Perhaps not what you thought
EPA proposal likely to slow EV adoption
By PETER DOUGLAS: MEMBER, ELECTRIC AUTO ASSOCIATION
The Environmental Protection Agency (EPA) recently released a detailed proposal designed to strengthen greenhouse gas emissions standards for light-duty vehicles. Unfortunately, it may not be what the electric vehicle (EV) industry needs at this juncture.
The Corporate Average Fuel Economy (CAFE) program, implemented under President Barack Obama in 2012, called for annual increases of 5% to the average fuel economy of new vehicles through the 2025 model year. The Trump Administration weakened the stringency of the program, rolling back the annual increases to just 1.5 percent and extending the standards through 2026. The latest proposal from the EPA would govern the 2023-2026 model years and restore stringency to roughly the level of the original program. The Trump rollback wasn’t finalized until 2020 and will only apply in 2021 and 2022.
While at face value this announcement looks like a win for the climate movement, there are provisions in the EPA's proposal that will cause it to fall short of the Administration's purported ambitions. The CAFE program promised to double fuel economy by 2025, but from 2012 to 2019, the real-world MPG of new vehicles improved just 7%, and annual gasoline consumption increased from 3.2 to 3.4 billion barrels. In 2019, fuel economy actually worsened, dropping slightly from 25.1 to 24.9 MPG as 14 out of 20 automakers failed to meet their standards. Maintaining compliance by using banked credits, many of these companies also purchased credits from other automakers to come into compliance with the regulation.
Footprints and compliance credits
To truly understand why the EPA’s new proposal may negatively affect EV adoption, you must understand the complex rules that make the CAFE program so ineffective.
The EPA’s regulatory framework assigns customized fleet standards to each auto manufacturer based on the footprints of its product offerings. Vehicles with larger footprints are allowed to generate more CO2 than vehicles with smaller footprints. If an automaker sells a relatively high number of large vehicles, its fleet is assigned a fleet standard that is easier to achieve. If an automaker outperforms its fleet standard, it earns credits and incurs a credit deficit when it underperforms.
In 2019, Honda’s moderately-sized fleet was required to produce an average of 227 grams per mile (g/mi) while Fiat Chrysler Automobile’s (FCA) fleet of mostly behemoths was allowed to emit 275. Honda ended up beating its fleet standard by 12 g/mi, performing at 212, while FCA’s fleet underperformed by 28 g/mi, scoring an abysmal 303. Because it exceeded its standard, Honda’s fleet generated excess compliance credits that it could bank or sell to other automakers. FCA used credits purchased from other automakers to remain compliant.
The use of footprints to determine fleet emission targets removes any incentive for an automaker to reduce the size of the vehicles it offers. If it opts to make smaller vehicles, it will simply be assigned a more difficult fleet target. The framework is deliberately designed to prevent downsizing, even though manufacturing smaller vehicles is the best strategy for reducing CO2 emissions. The ability to purchase compliance by buying excess credits from responsible manufacturers further undermines the effectiveness of the framework. The Clean Air Act does not authorize the EPA to offer the payment of civil penalties as an alternative to meeting emission standards, but the credit trading system provides the same pay-to-pollute benefit.
Rule change will sustain the glut of compliance credits
The EPA proposal includes a rule change that will bolster the pay-to-pollute travesty. Under the current rules, credits expire after five years. At the end of 2019, the enormous glut stood at 229,216,449 credits, 151,139,573 of which are due to expire at the end of the 2021 model year. The EPA’s rule change would delay their expiration for two years. The 21,747,811 credits due to expire at the end of 2022 would be delayed for one year. In total, credits representing 172.9 trillion grams of carbon dioxide would remain available to offset performance shortfalls until the end of 2023.
This is bad news for folks working to accelerate EV adoption. EVs generate compliance credits the honest way, but automakers have less incentive to build them if they can simply purchase credits to maintain compliance. When 14 out of 20 automakers failed to meet their standards in 2019, an industry-wide credit deficit of 24 teragrams was generated. With 173 extra teragrams of additional banked credit available through the end of 2023, the regulatory framework will not restrain automakers in any meaningful way, and there will be less incentive to manufacture more EVs. The rule change will be especially helpful to FCA, which has over 24 million purchased credits set to expire in 2021 and 2022.
