Trump Says Regulations Impede. Perhaps Not in the Electric Car Business

Source: By FARHAD MANJOO, New York Times • Posted: Wednesday, March 22, 2017

Doug Chayka 

President Trump is not fond of regulations. Within weeks of taking office, he and his appointees began to roll back rules that govern the financial industry, guns, the energy business and broadband internet providers.

Last week was the auto industry’s turn. In a speech in Ypsilanti, Mich., Mr. Trump said he would alter rules imposed by the Obama administration to raise vehicles’ fuel standards, which are aimed at curbing greenhouse gases. The rules, Mr. Trump said, are killing jobs. Getting rid of them would prompt a resurgence in the auto industry that would make America “the car capital of the world again,” he said.

That’s one possibility. We also have to consider another scenario: Loosening the fuel-economy rules could remove a primary incentive for big carmakers to catch up with innovative upstarts like Tesla and leave the American car industry out of step with a future ruled by electric motors rather than the internal combustion engine.

This might happen because the effects of regulation are not as simple as Mr. Trump argues. The president’s view that rules almost always hurt businesses is not supported by history. Researchers who study regulation and its effects on business said there have been numerous instances in which regulation speeds along, rather than impedes, technological progress. It has happened in the energy business, the electronics industry and health care.

And it’s happening now in cars. Vehicles powered by electricity keep getting better. Electric cars are getting less expensive, their range is increasing, and the infrastructure to sell, charge and maintain them is improving. As a result, electric cars keep getting more popular, even in a time of low gas prices. There are lots of reasons for this, but one above all: The whole industry is being pushed by regulation, both at the federal level and in the nine states that have adopted a zero-emission plan created by regulators in California.

“Having long-term targets is driving investments in innovative technologies,” said Don Anair, who studies the auto industry for the Union of Concerned Scientists, an environmental advocacy group. “Maintaining those standards is critical for maintaining that progress.”

Car manufacturers disagree. A spokesman for the Alliance of Automobile Manufacturers, a trade group that represents automakers on policy issues, said that regulations themselves are not spurring sales.

“Mandates are great at focusing attention on the development of a technology,” said Wade Newton, a spokesman for the Alliance, in an email. “But consumer acceptance of that technology is another thing.” In a letter to the Environmental Protection Agency, the Alliance argued in February that Obama-era fuel economy rules would make cars more expensive, thus reducing sales and causing the loss of 1.1 million jobs.

You might wonder why electric cars need help. If more efficient cars are so clearly better than their predecessors, shouldn’t the market ensure their success?

But that’s not how technological progress typically works. New technologies — even ones that, on paper, look much better than old ones — usually start out at a severe disadvantage to the stuff they’re up against. The first personal computers were costlier and less powerful than early mainframes, for instance, and early digital cameras were not as good as film cameras.

President Trump in Ypsilanti, Mich., last week with government and auto industry officials. He said he would alter rules imposed by his predecessor to raise fuel standards. Stephen Crowley/The New York Times 

Sometimes these technologies do not need a regulatory helping hand to get ahead. They merely get better with scale; the more that people bought digital cameras, the more manufacturers could invest in making better sensors, which became less expensive and offered better resolution, which in turn spurred sales, and on and on.

Electric cars also depend on scale. Like the production of camera sensors and microprocessors, batteries and other components for electric cars also get less expensive when there is a mass market for these vehicles.

But the process is slow, and it faces lots of hurdles. Switching to an electric car isn’t like switching to a digital camera. Gasoline engines are entrenched in the transportation economy. To make your electric car work correctly, you need an infrastructure to support it — you need ways to charge it, repair it, maintain it, resell it. In the absence of that ecosystem, switching to a car based on a fundamentally new tech platform, even if might offer benefits in the long run, is going to be hard — which means that car companies won’t have much incentive to build it.

That’s where regulation comes in. Traditionally, economists thought of regulation as a cost imposed by the government on companies. But in the 1990s, the economist Michael Porter argued that government rules could sometimes push industries to pursue technological innovations that they wouldn’t have otherwise considered.

In other words, regulations crafted in the right way could sometimes cost nothing — the rules would prompt innovations, attract new customers, and improve the industry over all. The idea took off among academics and regulators. Now it’s known as the “Porter Hypothesis,” and it has been shown to hold true in several studies across a wide range of industries.

There is some good historical evidence that regulations have been a primary driver of innovation in the American car business. In the 1970s, the American government began imposing fuel economy standards on car manufacturers. Rather than harm the industry, the rules — which made cars smaller, safer and more fuel efficient — played a crucial role in helping the American car business beat back competition from European and Japanese imports. They also allowed American cars to become more globally competitive. So the new rules bore out the Porter Hypothesis — they didn’t increase costs for consumers, but they improved cars.

There is also evidence that when the government backs off the car industry, cars do not improve much. The average fuel economy of American cars soared from 1975 to around 1980, when regulators were pushing hardest. Then, beginning with Ronald Reagan’s presidency, the government eased off, and cars began to get less efficient. It was only after the government imposed new fuel economy rules — first under President George W. Bush and then under President Barack Obama — that the average fuel economy of vehicles on American roads began rising again.

Today, the most important regulatory agency pushing the car industry’s adoption of electric vehicles isn’t the federal government. It is the California Air Resources Board, the state agency that manages California’s Zero Emission Vehicle program. The program, which has been adopted by nine other states, including New York, New Jersey, Connecticut and Massachusetts, outlines an escalating set of standards to encourage carmakers to create a market for electric cars.

In 2018, about 4.5 percent of a company’s sales in the covered states must be zero-emission vehicles (the cars can be fully electric, plug-in hybrids or powered by hydrogen fuel cell). By 2025, that rises to 22 percent. But the requirements are flexible. To meet the standards, car companies can decline to make electric vehicles and instead buy “credits” from other manufacturers; companies that sell more electric cars than the minimum standard can sell their extra credits.

The resulting system has been a boon to upstarts like Tesla, which has sold hundreds of millions of dollars in credits. The rules have also given bigger companies an incentive to pursue electric vehicles. For instance, Chevrolet beat Tesla to market last year with a long-range electric car that sells for under $40,000, the Chevy Bolt. It did so partly to satisfy California’s rules; even if it does not make much money on each Bolt, selling the electric car will allow it to keep selling more profitable gas-powered cars.

“What we’re seeing is that the standard itself is creating an environment of competition, which is leading to rapid advances in electrification over the last seven years,” said Mr. Anair of the Union of Concerned Scientists.

But the California rules under which we’ve seen these advances were made possible by a federal waiver granted by the Obama administration. Some environmentalists now worry that the Trump administration could attempt to revoke that waiver — and with it, the nation’s best shot at moving beyond gas engines.