Technology-Forcing Automobile Emissions Provisions of the 1970 Clean Air Act:

Forcing Invention or Innovation?

David Gerard & Lester Lave

Center for the Study & Improvement of Regulation

Carnegie Mellon University

November 2002

2

1970 Clean Air Act Amendments

• mandates 90% reductions in mobile source emissions

• sets short time horizons -- 1975 for HC, CO; 1976 for NOx

• establishes $10,000 per car penalty for non-compliance

• limits EPA’s discretion to delay implementation

Sharp contrast to provisions for stationary sources

3

Two Marquee Technologies

• Ford, GM install catalytic converters on 1975 MY vehicles; devices on most US vehicles by 1977.

• Widespread introduction of three-way catalysts in 1981

US producers do not meet standards set in 1970 statute until 1993

4

Major Control Technologies of New Vehicles Sold in US

Model Year Non-Catalyst Oxidizing Catalyst

Three-Way &/or FI

1974 100% -- --

1975 16.7 80.7 2.4

1976 16.2 81.7 2.1

1977 10.8 85.3 3.9

1978 8.4 88.0 3.6

1979 8.1 89.6 2.2

1980 0.0 94.4 4.6

1981 0.0 31.0 69.0

Source: Bresnahan and Yao (1985)

5

Federal Emissions Standards

Model Year HC CO NOx

Pre-Control 8.7 87 4.4

1968 6.2 51 --

1970 4.1 34 --

1972 3.0 28 --

1973 3.1

1975 1.5 (.41) 15 (3.4)

1977 2

1980 0.41 7

1981 3.4 1

(1970 CAAA standards) (Standards Met)

6

Questions

1. How does the technology-forcing regulatory process work?

• Who are the stakeholders / participants?

• What are their incentives?

• What did they do throughout the process?

2. What is the relationship between regulations and the development of new emissions control technologies?

Regulations Technological Advance

7

Answers -- Overview of Talk

1. Brief Theoretical Primer

2. We draw on information from economics, history, legal scholarship, court cases, and stakeholder interviews to look at three periods:

• Historical antecedents, Why Technology-Forcing Regulations?

• 1971-1975, catalytic converter• 1975-1981, three-way catalysts

3. Lessons, Limitations, Conclusions

8

Regulatory Instrument Choice

Technology Standard

• low monitoring costs, relatively high degree of certainty of outcomes

Performance Standard

• flexibility, lower costs, greater incentive to innovate

How does this basic compare to case where standards

are not attainable with current technology?

9

Technology-Forcing Literature

Firms generally have superior information• incentive to disguise, downplay ability to innovate• incentive to under-invest in R&D

Regulator commitment and credibility is central to motivating recalcitrant industry to do R&D.

Models generally predict that firms will either meet standard, or miss by a lot. (Kleit, 1992; Yao 1988).

Treat industry as single player (compare with Hackett, 1995; Puller, 2002).

10

Regulations Technological Advancein oligopoly setting

Generalized Model of R&D Incentives (Puller, 2002)

1. Reduce compliance costs (+) (M) (exo)

2. Operationalize Cost Advantage (+)

(raise rivals’ costs)

___________

3. R&D costs (-) (M) (exo)

4. Spillovers, Appropriability (-) (exo)

5. Ratcheting, Regulator Credibility (-) (M)

11

R&D Investment Link often Deterministic, but TF Fraught with Uncertainty

• Cost

• Technological breakthroughs (even if firms make good faith efforts)

• Reliability

• Unintended consequences

• Lock-in of inferior technology

all present challenges for political feasibility, and administrative actions

12

Answers -- Overview of Talk

1. Brief Theoretical Primer

2. We draw on information from economics, history, legal scholarship, court cases, and stakeholder interviews to look at three periods:

• Historical antecedents, Why Technology-Forcing Regulations?

• 1971-1975, catalytic converter• 1975-1981, three-way catalysts

3. Lessons, Limitations, Conclusions

13

Historical Antecedents to Clean Air Act

• Post WWII, US auto manufacturers a comfortable, untouchable oligopoly.

• 1961 California mandates PCV valve

• 1965 Unsafe at Any Speed; federalization of automobile emissions regulations (MVPCA)

• 1966 Safety Legislation (administrative discretion)

• 1967 Air Quality Act … HEW follows CARB’s lead in setting emission standards.

• 1969 Dept of Justice sues Big 3 (+1) for conspiring to suppress emissions control technologies. Stands until 1981.

