04/14/2020 - Opinion - Private Sector Project - Student Work

When industry support for stricter regulation is good business: Considering the car rules and methane standards

by Martin Levy, JD 2020

Since President Trump’s election, his administration has engaged in an aggressive rollback of environmental regulations promulgated during the Obama administration.[1] These reforms have been animated in part by a desire to stop “job killing” rules and help businesses grow.[2] Despite this pro-business intent, President Trump’s agenda has at times met resistance from the business community. Major automakers have resisted the president’s efforts to eliminate greenhouse gas regulations for mobile sources and major oil producers have opposed the president’s efforts to eliminate methane emission regulations.

Given the short-term costs regulation imposes on industry[3] and the influence of organized business interests on government policy,[4] why does industry sometimes resist environmental deregulation? In the context of the Trump administration’s efforts to roll back fuel economy and emissions standards for cars and light trucks, industry itself has rooted its opposition to deregulation in its desire for regulatory certainty.[5] However, regulatory stability is not industry’s only source of motivation. Using the lens of the Environmental Protection Agency’s (“EPA’s”) revision of fuel economy standards for cars and light trucks and EPA’s withdrawal of New Source Performance Standards for oil and gas methane emissions (“methane NSPS”), this post offers two other potential explanations. First, industry opposition to deregulation may be informed by a desire to gain an advantage over competitors with higher regulatory compliance costs. Second, industry support for the regulatory status quo may support a marketing campaign aimed at promoting a “green” image to consumers. In these ways, supporting regulation can be good business, giving firms both a compliance cost and marketing advantage over competitors.

Low Compliance Costs Relative to Competitors

A company that has already adopted compliance systems in expectation of stricter regulations will have less trouble complying and be more likely to resist deregulation. Having invested heavily to comply with government requirements, firms may fear the comparative cost-advantage deregulation would afford competitors not yet invested in compliance. Additionally, large firms may view significant compliance costs as a way to insulate themselves from smaller, under-capitalized competitors. Early in the Reagan administration, businesses that were once eager to see strong deregulatory action at the federal level became wary of changes in existing standards, as they had largely internalized environmental law into their business organizations.[6] This was compounded by the fact that deregulatory efforts were likely to give new entrants into the market a competitive advantage over existing companies.[7]

In the modern auto industry, differences in firms’ investments in fuel efficiency may explain their varied responses to the Trump administration’s fuel economy standards. For instance, Volkswagen projects that 15% of all its sales will be electric vehicles by 2025,[8] while Ford has invested $11 billion in boosting its electric vehicle fleet;[9] both companies opposed the Trump administration’s rollback. Similarly, Volvo pledged that at least 50% of its sales fleet would be fully electric by 2025[10] and recently signaled it would favor California’s more stringent fuel-economy standards over the Trump administration’s new rule.[11] In contrast, General Motors and Fiat Chrysler support fuel-economy deregulation and neither has laid out clear plans for increasing the efficiency or electrification of its auto fleet.[12] Toyota also supports deregulation and was the only automaker that saw the average miles per gallon (mpg) of their fleet decline between model years 2012 and 2017.[13] Accordingly, companies such as Volkswagen, Ford, and Volvo may be advocating for strict regulations in order to maintain a competitive advantage over companies with less fuel efficient or electric vehicles, such as Toyota, Fiat Chrysler, and General Motors.

