California Has a Plan to End the Auto Industry as We Know It

Source: by John Lippert, Bloomberg • Posted: Tuesday, August 4, 2015

Sergio Marchionne had a funny thing to say about the $32,500 battery-powered Fiat 500e that his company markets in California as “eco-chic.” “I hope you don’t buy it,” he told his audience at a think tank in Washington in May 2014. He said he loses $14,000 on every 500e he sells and only produces the cars because state rules re­quire it. Marchionne, who took over the bailed-out Chrysler in 2009 to form Fiat Chrysler Automobiles, warned that if all he could sell were electric vehicles, he would be right back looking for another govern­ment rescue.

So who’s forcing Marchionne and all the other major automakers to sell mostly money-losing electric vehicles? More than any other person, it’s Mary Nichols. She’s run the California Air Resources Board since 2007, championing the state’s zero-emission-vehicle quotas and backing Pres­ident Barack Obama’s national mandate to double average fuel economy to 55 miles per gallon by 2025. She was chairman of the state air regulator once before, a generation ago, and cleaning up the famously smoggy Los Angeles skies is just one accomplish­ment in a four-decade career.

Nichols really does intend to force au­tomakers to eventually sell nothing but electrics. In an interview in June at her agency’s heavy-duty-truck laboratory in downtown Los Angeles, it becomes clear that Nichols, at age 70, is pushing regula­tions today that could by midcentury all but banish the internal combustion engine from California’s famous highways. “If we’re going to get our transportation system off petroleum,” she says, “we’ve got to get people used to a zero-emissions world, not just a little-bit-better version of the world they have now.”

In that speech in Washington, Mar­chionne was talking up the little-bit-better option. He touted the improved efficiency to be wrung from traditional engines and gasoline-electric hybrids. But Nichols isn’t scared of auto executives and has never ac­cepted their vision of what’s possible. (Gen­eral Motors said catalytic converters, an early advance in tailpipe pollution control that Nichols promoted in the 1970s, could kill the company. They’re commonplace today, and GM’s not dead yet.)

Even if most people outside California have never heard of Mary Nichols, she’s the world’s most influential automotive regu­lator, says Levi Tillemann, author of The Great Race, a book on the future of automo­bile technology. “Under her leadership, the Air Resources Board has been the driving force for electrification,” Tillemann says.

Nichols, who drives a tiny electric Honda Fit, acts as if she’s an unstoppable force. California’s goals for the adoption of elec­tric vehicle technology are the most strin­gent in the nation, but Nichols thinks they need to be even tougher. Regulations on the books in California, set in 2012, require that 2.7 percent of new cars sold in the state this year be, in the regulatory jargon, ZEVs. These are defined as battery-only or fuel-cell cars, and plug-in hybrids. The quota rises every year starting in 2018 and reaches 22 percent in 2025. Nichols wants 100 percent of the new vehicles sold to be zero- or almost-zero-emissions by 2030, in part through greater use of low-carbon fuels that she’s also promoting.

The 2030 target is what’s needed to meet Governor Jerry Brown’s goal, set in an ex­ecutive order, of an 80 percent reduction in greenhouse gas emissions by the middle of the century, Nichols says. The conven­tional internal combustion engine needs to be off the road by 2050 and, since cars last many years, on its way out of new-car showrooms around 2030.

Brown, 77, has had Nichols at his side as a clean-air regulator through both his gov­ernorships—his first two terms from 1975 to 1983 and his remarkable, ongoing sec­ond act. He made her a member of the Air Resources Board in 1975 and named her its chairman in 1979. By the time he returned to the capitol three decades later, Nichols had regained the chairman’s job, having been tapped by Arnold Schwarzenegger. “She’s smart. She’s honest,” Brown says. “There’s no daylight between what I think and what Mary thinks on climate change.”

Both Brown and Nichols emphasize that California must inspire and sup­port action in other states and coun­tries if there’s any chance to slow or stop climate change. “If the federal government can’t get it right, we in Cal­ifornia are going to take care of busi­ness,” Brown said in an April speech.

Next year, Nichols will be a key player, along with Obama administra­tion officials, in a review and update that will set the course for the national mileage standards and her own ZEV quotas. “This review will shape the next 20 years of transportation tech­nology worldwide,” says Diarmuid O’Connell, vice president of business development at Tesla Motors. Elon Musk’s company, devoted exclusively to electric cars, is an exception among automakers in pushing Nichols to move more aggressively.

