Tailpipe Rules Finalized Amid EV Industry Uncertainty

In March and April 2024, the Biden Administration finalized a suite of regulations to promote the adoption of electric vehicles (“EVs”) even as EV demand has waned in recent months. Most notably, EPA “flattened” the stringency curve for its new light-duty emission standards to give manufacturers additional lead time, compared to what was proposed. The rules come as manufacturers such as Tesla have reported declining EV sales, canceled plans for new entry-level EVs, and announced substantial layoffs.[1] While considerations of cost, range, and charging times continue to slow the transition to EVs, the administration is taking the view that the switch to electric is inevitable, even if the pace remains uncertain.

I. The Final Rules
    A. Light-Duty Tailpipe Rule    

In May 2023, EPA proposed new emissions standards for criteria pollutants and greenhouse gases (“GHG”) for light- and medium-duty vehicles that would phase-in over model years (“MYs”) 2027 through 2032. The agency also proposed revisions to several aspects of the GHG program, including its incorporation of off-cycle and air conditioning credits and how it treats upstream emissions associated with zero-emission vehicles and plug-in hybrid electric vehicles in compliance calculations.[2] The proposed standards drew a storm of criticism: EPA received over 250,000 written comments during the two-month comment period and heard from approximately 240 speakers over three days of public hearings.[3] A previous article[4] in this Newsletter on EPA’s proposal (as well as its heavy-duty and DOE’s and NHTSA’s proposals) discussed the draft regulations and their larger regulatory scheme in greater detail.

The final light-duty tailpipe rule calls for automakers to meet a light-duty fleetwide average emissions rate of 85 grams of CO2 per mile for MY 2032, down from a projected 168 grams per mile for MY 2026 vehicles.[5] For reference, the MY 2024 Toyota Prius achieves 155 grams per mile and the 2024 Chevrolet Tahoe achieves 527 grams per mile.[6] The final rule allows more time to achieve the emissions standards than the proposed rule, a response to manufacturer calls for additional lead time for product planning changes.[7]

EPA also finalized an extended phase-down or phase-out for two optional credit flexibilities applicable to light-duty vehicles. First, manufacturers receive credits for making efficiency improvements to and taking steps to prevent refrigerant leakage from air conditioning systems. EPA finalized eligibility limitations for the credit starting MY 2027, such that EVs may no longer receive the credit. But in a change from proposed elimination of the credit, EPA also phased down the leakage control credit from MYs 2027–2030 while retaining a small permanent credit for MY 2031 and later.[8]

Second, manufacturers will receive credits for technologies that achieve CO2 reductions that aren’t reflected in the two-cycle tailpipe emissions test. EPA proposed phasing out these credits by MY 2030, but its final rule does not phase them out until MY 2033. The agency also finalized its proposal to remove EVs’ eligibility for off-cycle credits starting in MY 2027.[9]

The final medium-duty standards also reflect a reduced rate of stringency increase in the early years as compared to the proposed standards.[10] EPA also finalized changes to criteria pollutant emissions standards for both light-duty vehicles and medium-duty vehicles.[11] These final standards largely reflect those proposed, though again with more gradual phase-in periods in some instances.[12]

As it did in the proposed rule, EPA emphasized that its standards are performance-based—as required by the Clean Air Act[13]—and that manufacturers are not required to use particular technologies to meet the standards.[14] Put another way, according to the agency, “it would be technologically feasible to meet these standards without additional zero-emission vehicles beyond the volumes already sold today.”[15] However, the reality is, as EPA has acknowledged,[16] that manufacturers will choose to comply with the standards by substantially expanding their EV offerings, such that roughly two-thirds of new MY 2023 light-duty vehicles sold will be EVs or plug-in hybrids (“PHEVs”).

    B. Heavy-Duty Tailpipe Rule

In April 2023, EPA proposed new CO2 emissions standards for heavy-duty, on-road vehicles for MYs 2028–2032, and revised standards for MY 2027.[17] The standards will apply to heavy-duty vocational vehicles (e.g., delivery trucks, refuse haulers, transit buses, school buses) and tractors (day cabs and sleeper cabs on tractor-trailer trucks). In addition, the proposal included updates to certain elements of the heavy-duty Averaging Banking and Trading program, including a proposal to eliminate the last MY year of the HD GHG Phase 2 advanced technology incentive program[18] for certain types of electric heavy-duty vehicles, as well as new warranty requirements for batteries and other components of zero-emission vehicles and to require customer-facing battery state-of-health monitors for heavy-duty PHEVs and EVs. The public was nearly as engaged with the heavy-duty proposal as EPA’s light- and medium-duty proposal; the agency received over 170,000 comments and heard from nearly 200 individuals during public hearings.[19]

The final rule updated the proposal in a number of ways, reflecting concerns and additional data received in comments as well as other new research that became available since the proposal. In general, EPA finalized heavy-duty standards that are less stringent than those proposed for the early model years of the program and more stringent or equivalent to those proposed in later model years. Standards are less stringent for all vehicle categories in MYs 2027–2030—and increase in stringency at a slower pace through those same years—compared to the proposal.[20] Still, when compared to the existing Phase 2 standards, the Phase 3 standards begin with increases of 6–13% depending on vehicle type, and by MY 2032, the standards are 25–60% higher than Phase 2 standards, depending on vehicle type.[21]

EPA also decided not to finalize the earlier phase-out for PHEV and BEV multipliers; as such, manufacturers may continue to generate credits that include credit multipliers for these technologies through MY 2027, as was adopted in the Phase 2 rule.[22] EPA also finalized the battery warranty monitoring requirements without material changes from its proposal.

