How the Biden administration might change credit trading in the auto industry

Riley Beggin Breana Noble
The Detroit News

A new administration coming to Washington next month is expected to usher in policy changes that could reinforce credit programs that reward automakers for selling more electric vehicles — and force the laggards fielding lots of traditional pickups and SUVs to pay more until their own EV fleets expand.

That likely means electric-vehicle makers such as Tesla Inc., the nation's largest EV producer, have at least a few more years to reap reliable profits from sales of these regulatory credits, experts say, while other automakers with lower fuel economy ratings race to catch up.

Buying and selling credits is big business — one that automakers, especially those in the Detroit Three, are not keen to discuss. Collectively they have purchased millions of credits across state and federal programs, but how much they've spent doing so isn't public. Each of the Detroit Three lag their foreign-owned rivals in fuel economy rankings, and Fiat Chrysler Automobiles NV has paid tens of millions in federal fines for failing to meet requirements. It also has set aside billions for credit purchases through next year. 

President-elect Joe Biden waves as he leaves The Queen theater, Tuesday, Nov. 10, 2020, in Wilmington, Del.

"Now that there is a presumptive president-elect who will immediately change things back — to the extent he can in the short term and will in the long term — all of these things become really important," said Brett Smith, Technology Director at the Center for Automotive Research. "Because right now, most of the manufacturers' product portfolio puts them at a deficit."

The industry is preparing for what's likely to be an abrupt shift in automotive policy as President Donald Trump vacates the White House for Joe Biden. The president-elect has made it clear he's committed to aggressive action to combat climate change, including implementing policies that will encourage consumers and automakers to embrace electrification.

The federal Corporate Average Fuel Economy, or CAFE, program; the federal greenhouse gas emissions program; and the California Zero Emission Vehicle, or ZEV, mandate all allow automakers to buy and sell credits from one another to meet their own regulations. 

Tesla, the only major automaker to solely produce electric vehicles, built its business model around taking advantage of such programs to maintain profitability as it grew from infancy. Case in point: its net income was $566 million for the first nine months of the year thanks to nearly $1.2 billion from regulatory credits.

That even came under President Trump, who has sought to relax federal requirements and limit California's ability to impose its own restrictions. Now, those fortunes are likely to change — providing further stability in the short term to companies that have an abundance of them.

In this Friday, April 14, 2017, file photo, a security guard moves past an electric vehicle charging station in Beijing.

In flux under Trump

The U.S. auto industry deals in three different credit sharing programs, all aimed at reducing overall emissions. 

The federal CAFE standards set a minimum requirement for average miles per gallon for vehicles, and automakers can accumulate and trade credits to meet those standards. To date, most automakers have net positive credits under the program across their fleets. 

Traditionally, U.S. automakers don't do much trading under this program while European and Asian manufacturers do, said Christopher Knittel, a professor of economics at the MIT Sloan School of Management.

A second federal credit-sharing program is the greenhouse gas emissions standard, which also gives automakers credits when they over-comply with the program. Those standards have gotten more stringent over time, and most automakers selling increasing numbers of traditional pickups and SUVs have missed the standard since 2015 without credit transactions.

With them, all major automakers were in compliance with the federal standards as of model year 2018 — the most recent year for which data are available. Since the program began in 2009, Honda Motor Co., Toyota Motor Corp. and Tesla have sold millions of credits while such companies as FCA, Daimler AG's Mercedes-Benz and Volkswagen AG have purchased them in order to meet the federal requirements. 

Finally, the U.S. auto market trades credits under California's ZEV mandate, which requires automakers to sell a certain number of electric vehicles annually if they want to sell any cars in the state. Companies get credits for selling EVs, which they can sell to other automakers that don't meet the sales requirements. Eleven other states comprising a significant portion of auto sales nationwide have signed on to California's program, which means automakers have to abide by the same rules in those states.

The Trump administration has worked to roll back standards in all three of the programs since entering office in 2017. Regulators set less stringent greenhouse gas emissions standards for model years 2021 to 2026; slashed CAFE standards; and moved to revoke California's waiver to set stricter standards than the rest of the country, threatening the ZEV mandates.

Detroit impact

Only six of 18 automakers tracked by EPA earned net greenhouse gas credits in the last model year. General Motors Co., Ford Motor Co. and Fiat Chrysler weren't among them.

Since the program began in 2009, FCA has fared the worst of any major automaker, purchasing more than 45 million credits from its competitors. GM has purchased just over 7,000, and EPA records show Ford has neither bought nor sold credits. All three Detroit automakers have the lowest fuel economy rankings and highest CO2 emissions of major manufacturers across their fleets. 

Under California's ZEV credit trading program, FCA is one of the biggest sellers. Although it pales in comparison to Tesla, which has sold nearly 230,000 credits under the program, FCA comes in second with more than 25,000 credit sales since 2010. Ford has purchased the most of the three — around 36,000 — while GM and FCA are close behind with around 16,000 and 15,000 purchased, respectively. 

