Key Takeaways
The Biden administration has finalized rules regarding tailpipe emissions and fuel economy credits for electric vehicles requiring automakers to have electric vehicles command about 67 percent of their new car sales in 2032, up from less than 8 percent today.
Automakers currently lose billions of dollars on electric vehicles and make up their losses in part by selling gasoline-powered pickups and SUVs.
Consumers are wary of electric vehicles because of high prices relative to their gasoline counterparts, shortage of charging stations and long amounts of time to charge batteries.
U.S. automakers are heavily dependent on China and other Asian countries for their EV supply chains despite lucrative incentives in the Inflation Reduction Act to manufacture electric vehicles and batteries domestically.
Shortages of key minerals, including lithium, nickel and graphite, could emerge if EV demand accelerates in coming years—critical minerals where China dominates the processing.
The Biden administration’s Environmental Protection Agency (EPA) released its final rule on multi-pollutant emissions standards for model years 2027 and later for light-duty and medium-duty vehicles. The rule, a de facto gas-powered vehicle ban, is a massive overreach, using a novel application of EPA motor vehicle authorities in an attempt to force a transition in the motor vehicles market to products that align with the ideological preferences of the Biden administration.
The final rule eased the proposed rule that would have forced automakers to scale back production of gasoline vehicles even further or face billions of dollars in fines. This is occurring after strident opposition was expressed by those who make and sell U.S. autos. The Department of Energy (DOE) is slowing the phase-out of existing rules that give automakers extra fuel-economy credit for electric vehicles they currently sell and the Environmental Protection Agency (EPA) is ramping up its tailpipe emissions standards more slowly. The change will help U.S. automakers meet federal standards for fleetwide fuel efficiency and allow them to continue to sell gasoline-powered pickups and SUVs where they earn their profits that can pay for at least part of their losses on electric vehicles.
Automakers indicated that they could not meet initial proposals for a much more aggressive EV transition. Those proposals called for much stricter emission standards with the goal of pushing EV market share to 67 percent of all new cars sold by 2032 from less than 8 percent last year. The end goal remains the same as it a fundamental change in manufacturing in the United States with disruption of well-functioning markets, while limiting consumer choices in vehicles.
DOE Rule Change
The Energy Department (DOE) has been assigning unrealistically high fuel-economy values to electric vehicles, which are then figured in to fleetwide averages under federal Corporate Average Fuel Economy (CAFE) rules. The higher figures assigned to electric vehicles help offset the lower fuel economy values of gasoline-powered SUVs and pickups. The current DOE rules, for example, credit the Ford F-150 Lightning electric pickup as getting the equivalent of 237.7 miles per gallon (mpg). The administration’s original proposal last year would have reduced that to 67.1 mpg, a more realistic estimate of its real-world efficiency compared with a gasoline-powered F-150. That is, the original proposal would have lowered “petroleum-equivalent fuel economy” ratings for electric vehicles by 72 percent in 2027. The final rule will instead gradually reduce the equivalency ratings through 2030 by a total of 65 percent, giving automakers more time to adjust. DOE’s Miles Per Gallon equivalent ratings have not been updated in more than two decades and are determined using values for national electricity, petroleum generation and distribution efficiency and driving patterns.
EPA Rule Change
The Environmental Protection Agency’s revised 2027-2032 vehicle emissions requirements will also ease proposed rules through 2030 and then ramp up requirements through 2032. The new rules apply to light-duty vehicles — cars, sport-utility vehicles and most pickup trucks—for model years 2027 through 2032. It governs how much carbon dioxide new vehicles can emit, as well as criteria pollutants like nitrogen oxides. Changes were made after automakers, auto dealers and the United Auto Workers (UAW) called the original EPA plan unrealistic. EPA’s original rules were expected to result in automakers building 60 percent electric vehicles by 2030 while the final rules will allow automakers to build less in 2030. An estimated 31 percent to 44 percent of new light-vehicle sales would need to be electric in 2030 with the total percentage depending on the level of tailpipe pollutants from the rest of the vehicles sold, which would be a combination of gas-electric hybrids and traditional gas- or diesel-powered vehicles. The end goal in 2032 still remains the same, which requires that carbon emissions from new vehicles be cut nearly in half from those that went on sale in 2026, but the trajectory to get there is not as rapid. It still requires electric vehicles to account for the equivalent of two-thirds of new-vehicle sales in 2032.
