As the industry prepares for the Environmental Protection Agency’s (EPA) announcement of its 2023-2026 light-duty vehicle GHG standards, the EPA’s 2021 Automotive Trends Report offers a chance to consider how passenger car and light-duty truck manufacturers are progressing toward meeting the EPA’s greenhouse gas (GHG) standards. While headlines may note the year-over-year stagnation of light-duty fuel economy, it is worth looking deeper into the performance-to-standard data and the status of GHG credit banks.

Carbon offset credits arose in the late 1980s through an early attempt to mitigate climate change.1 A carbon offset credit functions as a transferable instrument certified by governments and represents an emissions reduction of one metric ton of CO2 or other greenhouse gas.2 For the EPA, these credits are helpful for monitoring and enforcing their GHG tailpipe emissions regulations. Since 2012, there have been shifts regarding GHG standards and credit compliance among passenger vehicle manufacturers. One of today’s most important questions for many automotive stakeholders is whether the automotive industry is heading toward a credit crunch or a credit glut.

Figure 1 shows that automotive OEMs had consistently complied with the EPA’s tailpipe GHG emissions standards between 2012 and 2015. However, starting in 2016, the industry as a whole has failed to meet the EPA’s increasingly stringent emissions standards and has relied on credits to remain compliant.

 

Figure 1: Automotive Industry GHG Performance and Standards 2012 – 2020

Source: The 2021 EPA Automotive Trends Report

 

As shown in Figure 2, OEMs throughout the industry steadily generated compliance credits until the industry’s carbon credit bank peaked in 2015. In 2016 the industry began to use more credits than it generated, leading to yearly credit deficits. The EPA designed the carbon credit program to encourage companies to exceed the earlier and less stringent standards by implementing advanced technologies more quickly, thus earning a balance of credits to use when the standards tightened. In retrospect, the regulation worked as planned.

 

Figure 2: Automotive Industry Credit Generation and Use 2012 – 2020

 

Source: The 2021 EPA Automotive Trends Report

 

Given recent trends, there may be a pending credit crunch on the horizon. 52 percent of all available carbon credits will be expiring in 2021 and the following years. As shown in Figure 5, some companies—including Ford, Hyundai, Mazda, and Nissan— will lose most of their currently-available credits after 2021. Other companies, such as GM, Honda, Stellantis, and Toyota, have more late-expiring credit in their credit banks. It is also important to acknowledge that all of these companies will spend their credits at varied rates based on their ability to comply with EPA standards through production. Tesla generates credits every year due to its all battery-electric portfolio but sells most of its credits to generate revenue rather than banking or spending them.

 

Figure 3: Distribution of 2020 Credit Balance, by Expiration Date (Mg)

Source: The 2021 EPA Automotive Trends Report

 

With credits representing 45 million Mg of CO2, Stellantis looks well-positioned with its credit balance. However, the automaker spent over 10 million credits to meet its 2020 requirements.3 Without generating new credits, a “burn rate” of more than 10 million Mg of CO2 per year could indicate a credit crunch for this company. Conversely, with nearly 40 million banked credits, Honda added to its bank by generating 2.8 million Mg of credits in 2020. Tesla generated almost 14 million Mg of credits but sold most of them.4

Combining the EPA’s increasingly stringent standards (expected to be implemented in 2023) with expiring credits will challenge automakers who rely on credits to meet compliance. Conversely, automakers with newly-generated credits, like Tesla and Honda, can benefit from the situation by selling their credits. Figure 4 highlights some of the dynamics around credit trading. Tesla, Honda, and Toyota are responsible for most credits sold, while Stellantis purchased more credits than all of the other companies combined.

 

Figure 4: Automotive Industry Credits Transactions

Source: The 2021 EPA Automotive Trends Report

 

Taken together, the EPA’s current and proposed GHG standards and automakers’ massive investments in battery electric vehicle production may alter the GHG credits balance equation. The Trump Administration set standards for 2021 and 2022 well below the stringent 2012 standards. This reprieve in stringency leading up to 2023 may allow some companies to exceed EPA standards in the near-term. Furthermore, the most recent EPA Notice of Proposed Rulemaking (NPRM) includes revisions to several established credit flexibilities. These proposed revisions would bring more credit value to a broader range of efficiency technologies to incentivize their implementation and increase available credits throughout the industry. These regulatory changes and the automakers’ substantial near-term investments and commitments to increase BEV production may ultimately lead to a GHG credit glut.

The U.S. automotive industry is in a time of upheaval. A few companies continue to derive large portions of their revenue from the sale of vehicles that will struggle to meet increasingly stringent EPA GHG standards. However, most of those companies are rapidly transitioning to BEVs and other emissions-reduction strategies. The challenge for the industry is to ensure the demand for BEVs can increase fast enough for OEMs to achieve compliance without penalty.

Taken together, the EPA’s current and proposed GHG standards and automakers’ massive investments in battery electric vehicle production may alter the GHG credits balance equation. The Trump Administration set standards for 2021 and 2022 well below the stringent 2012 standards. This reprieve in stringency leading up to 2023 may allow some companies to exceed EPA standards in the near-term. Furthermore, the most recent EPA Notice of Proposed Rulemaking (NPRM) includes revisions to several established credit flexibilities. These proposed revisions would bring more credit value to a broader range of efficiency technologies to incentivize their implementation and increase available credits throughout the industry. These regulatory changes and the automakers’ substantial near-term investments and commitments to increase BEV production may ultimately lead to a GHG credit glut.

The U.S. automotive industry is in a time of upheaval. A few companies continue to derive large portions of their revenue from the sale of vehicles that will struggle to meet increasingly stringent EPA GHG standards. However, most of those companies are rapidly transitioning to BEVs and other emissions-reduction strategies. The challenge for the industry is to ensure the demand for BEVs can increase fast enough for OEMs to achieve compliance without penalty.

 

  1. https://www.offsetguide.org/understanding-carbon-offsets/carbon-offset-programs/mandatory-voluntary-offset-markets/
  2. https://www.offsetguide.org/understanding-carbon-offsets/what-is-a-carbon-offset/
  3. The 2021 EPA Automotive Trends Report, p. 110
  4. Ibidem

Emeka Nriagu

Research Analyst

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