Watch Now

Commentary: Do environmental regulations really push markets?

A Freightliner eCascadia tractor. (Photo: Freightliner)

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.  

Being first in something is not always laudable. For instance, on June 25, 2020 California mandated that truck manufacturers produce increasingly higher percentages of zero-emission vehicles. This mandate applies to any truck manufacturers of Class 2 (e.g., light trucks like the Ford F-150) through Class 8 (e.g., tractors suitable for 18-wheel semi-trailers).

The California Air Resources Board (CARB) set the requirement to fulfill its mandate of getting more zero-emission vehicles on the road in order to relieve the air pollution in southern California. Of course, while the vehicles may be zero-emission, the supply chains that facilitate their production are not. Still, CARB’s website highlights rebates and other tax incentives available to buyers of such vehicles. However, that is nowhere near as intrusive as requiring manufacturers to retool their assembly lines without any direct tax breaks for them.

A Tesla Semi’s lights shine brightly.
(Photo: Tesla)

CARB’s new rule is the first of its kind and it applies to vehicle production and sales instead of to purchases. “Build it and they will buy it” must be the hope, since this is a narrow supply-side regulation. Specifically, the requirement is that from 2024 to 2035 zero-emission trucks and/or chassis sales need to rise to 55% for Class 2b and 3 trucks and to 75% for Class 4 through 8 straight trucks. For large truck tractors the proportion is 40%. By 2045 every truck produced and sold in California must be zero-emission.

Given today’s technology, a zero-emission mandate strictly favors electric vehicles since natural gas power is not quite emission-free. Even with electric vehicles there are two options. Battery electric vehicles (BEVs) take in electricity from a charger and store it in the vehicle’s battery. This is the preferred technology used at Tesla. The other option is fuel cell electric vehicles (FCEVs) which use hydrogen and oxygen to generate the electricity on demand. The hydrogen must be pumped into the vehicle’s fuel tank. Honda, Hyundai and Toyota have various FCEVs on the market. Each technology, however, requires different infrastructure at fueling stations. 

A natural gas fueling station.
(Photo: Jim Allen/FreightWaves)

Mandating production and sales on the supply-side of the market while using tax incentives to promote purchases on the demand-side is a real balancing act. Toss in economic uncertainty over COVID-19 with concomitant adjustments in manufacturers’ supply chains and this balancing act is on a razor-thin tightrope if regulators expect sales to meet their targets. Building something does not automatically lead to sales unless the seller lowers the price and eats into its own margins. What would this look like? Well, California-based Tesla may have the brand recognition and economies of scale to handle promotional price cuts, but what about smaller companies that are not yet price-competitive? What about other companies that still see profits in internal combustion? Basically, who ought to be responsible for pollution from vehicle emissions, the manufacturers or the users?

It was very self-serving for Andy Schwartz, a Tesla senior policy advisor, to say “Fundamentally, the point of regulation is not to simply require things; it is to push the market more quickly, transitioning away from fossil fuels as fast and effectively as we can.” If Tesla is such a good innovator in this niche, why does it need regulators to mandate it? Another question, apart from the fact that zero-emission vehicles are still an emerging technology that is untested in long-haul commercial trucking, what about the support infrastructure? Will original equipment manufacturers (OEMs) be able to ensure sufficient parts as production realigns over 2024-2045? Will charging stations proliferate at rates necessary to support the new fleets and their delivery schedules? This is the danger here. Regulations can, indeed, do things fast but they rarely do things effectively. 

(Photo: Jim Allen/FreightWaves)

The only regulations that truly push markets are those that facilitate and stabilize them. Establishing the rule of law, property rights, contract enforcement, etc. form the foundation of the market economy. Beyond that, regulations begin to interfere with free enterprise because they distort incentives and price signals.

A regulation mandating purchases on top of CARB’s rule mandating production would more likely achieve what the regulators want. It is true that more regulation forces a result; but it also stifles the free market. Regulations are always subjective and political. They should only fix market failures. Let the zero-emission vehicle market blossom on its own. Mandating what private companies produce distorts markets from the dealers all the way back to raw material extractors. If pollution is costly to society then tax it directly; but do not mandate how to avoid creating it.

Click here to see other commentaries by Darren Prokop on American Shipper and FreightWaves.

Two Freightliner electric tractors.
(Photo: Freightliner)

Darren Prokop

Darren Prokop is a Professor of Logistics in the College of Business and Public Policy at the University of Alaska Anchorage. He received his Ph.D. in economics from the University of Manitoba in 1999. Prior to his academic career Darren Prokop worked in government as an economist and in the private sector in inventory planning.