In the oil and gas industry a similar dynamic is at play, with larger and smaller firms having different capacities to meet regulatory costs. Large energy companies, such as Exxon Mobil, Royal Dutch Shell (“Shell”), and BP, expressed dissatisfaction with the Trump administration’s decision to rescind the methane NSPS.[14] They argue that natural gas production results in less greenhouse gas pollution than oil or coal and should be part of a climate-friendly energy future. Rescinding regulations to limit methane emissions from unnecessary leaks and releases during natural gas production undermines this argument.[15] Industry groups that represent smaller, independent oil and gas producers have consistently opposed EPA’s methane NSPS, arguing that the cost of the regulations would be significant for smaller companies.[16]

Lower oil and gas prices in 2016 forced smaller oil and gas companies to take on significant amounts of debt.[17] In 2019, as that debt matured, many smaller oil and gas company approached insolvency or went bankrupt.[18] With the onset of COVID-19 and an international oil price war, these smaller firms are under even greater financial strain.[19] Given their precarious financial situation, these companies were ill-positioned to meet the additional regulatory requirements of the existing methane regulation promulgated by the Obama administration. For large firms, the costs of the methane NSPS are negligible compared to their total revenue. EPA estimates that the repeal of the methane NSPS will save the industry at most $125 million over a six-year period[20] while BP alone made net profits of $12.7 billion in 2018.[21] Large oil companies have also been implementing high-tech methane monitoring systems. BP has implemented drone methane-monitoring technology[22] and Shell is experimenting with smart methane sensing technology.[23] Accordingly, large oil companies have comparatively little to gain by supporting the methane NSPS repeal.

Fear of Consumer Backlash

Fears of consumer backlash may also shape industry’s reaction to regulation. In 2018, 83% of millennials said that it is extremely or very important to them that companies implement programs to improve the environment; as millennials become the dominant US consumer, maintaining a green corporate brand will be increasingly important to the success of consumer products.[24] While it takes years to establish a green reputation, negative perceptions are established more quickly with little room for rehabilitation.[25] Effective consumer boycotts not only produce short term hits to a company’s share price [26] but also produce long term harm to a firm’s brand.[27] Recognizing this growing consumer eco-consciousness and the potential for consumer backlash, public opposition to deregulation can be understood as an attempt to generate goodwill among customers.

BP’s opposition to the methane NSPS repeal follows its efforts to restore its reputation in the aftermath of the Deepwater Horizon Oil Spill. In the years preceding the oil spill, BP spent $200 million in their ten-year “Beyond Petroleum” advertising campaign and adopted a green and yellow Helios sun as their logo.[28] By the end of the 2000s, consumers considered BP the most environmentally conscious oil company.[29] Then, the 2010 spill led to weeks of media coverage and widespread moral outrage directed at BP.[30] Consumers led protests at BP gas stations and hundreds of thousands of protestors joined “Boycott BP” Facebook groups.[31] The oil spill and ensuing protests tarnished BP’s efforts to brand itself as environmentally friendly.[32] While the “Beyond Petroleum” campaign was found to have mitigated the impact of the oil spill on BP’s reputation, the company still experienced a 4.2% drop in sales in the five months after the spill.[33] The divergence between the message of the “Beyond Petroleum” campaign and the horrific Deepwater Horizon Spill likely exacerbated the loss of consumer trust in its environmental stewardship.[34] By opposing the rescission of the methane NSPS, BP generates positive media attention that may improve its reputation among customers.

Like BP, Volkswagen has experience with environmental scandals. In September 2015, EPA found that many Volkswagen cars sold in the United States had a “defeat device” installed.[35] This software changed the performance of the vehicle to meet regulatory standards when tested by regulators.[36] Consumers reacted harshly to the news. Volkswagen sales dropped 20% in the United Kingdom and 25% in the United States.[37] Eventually, Volkswagen was forced to pay over $25 billion in claims to owners of vehicles and environmental regulators.[38] Since the scandal, Volkswagen has sought to craft a decidedly green image, including pledging to achieve a companywide zero-carbon footprint by 2050 and introducing new lines of electric vehicles.[39] At an auto show in Los Angeles, Scott Keogh, the president and chief executive officer of Volkswagen Group of America, directly linked Volkswagen’s support for California’s stricter emissions limits to its efforts to build trust among environmentally conscious consumers.[40]

