The Auto Industry Wanted Easier Environmental Rules. It Got Chaos.

By Mike Colias, Ben Foldy and Andrew Restuccia

When Ford Motor Co. (F) Executive Chairman Bill Ford Jr. called the president last spring, he was hoping to defuse what was looking like a lengthy legal battle over the nation's fuel-economy regulations for vehicles.

The Trump administration wanted to significantly ease U.S. environmental rules. California had sued to stop that. The car industry was caught in the middle. Mr. Ford, calling from his Dearborn, Mich., office, urged the president to broker a compromise with California, according to people with knowledge of the conversation.

President Trump was puzzled and told Mr. Ford his view was out of step with his industry peers. "He basically said: 'You're on your own' " to Mr. Ford, one of the people briefed on the call said.

The call was part of a nearly yearlong push to fend off the expense and delays of competing fuel standards, but Ford miscalculated the White House's appetite for a deal. Its efforts ultimately backfired, putting it at odds with the administration and other big car makers.

When Ford eventually made its own deal with California last summer, it drew an antitrust inquiry and spurred the administration to speed up efforts to strip California's authority to set its own tailpipe standards.

It also irritated Ford's biggest rivals, including General Motors Co. and Toyota Motor Corp., which have since sided with the Trump administration on the issue.

The industry -- more polarized than ever -- is now facing a confrontation that could last for years, leaving it in a costly limbo.

The Trump administration in the coming weeks is expected to finalize new fuel-economy rules that significantly dial back the targets adopted under President Obama. Mr. Trump's legal fight with California, the state that is the U.S. auto industry's biggest market, is expected to be bitter and drawn-out.

It is part of corporate America's struggle, three years in, to find a way to operate with the Trump White House -- where a disagreement could launch a barrage of negative tweets and when dramatic policy shifts come without warning. In the auto industry, none of the major players have managed to forge a way forward.

In its own deal with California, Ford agreed with the state to meet targets tougher than Mr. Trump's proposal but still tamer than the Obama-era requirements. Executives hoped the agreement would show the White House and other auto makers that California was willing to compromise.

Mr. Ford said the pact will allow the company to plan its vehicle lineup without being at the mercy of a legal fight. "We have this heavy commitment to electrification," he said in an interview. "This is where the rest of the world is taking us anyway. If you start to add it all up, a giant rollback wouldn't have helped us at all."

Three other car companies -- Volkswagen AG, BMW AG and Honda Motor Co. -- followed with similar agreements with the state.

In October, GM, Fiat Chrysler Automobiles NV and Toyota sided with the Trump administration in challenging California's authority. The companies said at the time they believed the federal government is best positioned to set a single national standard. Their decision drew praise from Mr. Trump.

"This has put the auto industry in a quagmire," said Brett Smith, a director at the Ann Arbor, Mich.-based Center for Automotive Research.

Unsure which side will win, car companies still need to move ahead with planning new vehicles that are designed and engineered years in advance of hitting showrooms, Mr. Smith added.

The nation's fuel-economy regulations, in place since 1975, have broad influence, including on a vehicle's engine and the mix of models offered. The existing rules were agreed to in 2012 in collaboration with California, when gasoline prices were higher, and sought to cut U.S. tailpipe emissions in half for new cars by 2025.

In recent years, average fuel prices have stayed well below $3, and U.S. car buyers have chosen heavier, less fuel- efficient SUVs and trucks, which made the regulations tougher to hit. Executives lobbied for more flexibility.

The industry initially saw an ally in Mr. Trump. Days after his inauguration in January 2017, the chief executives of Ford, GM and Fiat Chrysler met with the president at a White House breakfast. They asked him to consider a review of the Obama-era rules, believing them outdated.

Ford's then-CEO Mark Fields was outspoken on this point, arguing publicly that the regulations would hurt U.S. manufacturing jobs. Two months later, at a rally in Michigan, Mr. Trump agreed to re-evaluate the rules.

By spring 2018, auto executives were getting nervous. The White House signaled it wasn't only looking to ease the regulations, but to break with California, which under the Clean Air Act can request waivers to impose stricter pollution controls than those of the federal government.

More than a dozen other states follow California's rules -- covering more than 40% of U.S. vehicle sales -- leaving manufacturers concerned about differing regulations.

At the industry's urging, Mr. Trump asked administration officials to negotiate with California. They were to meet with Mary Nichols, an environmental lawyer who was first appointed to the state's powerful air-resources board in 1975. California's waivers have long afforded its regulators vast influence over setting auto-market standards.

Talks with California didn't get far before the EPA issued its proposed rule in August 2018, confirming what many auto executives feared: Rather than merely relax the targets, the White House wanted to freeze the requirements altogether at 2020 levels, nixing the 5% annual improvements set under Mr. Obama. That would forgo about one-third of the greenhouse-gas reductions expected when the current rules were agreed to.

Administration officials said the proposal would boost sales and lower sticker prices, enticing more buyers. Mr. Trump has said the move was intended to help the U.S. auto industry.

In recent months, the Trump administration has shown a willingness to bend -- the final rule is expected to include a 1.5% annual increase in the fuel-economy targets, rather than a wholesale freeze.

California and environmental lobbies are still gearing up for a fight. Environmental groups ran an ad in several U.S. newspapers in January focused on GM, Toyota and other auto makers who sided with the Trump administration, saying the companies were "attacking crucial clean-car standards that are helping to address climate change."

Environmental leaders have praised Ford's California deal, after having criticized the company previously for not opposing the proposed rollback. In May 2018, Public Citizen, a consumer-advocacy group, drove a Ford sedan with a faux black cloud protruding from its tailpipe to the company's headquarters with a sign reading: "Don't let Ford roll back clean air standards!"

