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Automakers to easily meet revised US EPA GHG standards with credit flexibility, existing technology

12 August 2021 Amena Saiyid

The US Environmental Protection Agency's (EPA)'s rationale for extending incentives for automakers to adopt zero-emission technologies in cars and light trucks is coming under fire because they can mostly rely on banked credits for current US CO2 limits to meet the recently proposed standards.

The EPA, under orders from President Joe Biden to decarbonize the transportation sector, is looking to tighten CO2 limits for passenger cars and light trucks for model year (MY) 2023 through 2026 to replace those imposed for MY 2020 through 2025 under President Donald Trump's 2020 Safer Affordable Fuel-Efficient (SAFE) rule, which significantly relaxed targets set in 2012.

The 5 August proposal, which was published five days later, responds to Biden directing EPA and the US Department of Transportation upon taking office to revisit the 2020 fuel economy and GHG standards under the SAFE rule because it replaced a rule with more stringent standards as part of his government-wide strategy to tackle the climate crisis.

The EPA's proposed rule was released the same day Biden released an executive order setting a goal for automakers to sell 50% electric vehicles (EVs) by 2030 as part of the US goal he announced in April to reduce emissions by 50-52% by 2030 and to reach a net-zero economy by the middle of the century.

Automakers as well as auto union workers are supportive of EPA's rulemaking as well as Biden's EV goal. This includes Ford, General Motors, and Stellantis, which jointly announced goals of 40-50% EV sales by 2030. Nissan also has committed to a 40% EV sales goal by 2030.

Analysts including EPA's own agree that the auto industry will reach the new emissions standards without making a great deal of change to their current product plans.

Need for incentives

However, two environmental groups, the Union of Concerned Scientists (UCS) and the Center for Biological Diversity (CBD), though supportive of the more stringent standards, are questioning EPA's rationale for showering automakers with incentives on top of the ones it has had in place since 2012 to reduce vehicular emissions.

The CBD said the EPA should return to the drawing board, write new rules to phase out sales of new gasoline-powered cars and trucks in favor of EVs by 2030, and require automakers to reduce GHGs each year by 70% without any loopholes to "escape real improvements."

Specifically, the EPA is seeking an average 9.8% decrease from 220 CO2 grams per mile (g/mile) that the SAFE rule set for model year 2022. After MY 2023, the agency is looking to tighten those standards each year by an average 5%, reaching a CO2 emissions limit of 170 g/mile with MY 2026.

Source: US EPA

The incentives include extending the timeframe to use banked credits, which have a five-year expiration date, to comply with the proposed standards, while also offering the chance to earn advanced technology multiplier credits for selling battery-electric vehicles (BEV), fuel cell-electric vehicles (FCEV), and plug-in hybrid electric vehicles (PHEV) in order to juice efforts to reach Biden's 50% EV sales goal by 2030.

Manufacturers receive additional credit for selling PHEVs, BEVs, and FCEVs in the form of sales multipliers, which allow automakers to count these vehicles as more than one vehicle in emissions compliance calculations.

The EPA also is proposing to restore full-size hybrid pickup truck incentives for MY 2022 through 2025 that the SAFE rule removed, and to increase the credit cap from 10 g/mile CO2-equivalent to 15 g/mile for off-cycle technologies such as improving the aerodynamics of a car or how long its engine remains idle.

Loopholes or incentives

Dave Cooke, UCS senior vehicle analyst, said these extra incentives, however temporary, are "loopholes" and "giveaways" that has weakened what otherwise would have been "a strong proposal."

Instead of strengthening weak standards, the CBD said the Biden administration allowed itself to be persuaded by carmakers lobbying for "loopholes that will allow them to keep making polluting cars, SUVs and trucks, escaping pollution controls through lavish credits for electric vehicles and other technologies."

The EPA's rationale for extending carry-over credits and extending the timeframes for incentives it has granted automakers in the past is that the incentives would bring low-emission technologies to market more quickly than would be the case in their absence.

With that in mind, the EPA said it is proposing technology multipliers from MY 2022 through MY 2025 with a cap on multiplier credits, and to reinstate the full-size pickup incentives removed by the SAFE rule.