On the other hand, Toyota’s support for the Trump administration’s fuel economy standards demonstrates the perils of ignoring consumer eco-consciousness. Many customers are loyal to Toyota because of its environmental reputation; a survey in 2007 found that more than half of Prius drivers purchased the car because it made an environmentally conscious statement.[41] After cultivating an environmentally conscious reputation over many years, Toyota received heavy consumer criticism on Twitter for its support of the Trump administration’s fuel economy standards.[42] In supporting weaker fuel economy standards, Toyota bets that consumer memory is short and consumer retaliation limited.[43]

Conclusion

Industry response to the Trump administration’s car emissions standards and methane NSPS rollbacks demonstrates how motivations beyond the desire for regulatory certainty influence corporate stances on regulation. Whether a portion of an industry supports or opposes a regulation will also partially depend on how it effects a firm’s competitiveness and public image. All things being equal, firms with lower regulatory compliance costs and a desire to forge an eco-conscious image are more likely to oppose environmental deregulation.

 

[1] See Nadja Popovich et al., 85 Environmental Rules Being Rolled Back Under Trump, New York Times (Sept. 12, 2019) https://www.nytimes.com/interactive/2019/climate/trump-environment-rollbacks.html.

[2]Juliet Eilperin, Trump establishes task forces to eliminate ‘job killing regulations’, Washington Post (Feb. 24, 2017) https://www.washingtonpost.com/news/powerpost/wp/2017/02/24/trump-establishes-task-forces-to-eliminate-job-killing-regulations/.

[3] See Richard J. Lazarus, Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future, 94 Cornell L. Rev. 1153, 1154 (2009) (“Climate change legislation is especially vulnerable to being unraveled over time for a variety of reasons, but especially because of the extent to which it imposes costs on the short term for the realization of benefits many decades and sometimes centuries later. To be successful over the long term, climate change legislation will need to include institutional design features that insulate programmatic implementation to a significant extent from powerful political and economic interests propelled by short-term concerns.”)

[4] Paul Pierson, Increasing Returns, Path Dependence, and the Study of Politics, The American Political Science Review, Vol. 94, No. 2, Jun. 2000, at 251-267.

[5] See Caitlin McCoy, Looking Forward from California’s Historic Agreement with Automakers, Harvard’s Environmental and Energy Law Program (Jul. 26, 2019) (“The four automakers explained in a joint statement, “These terms will provide our companies much-needed regulatory certainty by allowing us to meet both federal and state requirements with a single national fleet, avoiding a patchwork of regulations while continuing to ensure meaningful greenhouse gas emissions reductions.” The determination to market “a single national fleet” and “avoid[] a patchwork of regulations” has been central to the industry’s approach to tailpipe emissions regulation for decades.”) available at https://eelp.law.harvard.edu/2019/07/looking-forward-from-californias-historic-agreement-with-automakers/.

[6] Richard J. Lazarus, The Making of Environmental Law 160-165 (Univ. Chi. Press 2004).

[7] Id.

[8] Russ Mitchell, Automakers Vote for California in Emissions Debate, Governing (Nov. 27, 2019) https://www.governing.com/news/headlines/Automakers-Vote-for-California-in-Emissions-Debate.html.

[9] Bill Ford & Jim Hackett, A Measure of Progress, Ford Motor Company, Medium (Mar. 27, 2018) https://medium.com/cityoftomorrow/a-measure-of-progress-bc34ad2b0ed.

[10] The Future is Electric, Volvo Cars (2020) https://group.volvocars.com/company/innovation/electrification

[11] See Volvo Cars in Talks to Reach Emissions Deal with California, Reuters (Mar. 31, 2020) https://www.nytimes.com/reuters/2020/03/31/world/asia/31reuters-autos-emissions-volvo.html.

[12] Russ Mitchell, Automakers Vote for California in Emissions Debate, Governing (Nov. 27, 2019) https://www.governing.com/news/headlines/Automakers-Vote-for-California-in-Emissions-Debate.html.