California has a leadership position not just because of its size and fabled car cul­ture but because its voters actually want the government to address global warm­ing, says Brown, a Democrat. “We’re work­ing against time,” he says.

Nichols says she’s motivated in part by the fear that her three grandchildren, when they’re middle-aged, could be living in a state that’s hotter and drier, with eroded beaches and less-varied wildlife. But Cali­fornia emits only 2 percent of global green­house gases, which is why Nichols wants to export her clean-air programs and ideas, especially to emerging markets. Nichols is advising China about enacting its own elec­tric car mandate, and she’s consulting with seven Chinese cities, including Beijing, that are testing a cap-and-trade program.

“There are only a handful of people who’ve had the impact on clean air Mary has had,” says Lisa Jackson, who was the Environmental Protection Agency’s chief from 2009 to 2013 and now runs green ini­tiatives at Apple. “She’s implemented poli­cies that are models for the world.”

Brown is pushing the legislature to write into law his CO2 reduction plan for 2050, thus ensuring it will outlast his tenure in Sacramento. This includes an indefinite extension of a cap-and-trade program, begun by Schwarzenegger, that requires utilities and industrial companies to buy permits for exceeding their carbon emis­sion quotas and generates a revenue stream that Brown is using for things such as high-speed rail.

Final votes on Brown’s plans could come in September. Nichols says Brown, with the legislative battle to come, asked her not to retire two years ago, even though her hus­band was recovering from cancer.

The indispensable woman of Califor­nia clean-air politics began as a transplant from the East. She’s from upstate New York, where her father was an electrical engineer­ing professor at Cornell University and, for a time, mayor of Ithaca. She studied Rus­sian literature at Cornell and attended Yale Law School, which is where she met her husband, John Daum. After graduating, they drove across the country to L.A., ar­riving in a city choked by smog so thick it obscured the surrounding mountains.

Nichols took a job at one of the country’s first public-interest law firms and quickly got involved in a 1972 suit against the fed­eral government to test the new provisions of the Clean Air Act. Presenting the case in court, Nichols described Los Angeles air so polluted it was sickening people and harm­ing the economy, and she argued that the EPA must force the state to develop a plan to improve it. Judge Harry Pregerson of the U.S. Court of Appeals for the 9th Cir­cuit followed the case closely at the time. Now 91 and still on the bench, he remem­bers Nichols fondly and says that for many years he showed her brief for the case to young lawyers as an example of how to write. Pregerson also recalls the pollution nightmare of that era. His chambers are in L.A.’s Woodland Hills section, near the Santa Monica Mountains, with windows overlooking the Rose Bowl. “In those days, all you saw was this darkness,” he says. “It burned your eyes. It made you cough.”

Although the lawsuit succeeded, Nichols decided she could better push change in the government by working on the inside. That led her to the Air Resources Board under Brown, where she helped break new ground among global regulators by requir­ing specific pollution control measures—such as the catalytic converters carmakers so feared. “Whenever I hear people talk about smog as it used to be in L.A., I feel that—along with many other people—I’ve played a role in solving a really big prob­lem,” Nichols says. “Unlike some of my peers who left law school with the inten­tion of, say, ending poverty, clean air has proven to be something in which we could make real progress.”

After Brown left office in 1983, Nichols worked for the Natural Resources Defense Council and other groups. In 1993, she re­turned to government, joining President Bill Clinton’s EPA as an assistant admin­istrator. There, she ran a groundbreak­ing sulfur dioxide cap-and-trade program that reduced acid rain and worked on the first national limit on fine particulates, pollution from smokestacks and tailpipes that can lodge in the lungs and cause seri­ous health problems. She counts that rule as her biggest personal achievement.

Nichols was back in state government as head of the California Natural Resources Agency when Democrat Gray Davis was governor and out when Davis lost a recall election in 2003. But Nichols ended up working just a few years later for Davis’s successor, Schwarzenegger, who wanted her environmental bona fides as he sought to write the rules for his CO2 law. Though Schwarzenegger, a Republican, was turn­ing to a Democrat, he says he couldn’t let ideology get in the way: “Mary was quite simply the best person for the job.”

