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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

Updated 2 hours ago - Politics & Policy

Prosecutors charge parents of Michigan school shooting suspect

Photo: Scott Olson/Getty Images

The parents of a 15-year-old accused of killing four students and wounding seven other people at a Michigan high school have been charged with four counts of involuntary manslaughter, according to court documents.

The latest: Lawyers for James and Jennifer Crumbley told the Detroit News they are "returning to the area to be arraigned," after law enforcement officials announced a search for the Crumbleys had been initiated.

Updated 6 hours ago - Politics & Policy

Omicron dashboard

Illustration: Shoshana Gordon/Axios

  1. Health: Coronavirus variant surveillance varies widely by state — Omicron cases confirmed in 5 U.S. states America probably won't lead the effort to understand Omicron.
  2. Vaccines: Omicron adds urgency to vaccinating world — Omicron fuels the case for COVID boosters — Moderna loses patent battles tied to COVID vaccine.
  3. Politics: Nevada to impose insurance surcharge on unvaccinated state workers — New Jersey GOP lawmakers defy statehouse COVID policy — Oklahoma sues Biden administration over Pentagon vaccine mandate — Omicron travel bans are sign of what's to come.
  4. World: WHO: Delta health measures help fight Omicron — COVID cases surge in South Africa in sign Omicron wave is coming — Germany approves new restrictions for unvaccinated people.
  5. Variant tracker: Where different strains are spreading.
7 hours ago - World

Putin to demand legal guarantee against NATO expansion in call with Biden

Biden and Putin meeting in Geneva in June. Photo: Mikhail Metzel\TASS via Getty Images

Russian President Vladimir Putin is demanding a legally binding guarantee that NATO will not expand east — including to Ukraine — and plans to raise the issue in an upcoming phone call with President Biden, according to the Kremlin.

Why it matters: Russia has massed more than 94,000 troops on the border with Ukraine and could be preparing for a large-scale invasion at the end of January, Ukraine's defense minister said Friday.