[13] Dino Grandoni, The Energy 202: Toyota faces revolt from eco-conscious customers after siding with Trump, Washington Post (Nov. 6, 2019) https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2019/11/06/the-energy-202-toyota-faces-revolt-from-eco-conscious-customers-after-siding-with-trump/5dc1bc52602ff1184c3161f5/; Environmental Protection Agency, The 2018 EPA Automotive Trends Report (March 2019) https://nepis.epa.gov/Exe/ZyPDF.cgi/P100W5C2.PDF?Dockey=P100W5C2.PDF.

[14] See Alex Guillén & Ben Lefebvre, Trump administration to seek rollback of methane pollution rule, Politico (Aug. 29, 2019) (Detailing reactions of BP and Shell) https://www.politico.com/story/2019/08/29/methane-pollution-rule-trump-administration-1692262; see also Letter from Gantt Walton, Vice President of Exxon Mobil, to EPA (Dec. 17, 2018) (Describing Exxon Mobil’s support for “federal regulatory standards to mitigate methane emissions”).

[15] See Hiroko Tabuchi, Oil Giants, Under Fire From Climate Activists and Investors, Mount a Defense, New York Times (Sept. 23, 2019) (“Leaks undermine the energy industry’s argument that the burning of natural gas should be encouraged because it is cleaner than coal and can serve as a “bridge fuel” between fossil fuels and renewable energy”) https://www.nytimes.com/2019/09/23/climate/oil-industry-climate-investment.html.

[16] Bradley Olson & Christopher Matthews, Trump Rollback of Methane Regulations Splits Energy Industry, Wall Street Journal (Aug. 29, 2019) https://www.wsj.com/articles/trump-rollback-of-methane-regulations-splits-energy-industry-11567098375?mod=searchresults&page=1&pos=4.

[17] Rebecca Elliott & Christopher Matthews, Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale, Wall Street Journal (Aug. 30, 2019) https://www.wsj.com/articles/oil-and-gas-bankruptcies-grow-as-investors-lose-appetite-for-shale-11567157401.

[18] Id.

[19] See, e.g., Collin Eaton & Jon Hilsenrath, Texas Gets Double Punch From Coronavirus and Oil Shock. ‘There’s No Avoiding This One.’, Wall Street Journal (Apr. 5, 2020)  https://www.wsj.com/articles/texas-gets-double-punch-from-coronavirus-and-oil-shock-theres-no-avoiding-this-one-11586113727.

[20] Environmental Protection Agency, EPA Proposes Updates to Air Regulations for Oil and Gas to Remove Redundant Requirements and Reduce Burden (Aug. 28, 2019) https://www.epa.gov/newsreleases/epa-proposes-updates-air-regulations-oil-and-gas-remove-redundant-requirements-and.

[21] Ron Bousso, BP’s 2018 profit doubles to five-year high as output soars, Reuters (Feb. 5, 2019) https://www.reuters.com/article/us-bp-results/bps-2018-profit-doubles-to-five-year-high-as-output-soars-idUSKCN1PU0IU.

[22] Jordan Blum, BP launches gas cloud imaging, drones to monitor methane emissions, Houston Chronicle (Sept. 10, 2019) https://www.houstonchronicle.com/business/energy/article/BP-launches-gas-cloud-imaging-drones-to-monitor-14427433.php.

[23] Aileen Nowlan, Shell Becomes Latest Oil And Gas Company To Test Smart Methane Sensors, Environmental Defense Fund (Aug. 9, 2017) http://blogs.edf.org/energyexchange/2017/08/09/shell-becomes-latest-oil-and-gas-company-to-test-smart-methane-sensors/.

[24] Was 2018 the Year of the Influential Sustainable Consumer? Nielsen (Dec. 17, 2018) https://www.nielsen.com/us/en/insights/article/2018/was-2018-the-year-of-the-influential-sustainable-consumer/.