The EPA argues that delaying credit expiration provides appropriate flexibility to automakers as they struggle to meet the more stringent 2023-2026 standards. The rationale is patently disingenuous because the existing glut of credits is more than enough to offset performance shortfalls through 2026. What’s more, In 2021 and 2022, Trump’s lenient rules will be in effect and the stringency of the footprint targets will increase slowly, helping automakers replenish their banks with fresh credits.
Automakers are also allowed to finish a model year with a negative bank balance as long as they remedy the shortfall within three years, a risky program flexibility that they have yet to exploit. The regulatory framework is already as flexible as spaghetti jail cell bars. Automakers will continue to sell as many profitable gas-guzzlers as the market will bear, confident that they have a sufficient number of credits to maintain compliance indefinitely. Many of them are planning to build more EVs, but not because they’re worried about compliance.
Restoring the EV multiplier will not help
The EPA appears to have its mind made up about the credit expiration delays, but is seeking comment on its plan to restore the EV multiplier. Unfortunately, this is another proposal that is likely to hamper EV adoption.
When an automaker’s fleet performance is averaged out and compared to its standard, its EVs are extremely valuable, scoring an automatic zero against their footprint targets even though they actually produce upstream emissions. One EV with a footprint target of 200 g/mi offsets 20 gas-guzzlers that miss their targets by 10 GPM. The EV multiplier is a carbon accounting gimmick that allows one EV to count as two EVs in the fleet performance calculation, doubling the already generous windfall.
The EV multiplier was meant to be a temporary incentive to catalyze electrification back when EVs were just getting started, and it is currently being phased out, disappearing in 2022. The EPA is well aware that the multiplier allows EVs to generate windfall credits that exceed their real-world emission reductions. They are suggesting a cap that would prevent automakers from lowering their annual fleet performance by more than 2.5 g/mi. Each manufacturer would be allowed 10 g/mi over four years that they could exploit as they please. There is no reasonable justification for all this additional flexibility.
Even with the cap, restoring the EV multiplier is likely to slow EV adoption. Automakers strive to earn compliance credits any way they can, and the multiplier allows them to sell half as many EVs and still earn the same number of credits. The multiplier served its purpose well, was sensibly phased out, and should remain phased out. If anything, the EPA should be aligning the number of credits that EVs generate with their real-world benefits and preventing automakers from selling credits generated by EVs.
The current rules allow EVs made by Tesla to compensate for multiple gas-guzzlers that fail to meet their footprint targets, with pay-to-pollute dollars flowing to Tesla as a result. In 2019, automakers sold over 16 million vehicles, just 125,538 of which were built by Tesla. Tesla’s small fleet of EVs generated over 11 teragrams of credit, enough to offset roughly one-third of the conventional industry’s shortfall. It is quite disappointing that an altruistic individual who drives an EV out of concern for the environment ends up enabling the excessive emissions of countless individuals who drive gas-guzzlers. Sadly, that is precisely how the EPA’s ineffective credit trading system works.
Hope on the horizon
The EPA appears to be gearing up for a major revision of the regulatory framework that will be implemented in 2027. The release of its 2023-2026 proposal coincided with an executive order from President Joe Biden directing the EPA to develop and finalize new regulations for 2027-2030 before his first term ends. This may include changing the outdated CAFE 2010 framework that has always been a sensible way to reduce dangerous trace pollutants in auto exhaust but has proved to be unsuitable for controlling tailpipe carbon dioxide.
The current proposal for 2023-2026 would reverse the Trump Administration’s rollbacks, but it represents a business-as-usual approach. The EPA estimates that, by 2050, the stringency increases will only lower CO2 emissions from light-duty vehicles by 10% relative to Trump’s lenient standards. They recognize that such a meager incremental improvement is insufficient to address the scourge of climate change. Their 2027 proposal will have to do much more to accelerate EV adoption. By then, we will no doubt have a lot of catching up to do.