For the 62-year-old Mr. Ford, such criticism was bothersome, colleagues said. He considers himself an ardent environmentalist, spending much of his Ford career championing green causes, including the industry's first hybrid- electric SUV and insisting on a sustainable roof, planted with greenery, on Ford's largest factory.

By early 2019, he had dispatched a top lieutenant, Joe Hinrichs, to Washington to press the White House to negotiate with California. Mr. Hinrichs, president of Ford's automotive operations, met more than a half-dozen times over several months with senior White House officials, including Vice President Mike Pence, said people with knowledge of the meetings.

In one, Mr. Hinrichs urged senior adviser Jared Kushner to reach out to California Gov. Gavin Newsom, whom Mr. Kushner had joined months earlier to survey wildfire damage, and ask about a compromise, the people said.

White House officials felt they were getting nowhere with California, believing the state was slow-walking talks in hopes Mr. Trump would lose the election in 2020, according to current and former administration officials.

California, meanwhile, felt the administration was insistent on revoking the state's waiver and not interested in compromise, Ms. Nichols said. "The administration's desire to get California completely out of the picture was always sort of hanging over our head," she said.

Around this time, Ford staffers had been quietly talking with California regulators about a fallback plan that eventually evolved into a deal.

After the failed call to Mr. Trump, Mr. Ford convened a meeting with Ford Chief Executive Jim Hackett, Mr. Hinrichs and other executives about dealing directly with California as a way to align the company's U.S. emissions goals with stiffer rules overseas.

Ford executives discussed possible backlash from Mr. Trump, but Mr. Ford said customers might reward them for opting to meet more stringent environmental targets, said a person who attended the meeting.

Company executives thought the California agreement could be an olive branch, showing state officials were willing to meet Mr. Trump halfway, said Mr. Hinrichs in an interview. "We wanted to continue the dialogue, and encourage others to continue the dialogue," he said.

The White House was no longer interested in talking.

Ford wasn't an obvious candidate for pushing stiffer fuel-economy rules. The company's truck-and-SUV-heavy lineup ranked third-to-last in fuel economy of 13 major auto makers, according to the most-recent EPA data. But the company has new hybrid and electric vehicles in development that will help improve fuel-efficiency, executives reasoned.

Honda, already a leader in fuel economy, came to terms with California, encouraged by Ford's move, people familiar with the matter said. Volkswagen, investing billions into electric cars, also signed on, seeing the proposed freeze as out of step with emissions regulations in its two biggest markets, China and Europe, said one company executive. By mid- July, California also had a commitment from BMW.

Other car companies were approached, but GM was purposely left out. The group worried the company was meeting with the administration and would try to derail their effort, Ms. Nichols said.

When the pact was publicly revealed July 25, the president was frustrated, telling advisers he felt betrayed by the companies, according to White House officials. Mr. Trump believed he had given them what they had asked for and couldn't understand why they were siding with California. He later tweeted that company founder Henry Ford -- Mr. Ford's great- grandfather -- would be "rolling over."

GM executives were irritated, too, having been excluded from discussions, according to people familiar with their thinking.

A month after the California deal was revealed, Ms. Nichols said her team flew to Detroit and met on the 39th floor of GM's headquarters with Chief Executive Mary Barra to discuss joining. After hearing the proposal, Ms. Barra believed the terms didn't offer enough incentive for electric vehicles, a major focus for the company, people briefed on the meeting said.

California officials tried to recruit other auto makers. The governor personally called a Toyota executive. The company felt the deal de-emphasized hybrid cars, its specialty, and wasn't eager to provoke the administration, which has threatened import tariffs on foreign-built cars, according to a person briefed on the exchange.

Inside the White House, anger was festering. The administration wanted to prevent other auto makers from joining, and accelerated efforts to revoke California's waiver.

In September, the Justice Department dropped another bombshell: It had opened an antitrust investigation into whether Ford, Honda, Volkswagen and BMW had violated federal law in forging their pacts with California.

The probe blindsided Ford executives and some felt it was politically motivated, according to two people with knowledge of the reaction. A company spokeswoman said Ford is cooperating with the Justice Department.

A White House spokesman referred questions to the Justice Department, which declined to comment on the accusations. At the time the probe became public, a person familiar with the investigation said the Justice Department's antitrust division is acting on its own accord and without direction from or coordination with the White House.

The shock of a federal investigation had a chilling effect on the ongoing talks between the four auto makers and California, as well as the state's efforts to recruit others.

BMW, Volkswagen and Honda all said they planned to adhere to the California deal regardless of other companies joining, but declined to comment further.

White House officials began calling car companies not aligned with California to muster support for the administration's efforts to remove the state's waiver, according to people at those companies and administration officials.

GM was initially reluctant to take a stance, and other auto makers, including Toyota, didn't want to intervene without GM, the U.S.'s largest auto maker by sales, making the first move. A weekend call in October from a senior White House adviser persuaded GM executives to publicly back the administration, the people said.

The following Monday, GM, Toyota, Fiat Chrysler and two other car companies said they sided with the Trump administration. More auto makers joined the group shortly after.

Ford executives said they would stick to their agreement with California, even if most competitors haven't followed. "We believe we're on the right side of this debate for the long term," Mr. Hinrichs said.

Write to Mike Colias at Mike.Colias@wsj.com, Ben Foldy at Ben.Foldy@wsj.com and Andrew Restuccia at Andrew.Restuccia@wsj.com


  (END) Dow Jones Newswires
  02-03-20 1118ET
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