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One way carmakers comply with increasing fuel economy standards — even without selling many hybrids or electric cars — is by using regulatory credits they stockpiled from previous years or purchased from competitors.

Why it matters: The standards are getting tougher now, and companies are not only drawing down their banked credits; they've stopped generating new ones, too. That could drive up their trading value, enriching some companies with credits to spare, while putting others at risk of non-compliance.

  • But that flexibility is at play in the current fight between the Trump administration and California over fuel economy regulations.
Expand chart
Data: EPA Automotive Trends Report 2018; Chart: Andrew Witherspoon/Axios

How it works: Each manufacturer has its own compliance target, based on the number of vehicles produced and the size, or "footprint," of the vehicles in its fleet.

  • As an incentive for compliance, the government gives extra credit multipliers for advanced technologies like plug-in hybrids and electric vehicles.
  • Companies can also earn credits for other technologies that make cars more efficient, like flexible-fuel capability, LED lights, tinted windows, ventilated seats, and air conditioning improvements.
  • That flexibility gives carmakers important "wiggle room" to achieve targets they might not otherwise hit.
  • In 2016 and 2017, as emissions targets increased, all but a handful of automakers had to rely on credits to help them across the finish line.

Credits may be traded among automakers, and Fiat Chrysler Automobiles, which specializes in thirsty Jeeps and Ram pickups, has been a frequent buyer. Honda, which leads the industry in fuel efficiency, is a frequent seller, according to EPA data.

  • More than half of currently available credits are held by 3 manufacturers — Toyota, Honda and Nissan-Mitsubishi.
  • Tesla, with its all-electric fleet, also hauls in revenue selling regulatory credits; last year it made $420 million selling credits to GM and FCA, Bloomberg reported.
  • In July, Tesla chief financial officer Zachary Kirkhorn told analysts, "We expect regulatory credits to become a more meaningful part of our business."

What to watch: Under current law, 92% of available credits will expire by the end of the 2021 model year. The availability of future credits will depend on how the fight between California and the Trump administration shakes out.

  • Trump wants to eliminate that flexibility; California's deal with the 4 automakers would preserve the existing system for banking and trading.

Go deeper:

Go deeper

House cancels Thursday session as FBI, Homeland Security warn of threat to Capitol

Photo: Eric Baradat/AFP via Getty Images

The FBI and Department of Homeland Security predict violent domestic extremists attacks will increase in 2021, according to a report reviewed by Axios.

Driving the news: The joint report says an unidentified group of extremists discussed plans to take control of the Capitol and "remove Democratic lawmakers" on or about March 4. The House canceled its plans for Thursday votes as word of the possible threats spread.

40 mins ago - World

Pope Francis set to make first papal visit to Iraq amid possible turmoil

Data: Vatican News; Map: Danielle Alberti/Axios

Pope Francis is forging ahead with the first papal trip to Iraq despite new coronavirus outbreaks and fears of instability.

The big picture: The March 5–8 visit is intended to reassure Christians in Iraq who were violently persecuted under the Islamic State. Francis also hopes to further ties with Shiite Muslims, AP notes.

"Neanderthal thinking": Biden slams states lifting mask mandates

States that are relaxing coronavirus restrictions are making "a big mistake," President Biden told reporters on Wednesday, adding: "The last thing we need is Neanderthal thinking."

Driving the news: Texas Gov. Greg Abbott (R) said Wednesday he will end all coronavirus restrictions via executive order, although some businesses are continuing to ask patrons to wear face masks. Mississippi is lifting its mask mandate for all counties Wednesday, per Gov. Tate Reeves (R).