Death penalty for fuel vehicles! If the United States wants to reshape the automotive industry, can it succeed?

The U.S. government is pushing trams harder than ever to try to get a head start in the race for new energy. But the approach has sparked widespread rift and skepticism in politics and the auto industry.

On April 12, local time, the US Environmental Protection Agency (EPA) launched the most aggressive vehicle emission reduction proposal in history. Under the proposal, the EPA plans to drastically limit carbon emissions from the automotive sector and reduce the average greenhouse gas emissions target level by 56 percent.

According to media estimates, this move means that by 2032, electric vehicles will account for 2/3 of new car sales in the United States. This target is set quite high, equivalent to a 10-fold increase in the current market share. Last year, electric vehicles accounted for only about 6 percent of new car sales in the United States.

Therefore, if this proposal is finalized, it is basically equivalent to officially declaring the end of the era of internal combustion engines, and it will completely change the pattern of the US automotive industry. The New York Times commented that this regulation is no less significant than Henry Ford built his first car in 1896.

EPA Commissioner Michael Regan, speaking Wednesday, said:

"Today's action will accelerate our ongoing transition to new energy vehicles, tackle the climate crisis head-on, and improve air quality in impoverished communities across the country."

But since the proposal was announced, it has attracted many criticisms.

Policy details

The EPA's proposal is more radical than the previous executive order proposed by the Biden administration. In August 2021, the Biden administration proposed to make electric vehicles account for 50% of new car sales by 2030. Even at the minimum target, the EPA's proposal could allow electric vehicles to account for 54 percent of sales by 2030.

The new emission standard proposal will also apply to cars, SUVs and trucks produced between 2027 and 2032.

After the new rules go into effect, automakers will have to report to the U.S. government annually the average greenhouse gas emissions of all new vehicles sold. Companies that fail to meet the standards can be subject to penalties of varying degrees, including billions of dollars in fines.

The proposal will be finalized in spring 2024 after a period of public comment.

Perhaps it had been taken into account that the proposal would be highly controversial. In announcing the proposal on Wednesday, the EPA said at least 20 countries had announced they would phase out internal combustion engine vehicles in the next few decades, and also cited a new policy previously approved by the European Union to ban the sale of fuel vehicles until 2035, suggesting that its policy was not radical. But in fact, the EU withdrew the ban in March due to the high cost of banning the sale of fuel vehicles.

EPA Commissioner Michael Regan said Wednesday that the new policy, if effective, is expected to reduce carbon dioxide emissions by 7.3 billion tons by 2055, roughly equivalent to the total carbon emissions of the global transportation industry in a year. In addition, the EPA said that the new policy can reduce vehicle maintenance costs and save fuel, and the benefits will be $1 trillion higher than the cost.

The cost of transformation

Biden's ambitions for electrification transformation are costly.

The EPA said the Inflation Reduction Act (IRA), passed last August, has provided a strong injection of money for its new deal. The IRA bill invests $369 billion in climate change and renewable energy, which is far from covering the cost of electrifying the automotive industry.

The U.S. government is already providing high subsidies and tax breaks for the electric vehicle industry. Goldman Sachs estimates that subsidies and tax breaks alone cost $523 billion over 10 years. In other words, even if all of the IRA's investment in environmental protection is spent on new energy vehicles, this money is not enough for tax cuts and subsidies.

Moreover, the cost of electric vehicles is 10%-40% higher than that of fuel vehicles. According to industry research firm J.D. Power, in March, the average selling price of electric vehicles was $61,800, while the average selling price of fuel vehicles was $45,600.

In a report released last month, the U.S. Energy Information Administration noted that given higher prices and insurance premiums, a range of around 400 kilometers, and longer charging times, electric vehicles "remain uncompetitive compared to traditional gasoline-powered vehicles and light trucks that serve the mass market."

The agency predicts that electric vehicles are expected to account for only 15 percent of new car sales by 2030. Far from the goals of the US government.

Disruption of the free market?

Strictly speaking, the EPA does not have the legal authority to dictate what automakers can sell; it only indirectly regulates by setting carbon emission standards — leaving automakers with no choice but to electrify their products.

Despite environmentalists' support for the EPA's New Deal, some Republicans see the EPA's policy as undermining America's free-market system.

While the EPA's New Deal doesn't dictate specific car models that must be produced, the U.S. government is transforming a key industry in a way unprecedented in a free-market economy: it's not the consumers who decide what automakers should make, but the government. The U.S. government, which doesn't force consumers to buy iPhones or force Ford to build Model T-cars, is now interfering in the free-market economy in the name of reducing carbon emissions.

Republican Senator John Barrasso told the media:

"'Electrification of everything' is not the solution. It's a path to higher prices and fewer options. ”

Automakers were collectively opposed

The old fuel vehicle companies are extremely dissatisfied with the new policy. The Automotive Innovation Alliance, a lobbying group representing major automakers such as GM, Ford, and Toyota, said:

"The EPA's proposed emissions plan is aggressive from any point of view. This will require massive, 100-year changes to America's industrial base and the way Americans drive. ”

According to media reports, in mid-February, the lobby group has negotiated with the Biden administration on the EPA New Deal, and the established car companies unanimously said that the application of electric vehicles depends on factors beyond the control of car companies, including sufficient charging pile networks and stable power battery supply chains.

Therefore, these car companies hope to relax the upcoming new rules and give them enough time to transition to reduce risk and uncertainty. But apparently, the Biden administration ultimately did not adopt these recommendations.

Established car companies are already extremely dissatisfied with the US carbon emission regulations. Like China, the United States has a carbon credit system for the auto industry. Car companies earn points every year for manufacturing and selling electric vehicles, and if they fail to meet the standards, they will face legal action or fines.

Car companies that do not have enough points can only buy points from competitors who have extra points. Over the past three years, Tesla (62% U.S. market share in 23Q1) has made $4.8 billion just by selling points.

The new regulations that the EPA intends to introduce now are tantamount to pronounced the death penalty for fuel vehicles. These car companies must add more costs and invest in the production of electric vehicles. The road ahead is fraught with uncertainty.

The bigger question is, how long will the new rules last? The U.S. government will usher in a change of government in 2024. If Biden is not re-elected, the EPA's policy may not be able to continue.

Car companies have faced such a dilemma before. The previous Democratic president, Barack Obama, also set vehicle emission standards during his term, but Trump repealed them in 2017 as soon as he took office.

Lawrence Burns, former vice president of research and development and planning at General Motors, told the media that the incoherence and rapid change of US government policies have brought great difficulties to the production planning of the automotive industry, because the preparation time of automobile production is very long, and a lot of capital and technical verification are required before selling products.

He said:

"If these demands keep jumping around, I don't know who will win."