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Fiat Chrysler's $500 Million Strategy For Gaming The Clean Air Act

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FCA boss Sergio Marchionne

Carmakers are pouring billions of dollars into development of plug-in electric cars and hybrids, not because people want to buy them, but because the government requires it.

The latest announcement came from Ford Motor Co., which said December 10 it would invest $4.5 billion in electrified vehicles, adding 13 EVs and hybrids to its lineup by 2020. It’s a huge chunk of change that chief executive Mark Fields acknowledged the company probably wouldn’t spend if it didn’t have to.

Under the federal Clean Air Act, carmakers must cut tailpipe emissions to the equivalent of 54.5 miles per gallon by 2025. In California (and other states that have copied its laws), as many as 15 percent of cars must emit nothing – nada – by 2025. Currently, the only zero-emission cars being produced are EVs and fuel cell vehicles.

The trouble is, not enough people are willing to dish out premium prices for them. Even in California, home of EV champion Tesla Motors, fewer than 2 percent of the cars sold are electrics. Nationwide, electrified vehicles – including hybrids -- accounted for less than 3 percent of the more than 17.3 million cars and trucks sold in 2015, according to IHS Automotive. And with U.S. gas prices averaging less than $2 a gallon, there’s no reason to think consumers are going to rush to buy plug-ins or hybrids any time soon.

Fiat Chrysler Automobiles, which specializes in thirsty muscle cars, Jeeps and big Ram pickups, understands this and found a different way to comply. Rather than sinking huge sums of money on clean cars nobody wants to buy, it’s taking advantage of flexible language in the laws and stockpiling half a billion dollars’ worth of regulatory credits, most of which it purchased from other carmakers.

According to the U.S. Environmental Protection Agency, FCA bought 8.2 million greenhouse gas credits from Honda, Toyota and Tesla in 2014. The price wasn’t disclosed, but it’s easy to figure out. In 2014, the EPA forced Hyundai and Kia to forfeit 4.75 million EPA greenhouse gas credits to settle charges that it overstated the fuel economy of its 2012 and 2013 vehicles. At the time, the EPA said those credits were “estimated to be worth over $200 million” which works out to more than $42 each. That would put FCA’s purchase of 8.2 million credits at about $344 million.

The purchase dramatically increased the number of GHG credits FCA is hoarding, according to the EPA, which says Fiat Chrysler now has 13.76 million credits stockpiled. At $42 each, that’s worth a stunning $578 million. The company won’t comment on their value, but it’s certainly in the ballpark. In a filing with the U.S. Securities & Exchange Commission, FCA said its intangible assets included $545 million worth of regulatory credits. A spokesman said that figure includes more than just greenhouse gas credits, but wouldn’t elaborate.

The natural assumption is that FCA isn’t selling enough clean cars to comply with the Clean Air Act on its own, and has to buy credits from other carmakers in order to meet the requirements.

But, in fact, FCA does comply, even without selling more than a handful of plug-in Fiat 500s or counting the stockpiled credits. How?

Yet again, the company opted for a less expensive path. The EPA grants tailpipe credits for various technologies that make cars more efficient, like flexible-fuel capability, LED lights, tinted windows, ventilated seats, and air conditioning improvements. Chrysler has taken full advantage of this flexibility, using a new, cleaner refrigerant, for example, in the air conditioning system of most of its vehicles. Other carmakers have earned similar air conditioning credits, but FCA is by far the most aggressive to replace its old A/C systems. Such technology credits, plus widespread use of more efficient 8-speed transmissions, helped put FCA across the goal line.

So why is it hoarding credits then?

“I assume they’re buying them because they think they’re going to run out of credits in the future,” as the regulations get ever steeper, said Dale Kardos, a regulatory affairs consultant.

He created an online auction platform called Mobilis Trading (URL here) in 2012 to help automakers buy and sell credits from each other. Though many automakers have signed up, Mobilis has yet to hold an auction because the market is still in its infancy, he says. For now, it’s easier for a company like FCA to call up Toyota and cut a private deal, he says. As the regulations get more stringent, however, demand for credits will rise and it will make more sense to hold online auctions.

Fiat Chrysler is smart to buy and stockpile credits now, while they are still relatively cheap. Its future lineup doesn’t include a lot of electrified vehicles, although its next-generation minivan, due in 2016, will include a plug-in electric option. Truck standards, in particular, are going to get much tougher in years to come.

FCA Chief Executive Sergio Marchionne once famously begged people not to buy the plug-in Fiat 500e “because every time I sell one, it costs me $14,000.” On the other hand, he probably makes close to $14,000 every time he sells a $40,000 pickup truck.

Sooner or later, FCA will have to jump on the EV bandwagon, but with that kind of math, it’s hard to argue with his logic.