Detroit, Mich. — An environmental watchdog group reported Monday that California and EPA have reached agreement in principle that auto fuel-economy rules will be set by the federal government — but according to California’s proposed regulations. The resulting hike over already-onerous federal rules, say industry analysts, could cost U.S. automakers billions more in regulatory compliance at a time when they are already financially insolvent.

“EPA is likely to follow historical precedent and federalize the state rules,” reports InsideEPA.com, thus resolving “the long-running fight over the state’s request for EPA to grant a Clean Air Act waiver for greenhouse gas emissions standards while retaining industry’s preferred compliance mechanism under CAFE.”

The auto industry had vigorously opposed California’s new GHG target, arguing that they are a de facto fuel-economy standard (since there is a direct correlation between mpg and CO2 emissions) and California only has the legal right to set air standards. Furthermore, granting California a fuel economy waiver would set precedent for an unworkable patchwork of state-by-state mpg standards that automakers would have to meet.

The compromise favors industry arguments, but at enormous cost. The federal CAFE mandate will now leap from a required 35 mpg by 2020 (just adopted in 2007 at an estimated cost to automakers of $85 billion) to a whopping 42 mpg — equivalent to European Commission mandates that even European automakers have been unable to meet despite $6-a-gallon gas prices.

Greens tentatively embraced the compromise, which comports with the EPA’s larger goal of regulating GHGs (which the agency has concluded “endanger human health”).

But Rep. Pete Hoekstra (R., Mich.) was alarmed by the proposal. “So we’re going to have a national standard, but California gets to write it,” said the congressman who has watched his state lose hundreds of thousands of auto jobs, in part due to the costs of previous CAFE mandates.

Philip Gott, an auto analyst with IHS Global Insight, confirmed that the 42 mpg standard “would be da**ed expensive.” A recent Global Insight study found that California’s mandate “would increase power-train costs by 50 to 70 percent” — roughly $1,000 for small, large-volume vehicles and $5,000 for larger, luxury vehicles.

With GM and Chrysler dependent on federal aid for survival, Hoekstra fears the industry will have little say in the final rules. “The Obama administration fired (GM CEO) Wagoner last week,” says Hoekstra. “Is (new CEO) Henderson going to resist? I don’t think so.”

Myron Ebell of the Competitive Enterprise Institute, fails to see the logic of EPA’s rush to harsher mpg rules. “It’s going to be much tougher for the automakers to meet a national standard based on the California rules,” he says. “It seems odd to me that the Obama administration wants to set rules that make it difficult for Detroit automakers to survive while at the same time loaning billions of taxpayer dollars to try to save them.”

“The best thing the administration could do for Detroit would be to ask Congress to repeal the higher CAFE standards and deny the California waiver,” Ebell continues. “Unless they do that, it’s not clear to me how Detroit can survive no matter how many taxpayer dollars are poured into them.”

– Henry Payne is an editorial writer and cartoonist for the Detroit News.