[25] Id.; see also Most Influential Emotions on Social Networks Revealed, MIT Technology Review (Sept. 16, 2013) https://www.technologyreview.com/s/519306/most-influential-emotions-on-social-networks-revealed/; Andrew Winston, Five Lessons from the BP Oil Spill, Harvard Business Review (June 03, 2010) (“Warren Buffett famously said, ‘It takes 20 years to build a reputation and five minutes to ruin it.’ Having a reputation as a sustainability leader is valuable, but it’s a tenuous thing, and it can be lost very fast.”) https://hbr.org/2010/06/the-bp-oil-spill-top-5-lessons?referral=03759&cm_vc=rr_item_page.bottom.

[26] University of Pennsylvania, To Boycott or Not: The Consequences of a Protest, Knowledge @ Wharton (June 09, 2010) https://knowledge.wharton.upenn.edu/article/to-boycott-or-not-the-consequences-of-a-protest/.

[27] Tijs van den Broek et al., The Effect of Online Protests and Firm Responses on Shareholder and Consumer Evaluation, Journal of Business Ethics (2017) 146: 279–294.

[28] Lint Barrage et al., “Advertising and Environmental Stewardship: Evidence from the BP Oil Spill,” American Economic Journal: Economic Policy, Vol.12, No. 1, February 2020, at 33-61.

[29] Id.

[30] To Boycott or Not: The Consequences of a Protest, Knowledge @ Wharton, University of Pennsylvania (June 09, 2010) https://knowledge.wharton.upenn.edu/article/to-boycott-or-not-the-consequences-of-a-protest/.

[31] Sarah Wheaton, Protestors Gather at BP Gas Stations, New York Times (June 2, 2010) https://www.nytimes.com/2010/06/03/us/03boycott.html.

[32] Scott Neuman, As BP Backlash Grows, So Do Calls For Boycott, NPR (May 25, 2010) https://www.npr.org/templates/story/story.php?storyId=127110643.

[33] Id.

[34] Sabine Matejek & Tobias Gosling, Beyond Legitimacy: A Case Study in BP’s “Green Lashing,” Journal of Business Ethics, 120, 571–584 (2014).

[35] Russel Hotten, Volkswagen: The Scandal Explained, BBC News (Dec. 10, 2015) https://www.bbc.com/news/business-34324772.

[36] Id.

[37] Andy Sharman, Volkswagen hit by consumer backlash after emissions scandal, Financial Times (Dec. 4, 2015) https://www.ft.com/content/9ac95faa-9a79-11e5-be4f-0abd1978acaa.

[38] See Roger Parloff, How VW Paid $25 Billion for ‘Dieselgate’ — and Got Off Easy, Fortune (Feb. 6, 2018) https://fortune.com/2018/02/06/volkswagen-vw-emissions-scandal-penalties/.

[39] Russ Mitchell, L.A. Auto Show: VW America’s chief has a plan to move past the emissions scandal, Los Angeles Times (Nov. 27, 2019) https://www.latimes.com/business/story/2019-11-27/los-angeles-auto-show-vw-q-a.

[40] Id. (“You have to continue to draw a straight line that connects business and values. That’s why we raised our hand [to agree to California’s stricter emission rules]. Had we not done that it would have showed a disconnect with our customers. If you have a disconnect, you don’t have trust.”)

[41] Dino Grandoni, The Energy 202: Toyota faces revolt from eco-conscious customers after siding with Trump, Washington Post (Nov. 6, 2019) https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2019/11/06/the-energy-202-toyota-faces-revolt-from-eco-conscious-customers-after-siding-with-trump/5dc1bc52602ff1184c3161f5/.

[42] Tiffany Hsu, Toyata’s Support of Trump Emissions Rules Shocks Californians, New York Times (Oct. 29, 2019) https://www.nytimes.com/2019/10/29/business/toyota-california-emissions-honda-gm-chrysler.html.

[43] Id.