Biden's Fuel Economy Standards: Big Three Could Face Steep Penalties

© Reuters. Biden's Fuel Economy Standards: Big Three Could Face Steep Penalties

Quiver Quantitative - U.S. President Joe Biden's administration has put forth a proposal to raise fuel economy standards through 2032. If these standards are accepted, major automakers could face significant fines for non-compliance. Specifically, General Motors (NYSE:GM) is staring down a potential fine of $6.5 billion, while Stellantis, the parent company of Chrysler, might be penalized $3 billion. These numbers were highlighted in a letter from the American Automotive Policy Council, which represents GM, Stellantis, and Ford Motor (NYSE:F). The council has described the potential fines, stemming from not meeting the proposed Corporate Average Fuel Economy (CAFE) requirements, as "alarming." Furthermore, Ford could face around $1 billion in penalties, with Volkswagen (ETR:VOWG_p) encountering a similar amount, the largest amongst foreign automakers.

Both GM and Stellantis chose not to comment beyond the contents of the letter, while Ford and VW have yet to respond. The core of the issue, as expressed in the letter to the U.S. Energy Department, is the proposed alteration of the "Petroleum Equivalency Factor." The Detroit automakers believe this change could lead to "disproportionately higher compliance costs" for them compared to their counterparts. This new policy might inadvertently benefit automakers that have been slow to transition to electric vehicles.

The National Highway Traffic Safety Administration (NHTSA) aims to increase CAFE standards, targeting an average of 58 miles per gallon fleet-wide by 2032. This would mean hiking requirements by 2% per year for passenger cars and 4% for SUVs and pickup trucks. The Department of Energy (DOE) plans to adjust how it calculates petroleum-equivalent fuel economy for electric vehicles under this program. Responding to concerns, the DOE reached out to major automakers, emphasizing the potential balance between encouraging electric vehicle adoption and the risk of increased petroleum use due to more lenient fuel economy standards for traditional vehicles.

Last week, a group representing most major automakers voiced concerns, suggesting that the industry could be looking at a cumulative $14 billion in CAFE fines. NHTSA refrained from commenting immediately but had earlier remarked that the estimates given by automakers align with "our statutory obligations." They added that automakers have the option to pivot to electric vehicles to avoid these penalties. To date, Stellantis and GM have already paid $363 million in fines for previous non-compliance with U.S. fuel economy requirements.

This article was originally published on Quiver Quantitative