Last week Richard Thaler won the 2017 Nobel Prize in Economics for his work on humans’ lack of rational decision making. When asked how he would spend the $1.1 million prize Thaler had the perfect answer: “I will try to spend it as irrationally as possible.”
Coming from a 72-year-old academic, it was a funny line. But it also reminded me of the not-quite-as-humorous but very irrational behavior of U.S. auto companies when dealing with the future of the transportation industry.
On one hand, not a week goes by without a different carmaker announcing another investment in the trifecta of environmentally friendly mobility options: electric, autonomous, and shared vehicles. Some, like Volvo and Jaguar, have declared that their entire fleet will be “electrified” in the near future. Others, including Volkswagen, Mercedes, BMW, and GM, seem to be in an innovation drag race.
But these same companies are simultaneously fighting against environmental protections that encourage these goals. This battle has now extended to include the historic 2025 Light Duty Vehicle Standards for cars and SUVs, which will double the gas mileage to 54.5 miles per gallon by then. The plan I helped develop when I was at the Environmental Protection Agency (EPA) came into effect in 2012 and balanced critical environmental needs with the industry’s concerns. But this huge accomplishment is now at risk of crumbling. At the instigation of the auto industry, President Donald Trump’s EPA is now evaluating whether to rescind or delay the standards.
This October marks the fifth anniversary of the historic program, which has proven to be a win-win for automakers, consumers, energy security, and the planet. The industry had, for the first time, a unified national program with a long horizon for planning and investment—exactly the sort of regulatory certainty EPA Administrator Scott Pruitt claims he’s striving for while rolling back environmental protections. Since then, the entire industry has been able to not just meet but stay ahead of the standards. Some 17% of the 2016 models sold, or about 2.5 million vehicles, already meet the 2020 standards of approximately 41 miles per gallon.
Drivers have been big winners, saving more than $47 billion on fuel already. If we stay the course, the benefits grow: By 2030, we’ll cut our oil use by 2.4 million barrels every day, and drivers will save $6,000 over the life of their vehicles.
The industry has risen from the depths of the 2008–09 recession, when the Obama administration had to bail it out. Auto industry profits are touching 10-year highs. These successes are in part because the actual cost of compliance with the fuel economy regulations are lower today than was estimated in 2012.
Not surprisingly, a huge cross-section of Americans believe that the standards need to stay. At a recent EPA public hearing, nearly 100 different speakers gave testimony supporting the 2025 standards and describing how their benefits far outweigh costs.
The Blue Green Alliance testified how clean vehicle technology supports 288,000 manufacturing and engineering jobs at more than 1,200 facilities in 48 states. Dan Boone, president of United Steelworkers Local 970 in Cleveland, said the regulations push innovations that in turn create jobs, such as lightweight steel to improve fuel economy. A former Marine and chief executive at Securing America’s Future Energy, Gen. James Conway talked how the standards represent one of the “greatest weapons” against reliance on foreign oil. Consumers Union testified how their surveys indicate the overwhelming public support for strong fuel economy standards.
The most likely reason for the irrational behavior of auto companies is an anachronistic belief in boardrooms that regulatory rollback means higher profits. These board members need to take a step back and consider the companies seizing the future. Tesla, born and bred on California’s historically stricter environmental standards, has seen its market cap explode over the past five years from around $3 billion to over $56 billion, roughly the same as GM’s valuation and well ahead of Ford or Fiat Chrysler. Uber, the company that made ride-sharing a global phenomenon, went from a market cap of virtually nothing to nearly $70 billion earlier this year.
Perhaps these companies’ behavior can best be explained by former Republican presidential candidate Mitt Romney’s 2011 quote, “Corporations are people, my friend.” And people, as Thaler explained, are perfectly irrational individuals. I can only hope they see that their long-term viability depends on an unequivocal commitment to the future of transportation—a future that is clean, smart, and shared. They can’t shift into reverse and drive forward at the same time.
Margo Oge, who served as the director of the EPA’s Office of Transportation and Air Quality from 1994 to 2012, is the author of Driving the Future: Combating Climate Change with Cleaner, Smarter Cars.