NHTSA Rule on CAFE
The National Highway Traffic Safety Administration (NHTSA) is set to propose final revised CAFE rules this spring. The original proposal made last year proposed raising fuel economy standards by 2032 to a fleet-wide average of 58 miles per gallon. The proposal covers the 2027 through 2032 model years and would raise Corporate Average Fuel Economy (CAFE) requirements by 2 percent per year for passenger cars and 4 percent per year for light trucks. The end goal is the same as the EPA rule on tailpipe emissions.
Impact of the Original Rule on Automakers
The new federal rules will govern all automakers selling U.S. vehicles but the biggest impact will be on the Detroit Three because of their heavy reliance on sales of pickups and SUVs. Automakers and the UAW union have also raised alarms that the administration’s prior proposal could have resulted in U.S. automakers facing $10.5 billion in CAFE fines through 2032 for not meeting fuel-economy requirements. General Motors would have faced $6.5 billion in fines, followed by Chrysler parent Stellantis with $3 billion, and Ford with $1 billion through 2032. Volkswagen would have faced upwards of $1 billion, the most among foreign automakers.
Leeway of Modified Rules
The Biden administration’s final auto tailpipe emissions standards and related rules, including the DOE regulation, will give automakers more leeway to continue selling combustion vehicles, including gas-electric hybrids, through 2030. Under one potential compliance plan, an automaker could have more than a third of vehicles it produces in 2032 be plug-in hybrids. Plug-in hybrids are capable of traveling solely on electric power for short distances, often between 20 and 40 miles, before a gas engine comes on. The EPA’s original proposal last spring, which effectively called for 67 percent of light vehicle sales to be electric vehicles by model-year 2032, had not factored in plug-in hybrids. An optimal path to that same level of emissions could be 56 percent of the market being full electric vehicles, along with 13 percent plug-in hybrid. Ford, Toyota, Stellantis, Honda and Hyundai have reported increased sales of hybrid and plug-in hybrids. GM and Volkswagen are considering adding U.S. plug-in hybrids, reversing earlier plans to go all-electric.
Automakers Will Need to Buy Credits or Pay Penalties if They Cannot Comply
Automakers that cannot meet the emissions targets will have to buy credits from those that are in compliance and have excess credits to sell or face penalties. For years, Tesla has sold credits to traditional carmakers, adding billions of dollars to its bottom line. If credits are not available for purchase, car companies could be forced to reduce sales of gas-powered vehicles. Even before the Biden administration proposed the stricter emissions regulations last year, car companies had earmarked hundreds of billions of dollars on a transition to electric cars that was further encouraged by Biden’s Inflation Reduction Act that provided incentives to manufacture electric vehicles and their batteries domestically.
Conclusion
DOE changed its unrealistically high ratings for electric vehicles because a relatively small number of electric vehicles would mathematically guarantee compliance without much change in overall fleet efficiency. Its recent announced change will still lower the electric vehicle ratings but it will slow their phase out so that automakers can adjust and still make a profit from SUVs and pickups. Similarly, EPA adjusted its tailpipe emissions rule to soften the trajectory to 2030, but the 2032 goal still remains the same—to get two-thirds of new car sales to be electric by 2032.
The changes are to allow time for Americans to want to purchase electric vehicles, as more chargers get installed and automakers work to develop supply chains and more-affordable electric models. Surveys indicate that many Americans worry about being able to find enough charging stations and are concerned about the long time it takes to charge. Higher prices on electric vehicles relative to comparable gasoline-powered vehicles also have been a deterrent to adoption.
Serious challenges around affordability, charging infrastructure and supply chains, however, will need to be addressed before Biden’s EV mandate can be realized. U.S. and European automakers are heavily dependent on China and other Asian countries for their EV supply chains. Shortages of key minerals, including lithium, nickel and graphite, could emerge if EV demand accelerates in coming years.
