Federal Environment Minister Prentice has called the new Quebec vehicle efficiency standards an example of the folly of attempting to “go it alone” in the integrated North American market. His criticism has not been well-received in Quebec, with the media accepting at face value the response of the Quebec government that Quebec is not acting alone, but is merely replicating the standard deployed in California and a number of other states. Someone is mistaken.

In 2007, Canada and the US commenced a collaborative effort to develop more stringent vehicle efficiency standards for cars and light trucks. Concurrent with this bilateral dialogue, the Bush administration and California were engaged in a political and legal dispute concerning the ability of California to regulate carbon dioxide as a tailpipe emission. California applied for a waiver in 2005. The EPA denied the waiver in 2008. California was supported by 12 American states that wished to adopt the proposed California standard (the so-called “CAA 177 states”, section 177 of the Clean Air Act allowing other American states to adopt rules that are identical to the Californian standard). Quebec, BC and Manitoba all indicated they too would adopt the more stringent California standard if and when California received the necessary waiver from the EPA to bring the regulations into effect.

In January, 2009, President Obama ordered a review of the waiver denial, and commenced a negotiation with California. In April of 2009, Minister Prentice announced a Canadian process that would lead to the regulation of vehicle efficiency pursuant to the Canadian Environmental Protection Act, with vehicle efficiency to be calibrated not in terms of the traditional distance per unit of fuel (eg miles per gallon or kilometre per litre) but CO2 emissions per unit of distance (ie grams per km.).

In May of 2009, President Obama announced a landmark compromise agreement between the US Federal Government, California, auto manufacturers and the UAW to create one national US standard by essentially creating a pathway that would take California’s standards “national”. California would receive its EPA waiver , on the understanding California rules would be modified to create a compliance pathway that would accommodate the new national standard. California is currently amending its rules so that compliance with the EPA standard will be deemed compliance with California regulations.

On September 15, 2009, the EPA and Dept. of Transportation proposed a coordinated national program and rule-making process that would result in the former regulating vehicles in terms of CO2 grams per mile and the latter regulating on an analogous basis in terms of miles per gallon. The American process will result in new federal rules by the end of Q1 2010 for application for the 2012 model year commencing Oct 1, 2011. (This timeline is consistent with the longstanding practice to give auto manufacturers 18 months notice for changes affecting a particular model year)

On December 7, 2009, Minister Prentice released draft Canadian regulations in “Canadian” terms (ie grams per km) that will match the new American standard – in effect, taking the California standard “continental”. It is expected the Canadian regulations will come into effect by mid-2010 following the required consultation process. (Minister Prentice has also indicated that Canada and the US are working together to prepare a common North American standard for other transportation emissions, including heavy trucks and aircraft).

Notwithstanding the 2009 developments as described above, the Government of Quebec published its own standard on Dec. 30, 2009, to take effect January 14, 2010 on a retroactive basis for the 2010 model year (that had commenced October 1, 2009).

The Quebec standards are different from the California rules in a number of significant ways. First, Quebec has decided to deny credit for (i) reduced GHG emissions generated by improved air conditioning, and (ii) investment in advanced technology vehicles. Second, Quebec has reclassified a variety of crossover vehicles and SUVs (representing approximately 20% of the current vehicle market) from the “light truck” to “passenger car” category, thereby substantially increasing the improved annual efficiency required of these vehicles (over and above the rising stringency for all vehicles in both categories). Third, section 17 of the Quebec regulation proposes a “fee” of $5,000 per non-complying vehicle-equivalent that will be triggered once a manufacturer exceeds the required fleet average standard.

The effect of the changes, particularly the reclassification of vehicles, is to make compliance more difficult and non-compliance more costly in Quebec than in any other North American jurisdiction. Left unchanged, auto manufacturers will be left with some very unattractive options: (i) to withhold certain models from the Quebec marketplace (not selling larger vehicles being the only way to ensure that small cars will represent a higher percentage of total sales); or (ii) to try to transfer the financial risk to Quebec-based dealers through their wholesale pricing; or (iii) to encourage the sale of crossovers etc to Quebec consumers via their Quebec dealers in full knowledge that success will trigger some big fines in the future.

Some industry observers believe the ability of many Quebecers to simply “cross the Ottawa River” and purchase vehicles in Ontario means the principal victim of the regulations will be Quebec-based car dealers, rather than the auto manufacturers themselves. Others predict that the Quebec rules will encourage the longer use of existing vehicles and discourage the purchase of new (more efficient) vehicles, so that actual Quebec emissions will be higher in the future than if the province had merely moved forward under the new and increasingly stringent Canadian (ie Californian) standard. (This perverse impact occurred in California when it imposed higher standards that raised new car prices and diminished engine performance). To Minister Prentice, such unintended consequences exemplify “the folly of going it alone.”

Quebec has also decided that the regulation will kick in at different times for different auto manufacturers based on their historic market share, to the detriment of more popular manufacturers. It remains to be seen whether such arbitrary discrimination will prompt a trade complaint. Ironically, the exporting jurisdiction with the most to complain about is likely Ontario, given the number of “reclassified” vehicles that are assembled in Oakville, Alliston, Cambridge, Ingersoll and Windsor.

It appears that the Premier and Environment Minister of Quebec have been led to believe that Quebec is not acting alone in North America, but is merely replicating the California and “CAA 177” standard ahead of the rest of Canada. The facts do not support this position. In fact, Quebec is indeed going it alone, with a unique and more stringent standard than the other 59 states and provinces in the US and Canada.