Tighter regulations for car makers will drive buyers to choose electric

Over a decade ago, environmentally-conscious California introduced stricter standards for car emissions than those that applied elsewhere in the United States. While only one state, it accounts for one seventh of the US economy, so Californian standards became de facto the ones US car manufacturers had to meet.

The Obama administration set new US-wide standards that required car makers to achieve significant improvements in fuel efficiency over the period from 2012 to 2016. While these standards were seriously weakened under Trump, the gains made by 2016 have not disappeared.

Higher taxes on carbon may not be enough on their own to drive behaviour change

In a recent academic study, a US environmental NGO, Resources for the Future, looked at the cost and the impact of the Obama standards on greenhouse gas emissions. Drawing on an extensive database of most US car owners, the study looked at consumer preferences for car characteristics such as acceleration and fuel efficiency, and at responsiveness to price. The researchers also examined how manufacturers had reacted when more ambitious regulations were introduced.

The research found that the Obama regulations resulted in a substantial reduction in the high level of greenhouse gas emissions from cars. The cost to firms and individuals of achieving this worked out at just $6 per tonne (€5.14) of reduced carbon emissions.

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When compared to current Irish carbon tax rates of about €30 a tonne, it is clear these savings in emissions came at a very low price.

The research also showed that a significant part of the cost of the changes fell on manufacturers rather than consumers – providing a very strong incentive for motor manufacturers to up their game and move production to emissions-free cars.

The study also showed that car buyers were hazy about what they could save through enhanced fuel efficiency – actual savings were twice what consumers thought.

That means that higher taxes on carbon may not be enough on their own to drive behaviour change. What’s probably needed is a combination of increased regulation of vehicle standards, taxing carbon-rich fuels, and educating car buyers on savings through switching to more fuel-efficient models. This combination of policies could realise significant environmental gains at minimal cost to consumers.

If Joe Biden wins the US presidential election next week, his administration will probably want to drive carbon emissions down a lot further. The modelling work in this study will allow it to identify how quickly it should tighten regulations to reduce emissions and what the cost of such tightening will be.

The EU has also gone the route of tighter regulation of car emissions, with fines for breaches. From this year, greenhouse gas emissions per car, averaged over all a manufacturer’s sales, must be under 95g per km. Carmakers will pay a fine of €95 per car for every gram of additional emissions measured in this way.

For example, if Volkswagen’s average emissions per car sold this year was 100g per km, missing the target by 5g, they would pay a very significant penalty of almost €500 on every one of the three to four million car sales in the EU. In fact, Volkswagen will only reach the regulatory standard this year across their sales portfolio thanks to a temporary German government subsidy of €6,000 per electric Golf.

While we don’t yet have European research that quantifies the cost per tonne of reduced greenhouse gases from such regulatory action, the US findings suggest it’s a very efficient approach.

One way of temporarily escaping fines under this system is for a low-emissions manufacturer to pool its fleet with a high-emissions manufacturer. These agreements must be finalised by tomorrow to be valid.

Fiat-Chrysler has made such an agreement with Tesla, though the side payment to Tesla is unknown. These agreements are a temporary fig leaf. Rising vehicle standards will drive longer-term substantive change.

The regulations increase the profitability for manufacturers of electric car sales relative to sales of SUVs. As the regulations tighten further, they will accelerate the move away from manufacturing fossil fuel cars.

Ireland has a very demanding target for the take-up of electric vehicles by 2030. Encouraging the switch could cost a lot in subsidies and lost taxes, as the Department of Finance has noted.

However, if EU regulations are tightened, carmakers will respond, and supply of electric cars should rise, bringing down average cost. That would help drive the switch to electric cars at lower subsidy cost to the state.

The US research suggests that regulation, forcing lower carbon emissions from vehicles, is a cost-effective way of reducing our carbon footprint. EU leadership is vital in making that happen.