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.
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.