Moving the Goalposts of Emission Compliance

November 1, 2018

Michael Robinet

This industry has worked hard to reduce or at least control several critical risks. The effort has been key for all constituents, impacting strategic direction, the allocation of valuable human and financial capital, and enterprise profitability.

Risk reduction takes many forms. It ranges from aligning fluctuating commodities to an economic/commodity index, and aligning with labor constituents on long-term contracts. It even includes reducing currency risk through co-locating sourcing of a component or system to the same region in which it’s sold. Such risk elements, among many, are quantifiable and thus can be controlled and minimized.

Unfortunately, there are several risks which cannot be controlled or even predicted. Case in point is the current Notice of Proposed Rulemaking (NPRM) that’s in process (as I write this in mid-October) by the U.S. federal government with respect to light-vehicle emissions. The NPRM is a veritable known-unknown situation. While I am not here to argue for tougher or more lenient regulations — you can choose your side on that subject — what is critical is how OEMs, suppliers and others in the auto ecosphere will react to and accommodate any changes in the current standards set out by the U.S. EPA and NHTSA.

As football field-goal kickers like to say, “If you are going to move the goalposts, let us know before we snap the ball.”

There are nine total options to the NPRM outlined in late August. These range from status quo (maintaining the current standards through 2025) to flattening the standards as of the 2020 model year. The latter is the preferred option as laid out by Washington.

Two major issues arise with the proposed direction for the mid-term review. First, every vehicle OEM active in this market should be designing vehicles and modifying their powertrain mix to comply with the standards on the books, as these are known and part of the current regulatory framework. If the standards do change towards the preferred U.S. option for 2020, there is little OEMs can do other than to modify their powertrain and content mix over the short-term. That cake is already baked.

The window for truly accommodating any changes in standards from an engineering/design perspective opens at the 3-year point after a final standard is approved and implemented. Again, known versus unknown equals risk.

The second issue with the NPRM is potentially more serious. It has been well publicized that California and the 12 so-called “Section 177” states are not onboard with freezing the standards starting in 2020. They advocate for maintaining the current agreed-upon standards. OEMs don’t want a two-tiered emission - compliance structure, either, because it adds cost, reduces scale and limits the ability to sell vehicles between differing compliance markets. The plot thickens.

There is a global twist as well. The current U.S. standards are close in trajectory to those in force in China and Europe. While there are differences in implementation and incentives/stipulations with respect to electrification, the direction is common. Should the U.S. diverge from the current path through 2025, differences in compliance paths between the U.S. and other regions will widen.

Views on the impact of a divergence with China and Europe are varied. In terms of sales and production, both of those regions are larger than North America; we (North America) are the third horse in a three-horse race. We may increasingly become “compliance isolated” — a situation that could impact scale economies and the location of future powertrain/propulsion research hubs as well.

In the end, keeping all constituents happy — legislators, select U.S. states, OEMs, suppliers, consumers and global emissions regulators — is nearly impossible. And uncertainty raises the risk factor.

Placing definitive bets on any one compliance technology is a careful process of balancing several considerations, including cost, consumer acceptance, competitive considerations, and capital. Knowing the future location of the goal posts is the most important consideration.