It’ll Be a Do-Over on the U.S. 2022-2025 GHG Vehicle Standards

04.04.18 | Blog | By:

Everyone knows by now that this week U.S. EPA Administrator Pruitt, in a long-expected move, signed the final determination on the mid-term review (MTR) of the Agency’s model year 2022-2025 GHG vehicle standards. The Administrator found the standards inappropriate, finding that key assumptions the Agency relied upon in 2016 with respect to gas prices and consumer acceptance of advanced technology vehicles have changed. The Notice also throws in the social cost of carbon, the rebound effect and energy security valuation as economic inputs that also needs updating in setting new standards. This post will take a deeper look at the Notice, or as deep a look as you can get in an economical 38-page document. Diving right in, the Agency says that:

  • While the industry was “overcomplying” with the standards in effect between the years 2012-2015 and generating a bank of credits, in 2016, a number of companies had to use them for the first time and EPA expects this to continue in 2017. (See post Jan. 23, 2018) This reliance “suggests that it may be increasingly difficult for them to comply going forward as they use up their supply of credits. Additionally, the stringency curve dramatically increases at around the same time these credits could run out, further complicating the feasibility of compliance for MY 2022 – 2025.” The chart below from EPA’s latest manufacturer performance report shows individual performance in 2016.There is a larger issue with the credit program, as highlighted by Sam Ori in Forbes yesterday, and that’s that there is no transparent or functioning credit market in the first place. Without intervention, that will become a larger problem in the coming years.  “[F]or an automaker with a large truck fleet looking at compliance post-2021, your two most likely strategies will either be to make expensive investments in improving the efficiency of your trucks, or plan to rely on an increasingly tight—but also opaque—credit market. Given these choices, the auto industry collectively chose option C: fight to weaken the 2022-2025 standards. And EPA appears primed to go along.”

  • Meeting the standards is not feasible because there is not enough EV sales and advanced internal combustion engine technologies alone will not meet MY 2025 standards. Contrary to the original EPA MTR analysis, EPA believes based on the information provided by the auto industry, that more electrification will be needed than originally thought. Comments from stakeholders are recapitulated but there is not much actual EPA analysis on this point presented. Recall that in the original analysis, EPA showed that the two major technologies it expects would be used to meet the requirements was turbocharged and downsized engines and higher compression ratio engines, and both were barely mentioned in the Notice. Selected technology penetrations from the 2016 MTR analysis is shown in the chart below.

  • A bigger issue the industry has continually raised and that EPA agree with in the Notice is consumer preference for larger trucks and SUVs, which now represent over 45% of light-duty sales in the U.S. and continue to grow as gasoline prices stay low. EPA notes: “…the 2012 rule projected significantly higher fuel prices than current EIA projections, while the 2017 Final Determination used similar projections to EIA. Lower fuel prices mean lower incentives for consumers to purchase fuel efficient vehicles, because the fuel cost savings they get from doing so are also lower. Thus, the projections for fuel cost savings in the 2012 rule may have been optimistic, which increases the challenge manufacturers face in making fuel-efficient vehicles attractive to consumers.” As the figure below from the Auto Alliance shows, the light-duty truck market is even higher than what EPA cites. Note the decline in car sales and the increase in light truck sales as gasoline prices nosedived in 2014.

  • The Administrator notes that affordability of these vehicles for and impacts to low-income consumers have not been adequately considered but will be in the new rulemaking process.

“A fuel efficient car costs less to drive a mile and what happens when something costs less? We consume more of it, and so that incentive is operating in the opposite direction to what we want. We would like people to be driving less if our goal is to reduce the amount of gasoline that’s consumed. Our best read of the literature is that the rebound effect is large, it’s probably somewhere between 20 and 60 percent of the anticipated savings from making a car more efficient on average is going to be eroded by all of the follow on rebound effect incentives that are created.”

What would be better? According to Rapson and others in the academic community would be controls on carbon overall. (See posts Mar. 29, 2017 and Sept. 26, 2016 which feature various academics’ proposals and arguments on this topic as a better way toward reducing fuel consumption.)

  • A more rigorous analysis of job gains and losses is needed to determine the net effects of alternate levels of the standards on employment and this analysis will be included in the new rulemaking process.

EPA notes but glosses over comments on the importance of one, harmonized national program (which I took to mean harmonized as among EPA, the National Highway Traffic Safety Administration (NHTSA), which actually sets the fuel economy portion of the standard, and the California Air Resources Board (CARB), which has vowed to fight to keep the original standards in place, along with governors and city mayors around the country). Here was the response from EPA:

“EPA believes that a national harmonized program is very important and will continue to work toward maintaining a national harmonized program through MY 2025 and beyond. To that end, EPA, in collaboration with NHTSA, will initiate a notice and comment rulemaking in a forthcoming Federal Register notice to further consider appropriate standards for MY 2022-2025 light-duty vehicles, as appropriate. This coordination will ensure that GHG emission standards and CAFE standards are as aligned as much as possible given EPA and NHTSA’s different statutory authorities.

 

EPA and NHTSA have been communicating with stakeholders, including CARB and automobile manufacturers, to try and ensure that a national harmonized program remains intact to minimize unnecessary cost and burdens in the development of the notice and comment rulemaking.”

In other words, EPA and NHTSA have got this. Not EPA, NHTSA and CARB. EPA and NHTSA. The Notice makes it clear (though it doesn’t address the commenters’ concern) that CARB is just another stakeholder and is most certainly not driving the process.  “Bye Felicia!”