While Nichols was making a name for herself battling for cleaner air, her hus­band was fighting for Exxon. Daum was lead counsel defending the lawsuits that resulted from the Exxon Valdez oil spill in Alaska in 1989, and he eventually got the company a 90 percent reduction in the $5 billion in punitive damages it faced.

Being married to an oil industry lawyer, Nichols says, probably makes her a bet­ter regulator. “I always thought it gave me extra perspective that I know something about a company like Exxon,” she says.

Nichols shows enthusiasm for the sci­ence and engineering that underpin her agency’s rules. “This is the heart and soul of what the ARB is about,” she says during the visit to the L.A. heavy-truck lab. A few feet away, a Freightliner runs hard on a dy­namometer that simulates road conditions. The board will soon propose new emission limits not just on large trucks but also on ships, trains, and forklifts, and the test Nichols watches is part of the effort to be sure the rules are viable. “We have to make sure this stuff actually works,” she says.

Her approach wins over some business leaders. “Mary listens,” says Ron Nichols, no relation, who is senior vice president of regulatory affairs at Southern Califor­nia Edison, an electric utility that’s boost­ing renewables while aiming to keep rate increases below the pace of inflation. “She understands business needs.”

Still, if California utilities have made some kind of peace with Mary Nichols, the world’s car companies mostly have not. Nichols’s rising influence is forcing them to devote design and engineering dollars to future models that will run on batteries or hydrogen fuel cells as well as gasoline en­gines, says Bill Reinert, a retired product planner at Toyota Motor’s U.S. unit who helped redesign the Prius hybrid in 2003.

Auto executives are reluctant to com­plain out loud about the ZEV mandate. For one thing, they want to claim public rela­tions points for the green vehicles they pro­duce. For another, they don’t want to cross Nichols. “The public relations and image people are very afraid of her,” Reinert says.

Carmakers are also looking ahead to next year, when Nichols will be involved in the review of California’s ZEV quotas and Obama’s mileage standards. Her state pro­gram and the federal auto efficiency initia­tive were linked in 2009, when the federal government and California agreed to work together so carmakers wouldn’t face com­peting rules. Changes and updates to these regulations will need to be approved by her agency, the EPA, and the National Highway Traffic Safety Administration, which has jurisdiction over fuel efficiency.

Nichols’s 2030 target for zero- and almost-zero-emission vehicles is part of the jockeying in these negotiations. The ZEV mandate is more complicated than a simple numerical quota for electric ve­hicles. There can be a range of credits for plug-in hybrids, such as the Chevrolet Volt, and other advanced technologies (the almost-zero-emission category Nichols refers to).

GM, Ford Motor, Toyota, and Honda Motor have asked for more credits for plug-in hybrids. They argue that as bat­tery technology improves, these will be used more and more for all-electric driv­ing. Nichols says the mandate for truly zero-emission vehicles, powered only by bat­teries or hydrogen fuel cells, is vital to meet the state’s 2050 greenhouse gas targets.

As a sweetener to encourage automakers to embrace these targets, Nichols says, she can offer expanded preferential access to freeways and parking spaces for ZEVs, along with more charging stations and bonuses for dealers. She mentions another possible concession: a slower acceleration of the ZEV mandate. “Time and time again, we’ve post­poned, delayed, or stretched out the compli­ance path for a particular standard in return for a renewed commitment and clarity that we’re going to get to the goal.”

This is a hallmark of her career: Nichols will compromise but not capitulate. How much she will give on her push for electric vehicles will be seen when negotiations really get going for next year’s review.

Marchionne is unusual among auto­makers in that he complained in public that electric car and fuel economy man­dates are moving too fast. He says he will sell only as many 500e electric cars as the quota requires—not one vehicle more.

Nichols doesn’t seek out on-the-record debate with automakers, but she doesn’t run from it either. Asked how auto execu­tives view her personally, she says she has no idea. She does explain that global auto­makers view the Air Resources Board as the most important driver for various kinds of automobile technology. The car companies are making California the central place for design and advanced engineering, she says, and they know there’s a market for green innovation.

Asked about the comments from the Fiat Chrysler CEO specifically, Nichols pauses and then says: “There’s a reason Chrysler is the perennial No. 3 of the Big Three.” When asked a follow-up, Nichols stops the line of questioning. “That’s my answer. Take it or leave it.”

This story appears in the September issue of Bloomberg Markets magazine. With assistance from Michael Marois in Sacramento and Tim Higgins in San Francisco.