A turning point in the transition to EVs? Tougher EPA rules may be the catalyst

WASHINGTON — Faced with the challenge of meeting the EPA's more stringent limits on vehicle tailpipe emissions, U.S. automakers soon will determine how much — and how quickly — electric vehicles will be part of their compliance strategies.

The EPA, led by Michael Regan, in December finalized a tougher-than-expected rule on vehicle greenhouse gas emissions for the 2023 through 2026 model years that could act as a regulatory driver for speeding up the industry's electrification plans.

Under the final rule, which is more stringent than the agency's August proposal and the Obama-era requirements, emissions standards increase between about 5 and 10 percent each model year. The standards mandate an industrywide target of 161 grams of carbon dioxide per mile — or 40 mpg on window stickers — by the 2026 model year.

In the near term, automakers may lean on more efficient gasoline-powered vehicles and hybrid powertrains to meet increases in the 2023 and 2024 model years, several industry experts told Automotive News this month.

But the rule — which sunsets several flexibility provisions that allow automakers to generate compliance credits — could require manufacturers to accelerate their electrification strategies in the later years, putting the industry on a trajectory to meet even tougher requirements in a later rule-making and reach President Joe Biden's goal of half of new-vehicle sales being zero emission by 2030.

As compliance strategies take shape, several questions remain: Are the standards achievable for automakers? Will Congress pass additional legislation to support the transition? And will enough U.S. consumers buy into EVs?

"It's ambitious. I think it's definitely doable," said John DeCicco, research professor emeritus at the University of Michigan. "But it does require the industry to really shift into high gear in terms of efficiency improvement and electrification when they've kind of been coasting recently" under the more relaxed Trump administration rules.

As the standards ramp up in stringency — requiring a 28.3 percent cumulative reduction in vehicle emissions over those four model years — the EPA projects automakers can meet the requirements with more advanced gasoline vehicle technologies and sales of about 17 percent EVs and plug-in hybrids by the 2026 model year.

EVs made up only 3 percent of new-vehicle registrations in the U.S. last year through November, according to data provided by Experian to the Automotive News Research & Data Center.

The EPA — citing ambitious plans by automakers to develop and produce more near-zero and zero-emission vehicles — said it considers the requirements "feasible at reasonable cost."

A shift to ZEV technologies, the agency said, is "well underway, and it presents a strong potential for dramatic reductions in [greenhouse gas] and criteria pollutant emissions."

And it's not just happening in the U.S., but globally, said Margo Oge, a former director of the EPA's Office of Transportation and Air Quality.

"This is [transformative like] the Model T when it comes to the transportation sector ... and it's the right thing to do for the country to address climate change," Oge said.

By 2025, the auto industry will have invested $330 billion in electrification, according to the Alliance for Automotive Innovation.

The alliance's automaker members, which include the Detroit 3, Honda and Toyota, are aiming to electrify more, or all, of their portfolios by the end of the decade.

"They are committed to this in dollars, in volume and manufacturing plant capacity ... but they still know that it's going to take the consumer to pull this," said Brett Smith, director of technology at the Center for Automotive Research in Ann Arbor, Mich. "They need the support of the government financially and in infrastructure."

While the industry is committed to improving fuel economy and reducing vehicle emissions, John Bozzella, CEO of the alliance, said the EPA's "even more aggressive" rule will require consumer incentives and support for infrastructure and supply chains to reach the levels of electrification projected by the agency.

"It's going to take more than stringent rules to get us to where we all need to go," Bozzella told Automotive News. He has called for a national strategy that requires action across the public and private sectors as well as thoughtful policy development.

"It is absolutely essential that supportive government policies are in place and that we have infrastructure development, that we have the necessary work done to support that type of shift," he said. "I think, from where I sit today, there's an open question about whether we have the pieces in place to be able to get there."

While the $1 trillion bipartisan infrastructure bill passed in November includes $7.5 billion to build 500,000 EV charging stations across the U.S., the future of the Build Back Better Act — a centerpiece of Biden's economic and climate agenda that includes an expanded EV tax credit — remains unclear.

The EPA rule's feasibility, however, isn't dependent on a full transition to EVs by 2026, said Amanda Shafer Berman, a partner at Crowell & Moring's Washington, D.C., office.

"EPA is not anticipating some full fleet turnover," she said. "It's anticipating a meaningful but still fairly small shift over each of the next four years."

Meanwhile, each automaker will have its own approach to meeting the requirements, relying on an array of strategies such as improving the fuel efficiency of combustion engines and taking advantage of program flexibilities to ease compliance in the near term, several experts said.

"We will see some manufacturers that rely much more heavily on efficient gasoline vehicles, while others might move toward a higher portion of EV sales," said Dave Cooke, senior vehicles analyst at the Union of Concerned Scientists. "It won't be like every manufacturer is selling 14 percent EVs."

Toyota, for example, is pursuing multiple pathways to reduce emissions: launching plug-in hybrid, fuel cell and battery-electric vehicles while continuing to sell traditional combustion engine models.

"Our objective is to continue to comply with all laws and regulations, and we will certainly do our best to meet this one," said Tom Stricker, group vice president of sustainability and regulatory affairs for Toyota Motor North America.

Others, such as General Motors, could be in a harder spot in the early years "because they don't have hybrids to fill the gap while they're ... bringing up to scale their EV productions," said IHS Markit analyst Mike Fiske.

The EPA adopted a narrower set of flexibility provisions than what was proposed in August — in some cases, limiting the use of credits and incentives that can help with compliance to the 2023 and 2024 model years to help manage the transition to more stringent standards in the later years.

Reining in those flexibilities makes it a stronger rule, Cooke said, because "every flexibility just erodes the real benefits of the program."

The agency kept in place the averaging, banking and trading program, a compliance flexibility that dictates how credits can be generated and used.

Since 2016, automakers collectively have failed to meet the EPA's tailpipe standards, and, as a result, several have relied on credits to meet the greenhouse gas emissions regulation, said CAR's Smith.

"Through 2020, the industry has not met the tailpipe standard. They've certainly met the regulation, but they've used credits gathered either through buying credits from Tesla, for example, or from credits they had saved previously," he explained.

Through the 2019 model year, Stellantis had purchased the most credits, followed by GM and Mercedes-Benz. Tesla, Honda and Toyota sold the most credits.

To be sure, the credits were set up to do just that: Automakers would build them up in the beginning and use them as the standards get increasingly stringent.

But as the industry moves into the 2023 model year — and faces a nearly 10 percent jump in stringency over the Trump-era standard — "do they have enough credits to get them through to the point where battery-electric vehicle sales make a big enough difference that it's not a problem," Smith said, "or do we find that they don't have enough credits to get there?"

"From the industry's point of view, it's really, really important for the battery-electric vehicles to succeed," he added.

That success ultimately rests on consumer acceptance — a major hurdle that involves addressing issues of affordability, access to charging infrastructure, range anxiety and domestic sourcing of raw materials.

"There's no question that we're in a transition period where we're heading towards much more electrification," said Dan Ryan, vice president of government and public affairs at Mazda North American Operations. "But the question just remains, how far and how fast? And are consumers going to be on board with it?"

To that end, there are many pieces of the puzzle that have to come together, he said.

"I think, yes, it's possible that we are trying to go too fast," Ryan added, "but that's kind of always been the thrust of regulators in this area, is to push, push, push and see if you can make it happen."