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US EPA Proposed Greenhouse Gas Emissions Standards for Model Years 2023-2026; What to Expect

09 August 2021 Mike Fiske Stephanie Brinley Xi Wang

On 5 August 2021, the United States (US) Environmental Protection Agency (EPA) released a proposal to revise the current greenhouse gas emissions (GHGs) standards for model year (MY) 2023-2026 light vehicles, meant to replace the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule currently in place, supporting the Biden Administration's ambitious climate plans.

The proposed rule represents both a significant increase in stringency across all model years within the timeframe, as well as an extension of credits and mechanisms that will allow easier compliance for manufacturers that move towards increased electrification of their fleets. IHS Markit predicts that the US market will comply with the new MY 2026 target as a whole without drastic adjustments to their current product plans, although the specific compliance challenges vary from OEM to OEM.

For individual carmakers which might find themselves falling short under MY 2026 target, the flexibilities of credit generation, banking, transferring, and trading mechanisms will provide significant leverage.

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. Under the SAFE rule, the market would not only meet the fuel economy and GHG standards but would generate significant amounts of regulatory credits especially after MY 2023. The August 5 proposal from the EPA will significantly reduce the banking availability, moving the market quickly from overcompliance to credit deficits overall in MY 2023 and 2024. This ensures carmakers have sufficient incentives on deployment of technology innovation. The current proposal does not include details on MY 2027 and later vehicles but indicates credits will be phased out from MY 2026 to focus on electric vehicle market penetration rates.

Under the proposed rule and the executive order, according to IHS Markit analysis, the MY 2026 market will require at least 18% BEV sales share for most car manufacturers to meet their goals towards 2030. The new EPA proposed rule comes along with increasing industry investment and its targets can be supported by government policies and programs working towards reducing GHGs and while the market moves towards increased electrification and ultimately zero tailpipe carbon emissions. The alignment between the government support and industry investment is a rare moment in the industry's history, and necessary to move forward with the complex issue of transitioning the light-vehicle market from internal combustion engines to electric and zero-emissions vehicles.

As noted earlier, IHS Markit forecasts suggest that goals will be met in 2026. Beyond that, there remains work to do.

"Manufacturers, overall, are well positioned for the increased standards announced at the White House. The goal of electrifying vehicle fleets and moving towards an EV market has been a high priority for several years, despite changes in Federal standards. This commitment is evidenced by automakers pledging more than $300 billion in electrification investments over the next five years. However, manufacturers are also keenly aware of the risks associated with a rapid transition to electrification with consumer acceptance, vehicle range, and affordability among top concerns. 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."

--Mike Fiske, Associate Director, North America Powertrain Forecasting, IHS Markit

For context on these developments, so far in 2021 (based on available data through May), PHEVs accounted for just under 1% of US new light vehicle registrations, while EVs reached 2.2% share nationally and hybrid electric vehicles reached 5.8%, according to IHS Markit data.

IHS Markit forecasts from June do not yet reflect the recent pledges from OEMs or the proposed EPA rule in its market assumptions. However, IHS Markit forecast assumptions have factored in the direction of the August 5 EPA proposal and President Biden's executive order. Going forward, and as always, our forecasts will adjust as new information is available.

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