Five-year, lead-in period

By its own admission, EPA said automakers, which need a five-year, lead-in period to develop, design, and build new vehicles, are more than prepared to meet the SAFE rule, which took effect eight years after the 2012 standards were in place for cars and light trucks.

The SAFE rule relaxed year-by-year GHG reductions from 5% to 1.5% annually, thereby enabling automakers to comply and generate credits for over compliance.

"Thus, in most cases, vehicles that automakers intend to sell during the first years of these proposed MY 2023 and later GHG standards were already designed under the original, and more stringent, GHG standards finalized in 2012 for those model years," the agency said.

Existing vehicle technologies

The EPA has also said that automakers will reach this proposed target with the kinds of advanced light-duty vehicle engine technologies, transmission technologies, electric drive systems, aerodynamics, tires, and vehicle mass reduction already in place in vehicles within today's fleet.

So, "automakers don't need more flexibility to meet the new standards," Cooke told Net-Zero Business Daily. "There have been plenty of technological developments in internal combustion engines, and automakers are sitting on plenty of credits."

IHS Markit analysts in a 9 August note also predicted that automakers will comply with the new MY 2026 target without drastic adjustments to their current product plans, although specific compliance challenges may vary from one manufacturer to another.

Where individual carmakers find themselves falling short under the MY 2026 target, IHS Markit said the flexibilities of credit generation, banking, transferring, and trading offered under the EPA GHG program will provide significant leverage.

The EPA GHG program allows manufacturers to meet standards on a fleet average basis, where they can earn and bank credits to use later, trade with each other, or offset current deficits using future credits (either generated or acquired within three years) to determine final compliance.

"With the credit flexibilities offered by the proposal, together with relaxed targets for MY 2021 and MY 2022 under SAFE, the market will be well prepared to bank credits to be used for future years when targets are increased," wrote Mike Fiske, associate director for IHS Markit North American Powertrain Forecasting, Stephanie Brinley, the company's principal automotive analyst, and Xi Wang, senior research analyst, in the 9 August note on the EPA proposal.

Recognizing the problem of excessive credits, EPA is proposing a limited extension of carry-forward credits generated in MY 2016 through MY 2020. MY 2016 credits would be carried forward for seven years instead of five. Similarly, credits earned on MY 2017-2020 vehicles will be carried over for six years, meaning they can be easily used through the compliance period for the proposed limits.

According to IHS Markit's analysis, the 5 August proposal will significantly reduce the banking availability, moving the market quickly from overcompliance to credit deficits overall in MY 2023 and 2024. This does create some incentives for deployment of technology innovation, IHS Markit said.

No significant penetration of EVs

Despite saying its credits program would incentivize new technology, EPA said its proposed standards do not rely on a significant penetration of EVs into the fleet during the 2023-2026 model years.

In fact, the agency's regulatory impact analysis projects that approximately 8% of vehicles meeting the MY 2026 proposed standards would be EV/PHEVs, but that number could go higher. (The projection doesn't account for the announcements automakers have made to electrify their fleets since the start of the year.)

Likewise, IHS Markit's own June forecast, which excludes the impact of EPA's proposal on the market as well as recent automaker announcements, projects EVs will have a higher share than EPA, with BEVs making up at least 18.9% of total vehicle sales, PHEVs reaching 4.3%, and hybrid EVs at least 13.4% by 2026 to reach Biden's 50% EV goal by 2030.

The same data show that cars with internal combustion engines will continue to occupy a third of the market share by 2030.

Source: IHS Markit

Based on available data through May, PHEVs accounted for just under 1% of US new light vehicle registrations in 2021, while EVs reached a 2.2% share nationally and hybrid electric vehicles reached 5.8%, according to IHS Markit data.

50% goal 'possible'

IHS Markit's Fiske said the 50% EV goal is "possible," but there is much that needs to be accomplished before that possibility can turn to turn into reality. He said manufacturers remain keenly aware of the risks associated with a rapid transition to electrification, with consumer acceptance, vehicle range, and affordability among the top concerns, which also include a need for the federal and state governments to support and build an underlying network of charging stations to support EVs.

"Only through cooperation and support between the auto industry and government institutions will this ambitious transition be possible, with both strengthened electrification policies and expanded electric product availability as crucial components to success," Fiske said.

Posted 12 August 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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