- The Biden Administration has a proposed rule that would compel automakers to make and sell more electric vehicles by making it more difficult to comply with the efficiency standard.
- The proposal by the Energy Department would jettison credit multipliers for electric vehicles used in CAFE mandates that have allowed auto makers to meet the efficiency standards while providing Americans with trucks and SUVs.
- U.S. automakers not in compliance with the proposed rule would have to pay a penalty 4 times more per vehicle than their foreign counterparts since they sell more trucks and SUVs that Americans want.
The Department of Energy is proposing to reduce the credits under the corporate average fuel economy (CAFE) standards for producing electric vehicles. The change poses challenges for U.S. auto makers because under the change they will have to manufacture and sell more electric vehicles in order to comply with the standard. But, U.S. automakers are finding that electric vehicles are not selling as expected as there are many more electric vehicles sitting on dealers’ lots than gasoline vehicles. Not surprisingly, GM and Ford have proposed slowing down production of their electric vehicles to better balance supply and demand. If automakers do not meet the standard, they will have to pay a penalty that is almost 4 times greater than the penalty that non-U.S. automakers pay because a larger share of their fleets are composed of SUVs and pickup trucks as Americans prefer those vehicles.
Background
In 1979, the Chrysler bailout law required the Energy Department to impute a “petroleum equivalency factor” for electric vehicles to give auto makers a means of complying with CAFE standards besides making more fuel-efficient vehicles. In 2000, the Clinton Administration assigned electric vehicles with a fuel economy multiplier of 6.67. So, an electric vehicle getting the equivalent of 40 miles per gallon would receive a credit for 266.8 miles per gallon due to the multiplier under the CAFE standards. While Congress had limited the multiplier credit to cars that run on biofuels, natural gas and hydrogen, the Clinton Administration later extended it to electric vehicles as well. The multiplier was kept under subsequent administrations because it allowed auto makers to sell profitable SUVs and trucks consumers demanded and still meet the fuel economy mandates.
In 2021, the Sierra Club and Natural Resources Defense Council petitioned the Biden Administration to eliminate the 6.67 multiplier for electric vehicles, which would assist their shared goal of forcing automakers to produce more electric vehicles in order to meet the standard. In the spring of 2023, the Energy Department proposed eliminating the 6.67 multiplier while softening the impact with other changes. For example, a Ford-150 Lightning would be credited with 67.1 miles per gallon, down from 237.7 miles per gallon. Prior to the DOE proposal, U.S. auto makers had planned to produce just enough EV pick-ups with the “MPG Multipliers” to meet the CAFE standards.
Under the Energy Department’s proposal, it is likely to make more sense to pay the government penalties for not meeting the standard than to increase the production of electric vehicles that do not sell. The penalty, however, for U.S. automakers would be higher than for non-U.S. auto makers as a larger share of U.S. auto makers’ fleet sales is composed of SUVs and pick-up trucks. The average projected additional compliance cost per vehicle would be $2,151 for U.S. auto makers, while non-U.S. auto manufacturers would see an increase of $546 per vehicle. This would come at a time when fewer Americans can afford new vehicles because “it’s the least affordable car market in modern history.”
GM and Ford Delay EV Expansion Plans
GM recently put its electric Silverado pickup truck expansion on hold, and Ford put expansion of its Lightning on hold. Both electric pickups are losing money, with Ford losing $60,000 for every electric vehicle sold. GM has delayed the start of production of electric pickups at a plant in Orion, Michigan, to late 2025 from 2024, in response to slower-than-expected growth in sales of electric vehicles. The company is moderating electric vehicle production to protect pricing, adjust to slower near-term growth in demand, and implement engineering efficiency and other improvements that will make vehicles less expensive to produce, and more profitable. GM abandoned a goal to build 400,000 electric vehicles by mid-2024, citing slower-than-expected growth in sales.
Although GM is planning a slower ramp-up of electric vehicle production, it still plans to produce one million electric vehicles a year in North America by the end of 2025, but they will be the cheaper, smaller cars that do not require as much financing at today’s current high interest rates. GM announced it would continue Bolt production until at least the end of the year when it was supposed to have ended production near the middle.
Ford announced that it would be pausing the construction of a billion-dollar plant in Michigan due to uncertainties surrounding its ability to operate competitively. Ford planned to invest $3.5 billion in the plant, located in Marshall, Michigan, and partner with Chinese battery company Contemporary Amperex Technology (CATL) for the production of battery cells. Ford has reported that it will lose $4.5 billion on electric vehicle production this year, an increase from the previously projected $3 billion loss. Ford’s reported loss equals $60,000 per electric vehicle produced.
Conclusion
Biden’s unrealistic fuel economy standards combined with inflated credits for electric vehicles have allowed auto makers to meet CAFE standards without really reaching the mandated efficiency levels. Environmental groups are now asking for that to end by having DOE eliminate the MPG multipliers. That hurts U.S. automakers more than other auto companies as U.S. companies make their profits off of SUVs and pickup trucks—profits that help to cover losses from production of electric vehicles.
The DOE proposed change is finally awakening U.S. auto makers to the cost of President Biden’s electric vehicle push. Electric vehicles are remaining on dealers’ lots because they do not meet the driving needs of Americans that want to take long road trips and to be able to tow a trailer, without spending mounds of time at an EV charging station. That is why automakers are willing to pay the penalties rather than produce money-losing electric vehicles. While Tesla sales are doing much better than other U.S. produced electric vehicles, Teslas have been around for almost 15 years with most of the bugs worked out of them. Most Americans that own a Tesla, however, also own an internal combustion engine vehicle as well.
The Biden administration has been offering carrots to automakers for manufacturing electric vehicles and they have been gobbling them up. Now, that the Biden administration is taking regulatory action to produce even more electric vehicles, the automakers do not like it, especially since Americans do not want or cannot afford the new electric vehicles the government is forcing them to buy.
