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From Proposals to Policy

Many automakers and dealers are cheering after the EPA and the DOE settled on softer emission policies.
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From Proposals to Policy

The Environmental Protection Agency locked in its plan for cutting emissions on Wednesday, and it looks like we're gonna see another big push for electric vehicle sales as the rules on car exhaust get tighter through the rest of the decade. Plus, the Department of Energy dropped its own update this week on how electric cars stack up in terms of miles per gallon.

Both sets of rules got a bit of a chill pill from what was first thrown out there, something many automakers and dealers alike are counting as a major win after expressing concerns that the pace and penalties were far too aggressive.

McKinsey & Company

Let’s break them down:

The Department of Energy Ruling: The Petroleum Equivalency Factor

The Proposal

In April 2023, the DOE made headlines with its proposal to amend the "Petroleum-Equivalent Fuel Economy" rating system. This system, crucial for measuring the fuel efficiency of electric vehicles (EVs) in terms that compare directly to traditional gasoline vehicles, was set for a drastic adjustment. Initially, the proposal suggested a 72% reduction in the compliance value of EVs by 2027.

The Pushback

Many voiced concerns that the original, more stringent EV transition goals—targeting a 67% EV market share by 2032 from less than 8% last year—were out of reach. Particularly impacted are Detroit's Big Three (General Motors, Ford, and Stellantis), with Stellantis lagging significantly in EV sales in the U.S.

Automakers and the United Auto Workers union raised alarms that the administration's prior proposal could have resulted in U.S. automakers facing $10.5 billion in 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 $1 billion through 2032. 

The Compromise

Originally, the Biden administration aimed for a swift transition towards EVs to curb emissions, but after extensive negotiations, it has scaled back these ambitions.

The final rule will see a more gradual reduction through 2030, cumulating in a 65% total decrease. This gives the automotive industry a longer runway to adapt to the changing regulations.

The new PEF rules reduce the benefit that EVs get in this calculation. This is not because EVs aren’t clean, but rather so that automakers can’t build a bunch of polluting vehicles and a few clean vehicles just to balance their averages. The new PEF will ensure that automakers need to make suitable amounts of EVs, instead of just a few compliance cars that get them to skirt by.

Environmental Protection Agency Ruling: Emissions from Vehicles and Engines

The Proposal

Also in April 2023, EPA published a proposed rule for new, more ambitious proposed standards to further reduce harmful air pollutant emissions from light-duty and medium-duty vehicles covering the years 2027-2032.

At the heart of this proposal was a directive for automakers to pivot significantly towards EVs, mandating that they account for 60% of new vehicle production by 2030, and an even more robust 67% by 2032. 

The Pushback

Much like the DOE proposal, it was met with considerable resistance from various corners of the auto industry. Critics argued that the aggressive shift towards EVs imposed unrealistic expectations on automakers, potentially leading to significant financial strain and logistical challenges. 

Concerns were also raised about the current state of EV infrastructure and consumer readiness for such a rapid transition. The Alliance for Automotive Innovation, representing a broad spectrum of automakers, voiced a particularly strong objection, urging for more attainable targets that wouldn't compromise the industry's sustainability or economic viability.

Of the 19 biggest automakers, only three supported the strict original proposal – Lucid, Rivian, and Tesla.

The International Council on Clean Transportation

The Compromise

In response to the pushback, the EPA took a step back to reassess and ultimately soften its initial stance. The revised rules now propose a more gradual increase in EV production, aiming for closer to a 50% EV market share by 2030. This compromise offers a more balanced approach, acknowledging the industry's concerns while still maintaining a strong commitment to reducing emissions.

The final rule builds upon EPA’s final standards for federal greenhouse gas emissions standards for passenger cars and light trucks for model years 2023 through 2026 and leverages advances in clean car technology to unlock benefits to Americans ranging from improving public health through reducing smog- and soot-forming pollution from vehicles, to reducing climate pollution, to saving drivers money through reduced fuel and maintenance costs. These standards will phase in over model years 2027 through 2032.

Moreover, the new rules provide a boost for plug-in hybrid vehicles, offering an alternative path for automakers to comply with the emissions standards without relying solely on full EVs.

Though they've dialed down the accelerated timeline from the EPA’s original proposal, they expect the end goals for 2032 to remain the same.


What It Means

The Department of Energy's decision is crucial, as it slows down the phase-out of current rules that award automakers extra fuel-economy credits for the EVs they sell. This adjustment is aimed at allowing car manufacturers to continue selling profitable gas-powered vehicles while still meeting federal fuel efficiency standards.

The final rules are not just about slowing down; they're also about diversifying the path to compliance. Notably, plug-in hybrid vehicles are expected to receive a significant boost, potentially accounting for over a third of an automaker's production by 2032. This alternative compliance path offers manufacturers more flexibility in meeting stringent emissions standards.

Additionally, the EPA is poised to roll back its proposal to limit particulate matter emissions from gasoline vehicles, a move that the industry argued would necessitate particulate filters on all gas-powered models. Concerns regarding the ban on "enrichment" strategies for engine performance have also been addressed, with the EPA expected to relax or entirely remove this prohibition.

While the transition might not be as rapid as some environmentalists hope, these revised rules represent a balanced approach to achieving significant emissions reductions without putting undue strain on the industry.

There is one more rule still coming, an update from the National Highway Traffic Safety Administration to the Corporate Average Fuel Economy (CAFE) rule, which will incorporate the PEF rule into its mileage calculations. We’re not sure quite when that will come out, but it’s speculated to be coming down the pipes by the end of the month.

What It Also Means…

The gov needs to light a fire under their own tushies to get the charging infrastructure up to snuff if they intend to enforce these new rulings.

This is what will be required to support the electric push:


They will also need to work to convince buyers who don’t have the ability to charge at home that they won’t be in a constant struggle to find and keep power, something already holding back many shoppers.

McKinsey & Company

But, if we know the government, these rulings and projections won’t come up against any further fire or scrutiny and will be adopted without a hitch. Kick your feet up, it’s all smooth sailing from here, folks. 🤭

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