Recent Republican responses to President Joe Biden’s proposed automotive emissions standards came fast and furious.
“The Biden administration … wants to decide for Americans what kinds of cars and trucks we are allowed to buy, lease, and drive” howled Sen. Shelley Moore Capito (R-W.Va.), who is the ranking member of the Senate Environment and Public Works (EPW) Committee. Fortunately, things aren’t as bad as the senator would have you believe. That’s because choice lies at the heart of the Environmental Protection Agency’s (EPA) new proposed rule. The forthcoming regulations give American consumers and companies a huge amount of freedom to choose what to build and what to drive.
Indeed, the proposed emissions rule draws on an almost 50-year legacy of outsourcing some of the toughest regulatory decisions to industry and consumers.
The story starts in 1960 at the University of Virginia, when a British born economist named Ronald Coase published a paper called “The Problem of Social Cost.” The Coase Theory of Economics addressed the thorny question of “those actions of business firms which have harmful effects on others” — things like how much society should let industries pollute. The theory’s major innovation was to frame pollution as a question of property rights. By allocating property rights to public goods such as clean air, and allowing people to buy and sell them, Coase postulated, one could theoretically arrive at a socially efficient outcome for nuisances like air pollution.
Coase himself was wise to the fact that his ingenious theory wouldn’t necessarily work in practice. It relied on three beloved economic fairytales: perfect competition, perfect information and zero transaction costs. Nonetheless, the theory proved useful in practice. And it served as the basis for a crop of government policies that decreased cost and improved efficiency of environmental regulations by allowing companies to pay for the right to pollute.
By the 1980s, Coasian emissions trading was being harnessed at a global scale. In 1987, the Montreal Protocol applied the scheme to ozone-depleting chlorofluorocarbons (CFC) — responsible for the cancer-inducing ozone hole above Antarctica. The Montreal Protocol assigned a progressively shrinking number of credits to polluting companies and allowed them to buy and sell the credits as they saw fit. As a result, ozone-depleting CFC’s have been reduced by 98 percent from their 1990 levels and he ozone hole is expected to recover completely by about 2050.
The following year in 1988, a bipartisan group of Senators led by Democrat Tim Wirth and Republican Tom Heinz, championed emissions trading as a solution to cleaning up power plants and the resulting acid rain. Their bipartisan plan culminated in the Clean Air Act Amendments of 1990. The Competitive Enterprise Institute lambasted the policy as the “most expensive environmental law ever.”But, in the end, the program was wildly cheaper and vastly more effective than anyone had hoped. In one study, the EPA found that the benefit to cost ratio was roughly 30-to-1 and that the Clean Air Act Amendments saved 160,000 lives annually by 2010.
In California, the Air Resources Board used Coasian economics to kickstart the global electric vehicle (EV) market. Starting in the 1990s, the state forced automakers to build and sell clean EVs if they wanted to also sell combustion engine vehicles in the state. If automakers didn’t want to build electric cars, they could also buy credits from companies that did. These clean vehicle credit markets were a lifeline to early EV innovators like Tesla — which has used them to fortify the sometimes-shaky economics of building EVs. (Last year, Tesla made $1.8 billion selling regulatory credits to other manufacturers.)
The EPA’s new proposed rule is Coasian through and through. The rule says very little about what kinds of cars automakers have to sell. But it does require them, through some combination of innovation and buying and selling credits, to achieve lower emissions levels.
Since the new standard is just an average, automakers get to choose their own adventure. They can build some really dirty cars and an offsetting number of really clean cars, they can trade emissions credits to balance out their ledgers, they can build all clean cars (e.g., electric vehicles) and sell credits to other manufacturers at a profit (like Tesla), or they can build a fleet of cars and trucks that independently achieves the EPA’s regulatory standard.
If Ford wants to build a 13mpg 700hp F-150 Raptor pickup truck, the company just has to offset its emissions. (That’s only fair, as the rest of us have to deal with the negative side effects of polluting vehicles.) It’s a credits trading system that would look very familiar to Professor Ronald Coase.
In practice, many of the cars sold in the U.S. will likely be electric in order to make the system pencil out. But nobody is being forced to build or drive electric cars.
The secret to achieving these emissions goals efficiently lies in understanding social goals (e.g., clean air and a stable climate), assigning property rights and creating a market through which those property rights can be efficiently exchanged. The EPA is emphatically not tinkering under the hood of our future automobiles or forcing anyone to buy electric cars.
All of this points to a more complicated future than the headlines suggest. Imagine this: The year is 2032 and you’re driving a whisper-quiet electric car down an idyllic two-lane country road. All of the sudden, some brand-new gas-guzzling pickup truck roars past on the wrong side of the double yellow line and cuts you off. It boils your blood that automakers are still building such an obnoxious piece of hardware.
If the Environmental Protection Agency (EPA) gets its way, such a scenario is entirely possible. But, “future you” can take solace in the fact that for every fossil-fueled pickup truck they sell, that automaker had to pay dearly in emissions credits (either buying them from others or producing low-emission vehicles in-house). That’s because, on average, that truck will have to produce about 89 grams of CO2 per mile — that’s 61mpg equivalent, or less than a Toyota Prius emits today. How they achieve that is up to them.
Indeed, freedom to choose is at the core of the EPA’s new policy plan for cleaning up America’s cars. That’s a big win for all those freedom-loving, pro-choice Americans. It means we can both drive what we want to and, at the same time, breathe a little easier about air pollution and climate change.
Levi Tillemann is a former member of the Obama administration Department of Energy, senior adviser to Valence Strategic and joined Ample from the World Economic Forum, where he was leading an initiative on decarbonizing manufacturing, use-phase and end-of-life emissions of the automobility ecosystem. Tillemann is also the author of “The Great Race: The Global Quest for the car of the Future” (Simon and Schuster 2015).