to reach 54.5 mpg by 2025. Trump has reduced this to 40 mpg which, while still a lofty goal for automakers, represents a regressive policy decision. In response, multiple states are preparing to issue a lawsuit, which is expected to appear before the Supreme Court. 

For the end user, financial savings at initial purchase of a gas powered vehicle will be outweighed by increased usage cost (i.e. gas consumption) throughout the lifespan of the vehicle. In other words, for most drivers, the additional cost for a low mpg vehicle will surpass (by about $500) the premium that one would pay for an environmentally friendly (e.g. electric) vehicle. 

Contrary to the president’s claims, the change in legislation would result in a loss of 13,000 jobs, by bringing cars to market that couldn’t be sold overseas, because foreign countries have higher standards, which remain relevant. In addition to the economic benefits of a higher mpg standard, there would undoubtedly be societal benefits as well—notably cleaner air and reduced emissions. 

Concerning electric vehicles, this policy can arguably be interpreted as a setback, given that it loosens constraints for gas-powered vehicles. By lowering the mpg standard, automobile manufacturers can effectively produce cars more cheaply, and offer lower prices to the consumer. The financials behind EV ownership are less appealing now that a higher difference in upfront cost (compared to traditional vehicles) has to be justified; a disincentive to EV ownership.

The unfortunate reality of the Trump administration’s recent maneuver is that it could stifle EV markets by weakening the customer’s perceived value proposition. A key criticism is that the new rule, through its first phase introduced in fall 2019, specifically attacks California’s elevated fuel standards, which have been attributed to driving the popularization of EVs.  

Perhaps most importantly, this reversion of standards can deprioritize efforts to achieve an “all-electric future,” thereby potentially undermining innovation in a space that may be partially driven by consumer spending. Katherine Stainken, policy director at Plug In America, explains that “If the U.S. doesn’t continue to enact supportive policies, we’re going to lose that race [with EV technology], and then all that investment that goes with it.” With fewer restrictions, automakers won’t be forced to invest as much in electric and other types of low emission vehicles. As further support for why this isn’t a sound strategic move, gasoline prices could increase, making it even less sensible to disincentivize EV production. 

It is quite ironic that amid a public health crisis, a policy could permit adding more pollution to the air we breathe, which would be particularly detrimental for medically vulnerable groups such as the elderly and those with respiratory conditions. Furthermore, electric vehicle production has been shown to create solid American manufacturing and energy jobs. All in all, Trump’s lower lower mpg standards hurt the viability of EVs in the short term, and therefore the environment, public health, and the economy. 

While the current coronavirus pandemic and ensuing recession has significantly decreased the demand in the short term for all cars, both gas and electric powered, the 2020’s are still likely to be a strong decade for EVs as the price for batteries and charging times decrease, and the travel range per charge increases.  In the short term, Trump policies and lower oil prices will cause consumers to value the EV proposition less from an economic standpoint. 

However, American companies will always invest in the technology they deem to be the future, as will all major international players. Europe’s government continues to put standards in place to lower CO₂ emissions, with further targets anticipated in the future, thus driving EV production. Similarly, the Chinese government is committed to being a global competitor in the EV market. Their demand for gas powered cars is less affected by declining oil prices, as gasoline is not tied to global crude prices under $40. Regardless, oil prices will always fluctuate, but they will not derail the international commitment to EV transportation in the face of climate change. 

Eric Knorr

Undergraduate Seminar Fellow

Eric Knorr is an undergraduate student studying economics at the Wharton School. Knorr was also a 2020 Undergraduate Student Fellow.