• 1970 Nixon, Muskie back and forth leads to technology-forcing aspects of Clean Air Act Amendments measure

14

1970 Clean Air Act Amendments

1. EPA must set new Federal Test Procedure

2. HC, CO standards effectively changed in 1972, and NOx standards set to go into effect in 1973.

3. Mandates 90% reductions in mobile source emissions• HC 4.1 0.41 by 1975 MY

• CO 34 3.4 by 1975 MY

• NOx uncontrolled 0.41 by 1976

4. $10,000 per car penalty for non-compliance

5. EPA has discretion to delay standards once.

15

Development and Diffusion of the Catalytic Converter

EPA

• “enormous benefits at modest costs”

• equips its own vehicles and satisfies 50K standard

Industry

• Agrees in principle, but wants longer time horizon

• GM most adamant, as it has best shot at meeting standard at low cost

EPA and Industry both determine that catalytic converter is best control strategy to meet HC and CO 1975 standards

Unintended Consequences: compliance with1972 & 1973 standards results in really lousy cars, some degree of public

dissatisfaction with emissions control

16

Timetable of First Delay

Dec. 31, 1970 Clean Air Act

June 23, 1971 EPA sets standards for 1975, 1976 MY

January 1, 1972 NAS issues report suggesting technology tomeet standards not yet available

March 13, 1972 Volvo requests delay; Big 3 follows suit April 5

May 12, 1972 EPA denies request for delay

Dec. 18-19, 1972 DC Court of Appeals hears case and remands itback to EPA (IH v. Ruckelshaus)

Dec. 20, 1972 EPA issues supplement

Feb.10, 1973 Court again remands case to EPA

April 1973 EPA delays HC, CO standards

June 1973 EPA delays NOx standards

17

Effects of Catalytic Converter Push

• EPA sets stringent interim standards, basically forcing GM and Ford to put catalytic converters on vehicles– HC 4.1 1.5 (0.41)– CO 34 15 (3.4)

• Manufacturers no longer have to detune vehilces to meet standards.

• Catalytic converters reliable and durable (when not poisoned by leaded gasoline).

• Chrysler basically didn’t do anything, and does not put catalytic converter on its 1975 MY vehicles. Emissions of HC 38% and CO 60% higher than Ford, GM vehicles

18

Recapitulation

• Ambitious goal, short time horizon

• EPA had clear idea of what it wanted to do: force development and installation of a fairly mature technology

• Industry did not have big information advantage

• EPA shows extra-ordinary determination, but winks at Chrysler

• rapid diffusion of catalytic converters and steep reductions in HC, CO emissions, but still not that close to meeting standards

19

Complicating Factors• Economic Malaise of 1970s

• Oil Embargo

– Questions about whether emissions controls affect fuel economy. GM splits with Ford, Chrysler

– Congressional delay from 1976 to 1977

– EPA technical staff jumps ahead of the curve on fuel economy

• Sulfate question

– EPA delays deadline from 1977 to 1978

– industry split

– EPA split

20

1977 Clean Air Act Amendments

• Industry cannot comply with 1978 standards, but produces vehicles anyway

• EPA cannot delay standards

• Congress forced to delay standards or shut down industry, chooses to delay standards to 1981 for NOx.

21

Hard NOx

• July 20, 1973 EPA delay of NOx standard not particularly controversial -- neither EPA nor industry has a good plan for meeting standard (plus EGR was not working particularly well)

• 1975 EPA and NAS suspect that industry is lax in its research efforts

• 1981 Three-way catalysts put on most US vehilces. Major problems with technology

22

What Happened? Possible Explanations for Problems with Meeting Standards

• Too many disruptions

• Industry diligently pursued new technologies, but simply couldn’t get enabling technologies in place

• For whatever reasons industry scaled back its R&D efforts.

– EPA lacked credibility after giving Chrysler a free ride.

– EPA did not have a clear idea of whether NOx controls were feasible

– Informational chasm between industry and EPA

• Forcing invention inherently more uncertain

23

Aftermath

Technological Advance through 1970s and 80s• Fuel Economy Improvements• Beefed up horsepower• Incremental improvements in emissions performance

Competing Explanations• Regulations led to putting electronic controls on cars. This

produced a platform for performance improvements.• Industry saw dramatic entry and competition, which forced

firms to redouble their efforts to improve their products.

24

HC Emissions of 1974-1990 Vehicles

25

To Be Continued

California Regulations

• 1989 ZEV mandate

• 2002 CO2-reductions mandate

26

Lessons

• Consistent with Theoretical Predictions

– technology forcing works best when asymmetry of information is limited and regulators are committed and can credibly enforce standards

• Consistency with conventional wisdom about technology standards versus performance standards less clear

• Difficult to force technological leaps (to say nothing of high fixed costs of network effects)

• Process especially vulnerable to unforeseen complications

27

Limitations

• Controlling for External Factors

• Says nothing about whether technology-forcing regulations pass a cost-benefit test

• does not endorse technology-forcing as the best approach

– stiff gas tax

– aggressive I/M program, vehicle scrappage

– driving restrictions