Analysis-US automakers caught in crossfire of Trump, California EV battle

By Chris Kirkham

LOS ANGELES, Feb 19 (Reuters) – A legal clash between the Trump administration and California over auto-pollution rules is coming to a head, with enormous financial implications for EV makers including Tesla and traditional automakers dependent on fossil-fuel vehicles.

California is challenging an unorthodox move by congressional Republicans to kill a waiver allowing the state to enact its own emissions regulations. If California wins, it could force U.S. automakers to comply with two diametrically opposed regulatory schemes: President Donald Trump’s anti-EV policy and California’s pro-EV regime, which 11 other states have adopted.

California aims to require automakers to sell 100% EVs or other zero-emission vehicles by 2035, with aggressive interim targets that were set to begin this year. The Trump administration, by contrast, has killed federal EV subsidies and policy incentives – crashing electric-vehicle sales nationally.

California has set its own, tougher auto-pollution rules for decades with bipartisan federal support. Under recent Democratic administrations, those rules largely aligned with federal policies promoting EVs and more fuel-efficient vehicles.

Now, California and federal regulations are heading in opposite directions. Trump eased some emissions regulations in his first term only to see those efforts reversed by Democratic President Joe Biden. Now, in his second term, Trump is taking a scorched-earth approach to federal EV support.

Congressional Republicans last year killed a $7,500-per-EV subsidy and eliminated penalties on automakers failing to meet fuel-efficiency standards. Trump’s Environmental Protection Agency (EPA) last week overturned an Obama-era scientific finding that greenhouse gas emissions endanger human health — the foundation of EPA vehicle-pollution rules first adopted in 2010.

Ending the California waiver is essential to Trump’s strategy, but the state’s lawsuit alleges Congress has done it illegally. The administration filed a motion to dismiss the case that is scheduled for a federal-court hearing on Thursday in Oakland, California.

California argues Trump’s EPA and Congress used a sleight-of-hand to reclassify California’s waivers as administrative “rules,” subject to reversal under the Congressional Review Act. For decades, the EPA noted in its California decisions that the waiver is “not a rule” and the act “does not apply” – a key point of California’s lawsuit.

If the administration wins, traditional automakers would face less pressure to sell money-losing EVs in California and the 11 other states, which together account for 29% of U.S. new-vehicle sales, according to data provider S&P Global Mobility. Tesla and other EV makers could lose critical revenue from selling regulatory credits to other automakers that use them for compliance.

If California wins, traditional automakers could be forced to develop different model lineups to suit two contradictory regulatory schemes in the United States. The Alliance for Automotive Innovation, an industry lobby group, argues that would restrict consumer vehicle choice and has called the California rules an “unaccountable, unachievable regulatory wormhole.”

Mike Murphy, a former Republican strategist who co-founded the advocacy group EVs for All America, said the California-federal standoff highlights how automakers are being “whipsawed” by political shifts that upend their model-development and manufacturing plans. Since Trump’s election, automakers have taken $55 billion in writedowns on EV investments.

“What I hear from all of them is, ‘This short-termism is killing us,’” he said. “We have a monkey at the controls in Washington, and it’s very hard to plan.”

White House spokeswoman Taylor Rogers called California’s lawsuit “frivolous” and said Trump has “canceled unpopular green-energy subsidies that wasted Americans’ hard-earned tax dollars.” 

CALIFORNIA RULES EMERGED IN SMOG CRISIS 

California started setting its own vehicle-emissions standards in the 1950s as it battled severe air-quality problems from automotive and industrial pollution, including thick smog enveloping Los Angeles.

Congress allowed California to keep that authority in the Air Quality Act of 1967, which gave the EPA the right to grant California a waiver to pursue its own regulations. Administrations of both parties have since granted the state more than 100 such waivers.

In 2019, Trump’s EPA rescinded parts of a waiver through a formal rulemaking, a slower process that California also challenged in federal court. The Biden administration reinstated the waiver in 2022. In Trump’s second term, Republicans tried a shortcut – killing the waiver through the Congressional Review Act.

The Government Accountability Office (GAO), an independent agency that has historically ruled on whether agencies are complying with the act, concluded last March that waivers are not rules because they are a “case-specific, individual determination,” not a “broad application of general principles.”

Congressional Republicans disregarded the GAO conclusion, arguing Congress has the power to decide what constitutes a rule. California sued the same day Trump signed the legislation in June.

California Attorney General Rob Bonta told Reuters the case underscores the Trump administration’s “contempt for the law” and use of “fringe” legal theories to justify violating it.

“They were told. They knew. They did it anyway,” Bonta said in an interview, calling the move a dangerous expansion of congressional review powers.

In a statement, the EPA said “the only ‘contempt for the law’ here is California’s.”

“We live in a democracy, and Congress writes the laws,” the agency said, adding that California’s regulations would have “crippled American industry” and raised consumer prices.

COURT CHALLENGE LEAVES AUTOMAKERS IN LIMBO

Legal observers say many questions in the case have never been tested in court, leaving few clues in case law to illuminate how the court might rule.

“The level of instability and confusion here is unprecedented,” said Paul Libus, an attorney at Van Ness Feldman LLP who specializes in vehicle-emissions policy.

California’s Air Resources Board (CARB) has told automakers that, for now, they can choose whether to comply with its new standards – but warned they could face penalties for noncompliance later if California prevails in court. Many automakers are choosing to comply, CARB records show.

California originally adopted the regulations in 2022, when U.S. electric-vehicle sales were projected to take off. The state now faces challenges in hitting its ambitious EV-adoption goals as consumer demand wanes, raising questions about whether the targets are realistic. EVs accounted for 21% of the state’s new-car sales last year, down slightly from a year earlier. CARB has said it will not enforce this year’s EV-sales target given the uncertainty over its regulations. 

Murphy, the former Republican EV advocate, said he expects automakers to compromise with California regulators because they cannot afford to bet that Trump’s rollback of pollution standards will last beyond his administration – and they need to compete globally. EVs are essential in markets including China and Europe, where regulators are tightening vehicle-emissions controls.

Automakers understand, he said, that “the drunken holiday with the federal regs is probably not going to last.”

(Reporting by Chris Kirkham in Los Angeles; Additional reporting by Kalea Hall in Detroit and Abhirup Roy in San Francisco; Editing by Brian Thevenot and Matthew Lewis)