U.S. EPA releases Mid-Term Evaluation Final Determination: Back to the Drawing Board
U.S. Environmental Protection Agency (EPA) Administrator Pruitt has indicated that the EPA believes the current standards (for model years 2022 through 2025) are not appropriate and should be revised, as had been expected. A new rule making session is initiated-though no timeline has been set and no proposals for what the new regulations should be has been communicated.
Under the new rulemaking process, according to the 38-page Mid-term Evaluation Final Determination, EPA and NHTSA will also work together on greenhouse gas emissions rules and corporate average fuel economy (CAFE) rules. Prior to this, EPA had set GHG regulations, which would drive the NHTSA mpg regulation; in this case, the proposal was for GHG emissions for 2022 through 2025 model years. The report had estimated what mpg would be under this scenario, but NHTSA had not formally set mpg regulations. EPA has said that for the new process, the two sets of regulations will be set together.
The announcement brings some uncertainty for automakers with significant US business. They are caught between a national protection measure versus global competitiveness and innovation creation. Automakers will need to continue to meet more restrictive global standards and these standards will drive the need for more fuel-efficient vehicles. To remain globally competitive, IHS Markit expects that the upcoming influx of electrified powertrains-from full battery electric to full and mild hybrid to plug-in hybrid electrics-will remain a strategic absolute. On other hand, automakers will support the determination that the US standards are not aligned to the major determinants, as there is a disconnect between US consumer demand and the technology push.
To that end, IHS Markit is unlikely to make any significant changes to expected technology mix, given that the current mix that we do have seems to broadly meet our forecast criteria-of which the regulatory environment is only one of several elements--whilst enabling the majority of OEM's to comply with a rolled back standard. The latest IHS Markit forecast suggest that in 2025, sales of battery electric vehicles will reach 4.7%, with internal combustion engines fitted with stop/start accounting for 60% of light-vehicle sales. Full hybrids are forecast to reach 4.6% of the market, with plug-in hybrids at 5.6%. Mild hybrids are forecast to account for nearly 12% of the market. Only 14% of US light-vehicle sales are forecast to be internal combustion engines with no electrification. By comparison, hybrids and electrics reached 3.6% of US light-vehicle sales in 2015 and ICEs without stop/start accounted for nearly 85%. A significant change is forecast, though PHEV and EVs are forecast to about 11% of the market in 2025. At this time, we are not providing further breakdown on these figures.
The EPA versus California
IHS Markit expects that the most contentious element of the Environmental Protection Agency Mid-Term Evaluation Final Determination will be formal statement that the EPA will review California's current right to set standards for vehicle emissions of certain pollutants that are more strict than the federal requirements. The right is a result of 1970 Clean Air Act (CAA), a federal law which requires Congressional approval to change. Under the expectation this approval is required, a full revocation of California's autonomy seems less likely, but the challenge remains the most impactful element of the announcement.
While the most contentious, this was also not a surprise. President Donald Trump signalled this was an issue for his leadership of the EPA soon after inauguration; the California regulating body, Air Resources Board (CARB) has also made several statements over the past months indicating it will work to continue to maintain the standards it has set and to keep its right to do so.
The Mid-Term Evaluation Final Determination formalizes that the EPA is considering revoking California's waiver (which also would impact the states who have opted to mimic California's regulations), and sets the stage for further uncertainty as well as potential for a step away from an agreement on a set of national rules.
Suppliers and Investment
IHS Markit Consulting Director Michael Robinet also provides insight relative to investment and the supplier community, noting that the uncertainty and lack of visibility are not investment-friendly conditions.
"For several component systems, decisions on technology and capital are being made 4-5 years in advance. In this environment, the standards are uncertain for the 2022-2025 timeframe. This will push the industry to engineer to the highest common denominator. Vehicles launching in the 2022 timeframe already have the basic technology suite established by this point; changes in regulations are likely to only offer some flexibility depending upon structure and timing.
Further, the lack of clarity with US federal standards versus California will add complexity to future technology and capital decisions. OEMs need to also consider that the European Union, China and Japan will all be raising emission standards at a heightened pace over the next decade. This also can push designing to the highest common denominator."
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