Pembina Institute

How I stopped worrying and learned to love (some) regulations

Have you heard about the new $36 billion “car tax” that will make cars more expensive, and maybe even force you to buy a Prius?

I’m referring to draft regulations that the federal government announced last week, aligning passenger vehicle tailpipe emissions standards in Canada with the rules already adopted in the U.S. The standards will pick up where the current ones (which cover model years 2011 to 2016) leave off, requiring significant improvements in fuel economy from model years 2017 to 2025. Manufacturers are given a significant amount of flexibility to choose the best compliance path for them to reach these ambitious but achievable goals.

Some critics were quick to slam the regulations as another example of the government choosing costly regulations over carbon pricing.

We disagree.

Yes, carbon pricing is very important. We agree with companies like Shell, BP and Statoil — to name but a few — that it should be a central part of national strategies to curb emissions. But carbon pricing is not a silver bullet: we’re not going to cut greenhouse gas pollution fast enough to avoid dangerous climate change on pricing alone. To succeed, carbon pricing also needs complementary policies to back it up and address important market barriers. Energy efficiency regulations, especially in buildings and vehicles, are among those essential complementary policies. 

Pembina has been very critical of poorly designed vehicle regulations, but that does not diminish the role or importance of good regulations. The vehicle efficiency rules Canada just adopted, which were developed by California and the Obama administration, will produce significant improvements in fuel economy and provide benefits to the climate, clean air and drivers. 

"The vehicle efficiency rules Canada just adopted... will produce significant improvements in fuel economy and provide benefits to the climate, clean air and drivers." Will cars cost a little more? Sure, they might. Then again, they might not. As carmakers get to work meeting the current regulations, they are finding all sorts of ways to make cars more fuel efficient, powerful and affordable at the same time.   

Industry estimates of how much it will cost to comply with vehicle regulations have proven to be overstated again and again, sometimes by nearly 10 times the actual cost. The estimate cited from the Center for Automotive Research, an industry think tank, that the rules might add $5,200 or more to the cost of a car in 2025 fits perfectly into this pattern of hyperbole, along with its history of inappropriate methodology.

Even if the government’s estimates of modest price increases (an average of $700 for a new model year 2021 vehicle, rising to $1800 for model year 2025) are correct, the fuel savings from increased efficiency will mean the rules pay for themselves in a few years at most. Far from being a “tax,” these standards will have the same effect as a tax cut — savings at the pump will leave more money in people's pockets for them to spend elsewhere. In other words, while the cost of a new vehicle in 2025 may rise by $1800, drivers would save an estimated $900 per year on fuel as long as they own the vehicle.

new cars in a lotIt’s also worth noting that as recently as last year, Canadian auto dealers reported that new cars were the most affordable they have been for 17 years. Prices are now the same as they were in 1994. Adjust for inflation and they are actually 40 per cent cheaper today. In that context, is an extra 5 per cent or so on the price of a new vehicle more than a decade from now really such a cause for concern?

Complementary, my dear Watson

None of this is to say that carbon pricing doesn’t have an important role in tackling emissions from transportation. Carbon pricing would support these regulations by creating more demand for fuel-efficient vehicles and encouraging people to reduce their vehicle use. Carbon pricing would also provide revenues that governments could re-invest in clean transportation options like transit and electric vehicle infrastructure.

We don’t see it as a choice between carbon pricing and efficiency standards: they’re "By ensuring that efficiency continues to improve across the board, standards like these help manage the impact of higher gas prices from carbon pricing, and ensures that they will have plenty of cleaner options to choose from."complementary, not alternatives. By ensuring that efficiency continues to improve across the board, standards like these help manage the impact of higher gas prices from carbon pricing, and ensures that they will have plenty of cleaner options to choose from. The Western Climate Initiative, which features a cap-and-trade system, also sees stringent vehicle standards as a key complementary policy to carbon pricing. An economic modeling assessment of climate policy options for Canada that we published in 2009 took the same approach. 

Automakers need clarity about the government’s efficiency goals so they can plan their product development. These regulations deliver the certainty that companies need to guide investments, and have plenty of flexibility to allow companies to comply at lowest cost. It shouldn’t be surprising that major manufacturers, including the Big Three, have endorsed them, with GM’s CEO calling them “a win for American manufacturing.”

The bottom line is, while I and many others would like to see a sound carbon pricing approach, we can’t pretend that it would replace the need for some regulations — especially not these ones. The reality is that we need both.

These regulations are a step in the right direction and deserve to be acknowledged as such. 

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