On April 2, 2018, the U.S. Environmental Protection Agency (EPA) published a Notice on the Mid-Term Evaluation (MTE) of Greenhouse Gas Emissions Standards for the Model Years (MY) 2022- 2025 and indicated intent to place it in the Federal Register.¹ This long-awaited document has broad and critical implications for all automotive industry stakeholders, and, in many ways, it is another chapter in the long and challenging story of the U.S. approach to regulating fuel economy and emissions.
According to the notice, the Administrator:
1. Determined that the EPA based its current standards on information that is now outdated, and that more recent data suggests the current standards may be too stringent;
2. The EPA is withdrawing the previous Final Determination issued by the Agency on January 12, 2017; and,
3. The Agency will initiate a notice and comment rulemaking into further consider appropriate standards for MY 2022-2025.
That last point means the EPA has, in effect, initiated a rulemaking process to adopt new standards for MY 2022-2025.
While the Obama Administration’s EPA aggressively pursued an overall reduction in GHG, the April MTE Notice makes clear that the Trump administration has very different intentions. Many think the EPA will substantially reduce the targets for GHG regulation for light-duty vehicles (and by association, the National Highway Traffic Safety Administration (NHTSA) will also lower the Corporate Average Fuel Economy (CAFE) targets). Manufacturers, states, non-governmental organizations, and other stakeholders will have the opportunity to provide input into the rulemaking process in the coming months. This round of rulemaking is sure to be contentious, and there may well be many legal battles before the outcome of MY 2022-2025 fuel economy and emissions standards are determined.
The Notice indicated that for the 2016 model year, “many” companies, for the first time, had to rely on banked credits to comply with the U.S. GHG regulations. The current EPA regulation was designed to enable companies to accumulate credits for exceeding the regulations in the early years and to be able to leverage those credits as the standard became more stringent. However, companies found themselves below the standard and needing to use credits much soon than had been anticipated. The chart shows that for 2016, the industry missed the two-cycle tailpipe emissions regulation by nearly double the performance gap in the previous year. Auto manufacturers were not able to offset this widening gap with other credits (i.e., flex fuel, air conditioning leakage and efficiency, or other off-cycle credits). For the first time, the industry reported a net loss of GHG credits in 2016; that is, they used more credits than they earned. Given current consumer preferences and market segment trends, the rapidly growing deficit between regulatory performance and banked credits suggests that many manufacturers may not comply within a few years.
Suppliers (and automakers) are making substantial investments in fuel efficiency technology, and need to amortize those investments over millions of units at a global scale. Investing in advanced technologies is not only costly but also brings with it considerable risk. Auto suppliers may lose significant returns on these investments if the U.S. weakens its CAFE and GHG regulations, and many would like to keep the Obama-era regulatory targets in place. At the same time, suppliers realize that their customers—the vehicle manufacturers—must be able to pass the cost of new technology through to consumers. Getting consumers to pay can be especially challenging in the U.S. market where most consumers do not value fuel efficiency as much as other global regions, and where costly technology may not be needed to meet the relaxed regulatory standards.
The auto industry also operates in many different regulatory environments around the world and must meet many different sets of targets. Even while the EPA and NHTSA are re-examining their regulations, automakers and suppliers are aggressively pursuing fuel efficiency technologies to achieve efficiency and GHG emissions reduction standards set across Europe, Asia, and South America. In North America, Canada and Mexico have signed agreements to align their regulatory frameworks with that of the California Air Resources Board (Government of Canada, 2014). All of this means that automakers and suppliers—nearly all of which are multi-national companies—must keep pace with the most aggressive regulatory environments if they wish to remain globally competitive. Companies are working to amortize their fuel economy and emissions technology investments across regions, and the impact of the recent U.S. regulatory action is yet to be fully understood.
The One National Program for GHG and fuel economy was a coordinated effort between the EPA, NHTSA, and CARB in 2010 that aimed to keep regulations similar across the United States. The future of the Program is now in considerable doubt. Regardless of the EPA’s actions, California and many of the §177 states that align with California’s standards, continue to express strong intent to go forward with more stringent regulation. The §177 states together account for roughly one-third of the U.S. market. On several occasions, the EPA administrator has indicated a willingness to challenge the California waiver that allows that state and the other states that follow California emissions standards the right to set standards that are different from those set at the federal level. Such a challenge would likely lead to lengthy legal battles. Without a consistent National Program, the industry may find two very different markets within the United States—a possibility that is very unsettling for almost all of the auto manufacturers that sell vehicles in this market.
The Center for Automotive Research has been deeply involved in the fuel efficiency discussion and will continue to actively work with all stakeholders as we move toward a solution that enables consumer choice while effectively minimizing the environmental impact of the motor vehicle.
1 – Mid-Term Evaluation of Greenhouse Gas Emissions Standards for Model year 2022- 2025, 40, CFR Part 86, U. S. Environmental Protection Agency, April 2, 2018 (the U.S. Environmental Protection Agency (EPA) published a Notice for publication in the Federal register. The EPA stated the documents was representative of what would be published in the Federal Review. The agency indicated they expected minimal alterations to the document.)