For the fuel-economy credit program under the CAFE Standards, NHTSA does not report which automakers bought or sold credits, only the net credit holdings at the end of each year — which could include both credits earned or bought. To date, FCA has the most credits under the CAFE standards with 301 million credits, followed closely by Toyota and Tesla.

Fiat Chrysler, however, was the only automaker to pay civil penalties for the two most recent model years for missing the requirements, according to NHTSA. The penalties totaled more than $79 million for 2017 and $77 million for 2016.

President-elect Joe Biden speaks to reporters as he leaves The Queen theater, Wednesday in Wilmington, Del.

Continuing to miss those standards could get costly. A federal court of appeals in August overturned the Trump administration's efforts to ease penalties. The decision increases their costs to $14 from $5.50 for every 0.1 mpg of fuel more that new vehicles use over the standards. NHTSA could appeal the decision to the Supreme Court.

If the court's decision is applied retroactively to the 2019 model year, FCA has disclosed it could be required to pay $583 million.

How much automakers are spending for the credits under each program, however, isn't clear. It's up to each company to choose whether to disclose how much they're spending and making off credits.

FCA committed to spending $2 billion through 2021 to buy regulatory credits from Tesla and other automakers, Richard Palmer, FCA's chief financial officer, said on a May 2019 earnings call. In the first nine months of 2020, it spent almost $642 million on regulatory expenses and using regulatory credits primarily in North America and Europe, roughly 25% more than all of 2019. Both FCA and GM said in court filings last year they'd made a deal to purchase credits from Tesla.

Neither GM nor Ford specifically disclose credit spending or earnings in their financial filings. When contacted by The Detroit News, spokespeople for FCA, GM and Ford declined to share how much the companies have spent or earned buying and selling credits. Tesla did not respond to a request for comment.

"Because these transactions are not public information unless you catch bits and pieces in quarterly reports, it's really hard to determine the number of transactions that have occurred," said Mike Taylor, president of Emission Advisors, a Texas-based company that advises companies dealing in environmental credit-trading markets.

What future may hold

The half-dozen auto industry experts who spoke with The News agreed that Biden is likely to reverse as many of the Trump-era rollbacks as he can and further incentivize EV development nationwide. 

Biden has said he'll spend billions of federal dollars on clean energy and electric vehicles and has pledged to prioritize developing infrastructure that can support them such as charging stations. He's also said he'd expand consumer tax credits as an incentive to buy electric vehicles, which still make up only 1.5% of sales so far this year.

Trump's efforts to rein in and roll back the three credit programs likely will be reversed to the extent that Biden can without the help of Congress, Smith of the Center for Automotive Research said. Biden likely will no longer challenge California's right to set more stringent standards than the federal government and is likely to return to Obama-era emissions and fuel economy rules enacted under executive branch agencies.

Implementing a nationwide electric vehicle mandate — something regulatory experts see as a potential next step, especially if California Air Resources Board Chair Mary Nichols becomes EPA administrator — would be a bigger hurdle.

Proposed legislation would encourage installation of charging stations for electric vehicles.

It could come down to two Georgia seats in the U.S. Senate to be decided on Jan. 5. If Republicans win just one of them, they'll maintain control of the Senate; if Democrats win both, the party would control both chambers of Congress and the White House, making Biden's environmental plans easier to enact.

Still, "I would expect as these standards get more and more stringent, I would expect more trading" of credits, Knittel of MIT said, adding that's a good thing. "Some firms are better at making highly fuel-efficient cars than others ... so we want firms to take advantage of their strengths."

Over the last four years, many automakers have been moving to electrify their fleets without a push from the federal government. But most auto companies may still struggle to meet regulations if they return to or exceed Obama-era requirements, Smith said, because even those automakers who have invested in electric vehicles have plenty of trucks and SUVs to sell in the years ahead. 

So far, Tesla has been the only major player in the electric space domestically. But Dan Ives, analyst for Wedbush Securities Inc., said the industry is at a precipice. U.S. automakers have been watching the Chinese market closely and see the possibility of a huge spike in demand for electric vehicles ahead. 

“The missing piece of that was not having a push from a governmental perspective," he said. "We’re going to get that."  

Last month, GM detailed a historic shift to invest more in next-generation technology over the next five years than on the gas and diesel powertrains that drive its profitability.

“That technology would not have existed without the regulation,” said Larry Burns, an adviser to autonomous-vehicle companies and GM's former vice president of research and development. Tesla, too, could not have been possible without the technological advances that came out of research and development spurred on by regulation.

“We’ve reached that miracle moment, that magic moment in capitalism,” Burns said. The tipping point for electric vehicles is where "the value of the product exceeds its price. People are at the point where they really want it.”

rbeggin@detroitnews.com

Twitter: @rbeggin

bnoble@detroitnews.com

Twitter: @bnoble