Generally speaking, change is a source of opportunity, but also risk . . . especially for the unwary. This is particularly true for the automotive industry and the evolving landscape of environmental regulation, which can apply directly to manufactured vehicles (including individual parts and systems) as well as the production facilities that build parts and develop products. Further, auto suppliers face regulation of their products and facilities at the federal, state and sometimes even county or city level. There is much to monitor.
Yet, despite this daunting array of potential regulations and regulators, the companies that track the new and modified environmental requirements for auto suppliers will often enjoy a distinct advantage over their competitors who ignore them. Expensive decisions about where to expand capacity or shift production can change considerably when new regulations become applicable and, in some cases, fundamentally change the outlook for that product or location. Also, in some cases, if you are not at the table discussing the regulatory changes, you may unwittingly become the target of those changes.
At the federal level, as the Biden administration continues to take form, the auto industry (like many) awaits the development of new environmental initiatives by the U.S. Environmental Protection Agency (EPA). The EPA has pledged bold action on additional vehicle regulation, as well as numerous policies and rules that target manufacturing in general. These more general objectives for manufacturing include environmental justice (EJ), climate change and enhanced corporate reporting requirements for environmental, social and corporate governance (ESG) issues.
Vehicle regulation can occur directly or indirectly. For a “direct” example, much of the ongoing battles over tailpipe emission standards are being fought at the OEM level with the EPA and the National Highway Traffic Safety Administration (NHTSA). Debate continues over the proper regulation of traditional combustion pollutants like carbon monoxide (CO) and oxides of nitrogen (NOx), but is also complicated by the heightened concerns over greenhouse gases like carbon dioxide (CO2) and methane. Given the recent political changes, as well as the influence of California, the auto industry has been largely deprived of the regulatory certainty about tailpipe standards that is helpful to steer future production.
Beyond direct regulation of tailpipe emissions, indirect regulation may prove equally or more impactful for some auto suppliers. On-Board Diagnostic (OBD) programs — and California’s in particular — cast an expansive net that increasingly implicates automotive suppliers. California’s regulation of “emissions relevant” vehicle parts and products provides a broad net of potential liability for auto suppliers based on the impact on a vehicle’s fuel economy and tailpipe emissions. Even if a part or product was not emissions relevant in the past, that status is subject to change and can have tremendous impacts in the event of warranty extensions or recalls.
Regulation of Manufacturing Facilities
Environmental regulation of production facilities is also evolving in ways that still remain somewhat vague. In particular, while Environmental Justice (EJ) remains somewhat nebulous, the EPA is addressing EJ through: (1) additional facility inspections; (2) “innovative relief” focused on enforcement remedies in local communities; (3) enhanced community communication; and (4) increased federal oversight — including enforcement — where state and local regulators are not sufficiently aggressive. In recent weeks, EJ considerations led to significant (and potentially unsurmountable) air permitting setbacks as well as the dreaded “shutdown” order for one noncompliant source. Thus, even if a manufacturing facility has a sterling compliance record, it may prove important to anticipate potential delays and additional scrutiny for permitting in EJ areas. For these reasons, various companies, both big and small, are rethinking the importance of community relations and a dialogue with local stakeholders to minimize these potential complications.
The ultimate form for many of these environmental initiatives remains uncertain, but policies and rulemaking seem likely to drive implementation. As a result, the industry should keep a wary eye on the development of these potentially transformative initiatives and take advantage of the opportunities to influence them through stakeholder groups and providing public comments, both directly and indirectly (through trade groups, chambers of commerce or other representatives). Understanding the potential ramifications of these initiatives at an early stage will improve the related advocacy and inform stakeholders of the associated risks, thereby improving corporate planning and decision-making.
Finally, keep in mind that if you aren’t at the table, you may appear on the menu.