As it did with light- and medium-duty rule, EPA emphasized that its heavy-duty standards were agnostic with respect to technology. That being said, EPA projects that nearly 50% of new vocational vehicle sales and 25–40% of new tractor sales would be zero-emission (battery-electric or fuel cell) vehicles by MY 2032.[23]

    C. Petroleum Equivalency Factor (“PEF”)

NHTSA uses DOE’s PEF to calculate EVs’ fuel economy for purposes of automakers’ compliance with Corporate Average Fuel Economy (“CAFE”) standards. After an environmental group petitioned[24] for an update to the PEF, DOE issued a proposed rule in April 2023.[25] DOE received twenty comments on the proposal, several of which raised concerns that the MY 2027 effective date gave too little lead time to manufacturers.[26] In fall 2023, the agency requested and received manufacturer data supporting those concerns and incorporated the data into its final rule.[27]

On March 19, 2024, DOE finalized a PEF value somewhat less stringent than what the agency had proposed, and now phased in over MYs 2027–2031.[28] Three key changes to methodology spurred the revisions from the proposal. First, the final rule incorporated the National Renewable Energy Laboratory’s (“NREL”) standard 2022 model for its electricity grid mix projection, rather than a slightly more aggressive NREL model that also used 2021 data. DOE concluded that the 2022 standard model, published after the rule was proposed, more accurately captured the effects to date of the Inflation Reduction Act (“IRA”) and Infrastructure Investment and Jobs Act (“IIJA”) on renewable and other clean electricity generation.[29] Second, in response to industry concerns, the agency used a more refined survivability-weighted lifetime mileage schedule[30] of the fleet of vehicles sold during the regulatory period, as opposed to the simpler average of annual PEF values only over the covered modeled years which was proposed.[31] The grid mix and lifetime mileage changes resulted in a “cumulative annual gasoline-equivalent energy content of electricity” value of 28,996 Watt-hours per gallon (“Wh/gal”)—somewhat higher than the proposed 23,160 Wh/gal value and substantially higher than the existing 12,307 Wh/gal value.[32]

DOE also elected to slow implementation of its proposed revisions to another value that makes up the PEF formula. In its third key change from the proposal, again in response to industry concerns, the final rule phases out use of the “fuel content” factor over several years, rather than removing it from the PEF equation as of the rule’s effective date, as had been proposed.[33]

The result is a final PEF value that decreases from 82,049 Wh/gal through MY 2026 to 28,996 Wh/gal for MY 2030 and later, with MY 2028 vehicles seeing the sharpest year-over-year decrease, from 79,989 Wh/gal to 50,427 Wh/gal.[34] Once fully implemented, the new factor means automakers will have to sell roughly three and a half times as many EVs as they currently sell to receive the same reduction in their fleetwide average for purposes of the CAFE compliance. Legacy manufacturers and EV proponents disagree over whether the new factor will incentivize additional EV production. Because they will get less fuel economy “value” for each EV, legacy manufacturers have argued that they will try to make up the shortfall by using hybrid vehicles, paying penalties, or some combination of the two.[35] On the other hand, environmental groups and the Biden Administration are hopeful that manufacturers will simply build more EVs than they otherwise would to make up the shortfall.[36]

II. Challenges in Courts and Congress Await

EPA’s rules will be published in the Federal Register in the coming weeks; the PEF rule has already been published. Parties will have 60 days from the date of publication to seek judicial review in the appropriate circuit—the D.C. Circuit for EPA’s rule or the D.C. Circuit or petitioner’s home circuit for the DOE rule.[37] Indeed, 13 states and an industry group have already filed a lawsuit with the U.S. Court of Appeals for the Eighth Circuit asking the court to vacate the PEF rule.[38] The coalition plans to argue that DOE lacked statutory authority for key components of the rule, that DOE failed to comply complete necessary review under the National Environmental Policy Act, and that the rule is arbitrary and capricious under the Administrative Procedure Act.[39]

Legal challenges to the tailpipe rules are virtually certain; the light-duty rule’s previous iteration elicited challenges from dozens of states and fuels-oriented trade associations, among others.[40] In those consolidated cases, the petitioners argued primarily that EPA’s reliance on EVs to meet the standards exceeded the agency’s statutory authority and violated the major questions doctrine. In particular, they argued that widespread charging jeopardized grid reliability, a lack of domestically sourced components compromised national security, and that assigning zero emissions to EVs for fleetwide averaging purposes violates the Clean Air Act.[41] The D.C. Circuit heard oral arguments on the earlier rule in September 2023 and has yet to issue a decision.

Congress may also get involved. Members have previewed action under the Congressional Review Act, which gives Congress authority to pass a joint resolution of disapproval to reject a rule within 60 days.[42] Members may also pursue legislation to amend or remove the agencies’ authorities to promulgate vehicle standards, but such bills have not gained traction in recent years.[43]

III. More EV Rules Upcoming

In the coming weeks, NHTSA will likely finalize its next set of fuel economy and efficiency standards for cars, pickup trucks, and vans. The standards covering passenger cars and light trucks will apply to MYs 2027–2032, and the standards applicable to heavier vehicles will cover MYs 2030–2035. The agency proposed to increase stringency at 2% per year for passenger cars, 4% per year for light trucks, and 10% per year for HDPUVs, for each applicable MY. Given EPA’s finalization of the same endpoint for its standards—and the fact that NHTSA’s rule may face less litigation risk[44]—NHTSA will almost certainly adopt its standards as proposed.

The Internal Revenue Service (“IRS”) is also set to finalize additional regulations for determining the amount of the federal income tax credit under the IRA for the purchase of qualifying new EVs.[45] Before the end of the year, the IRS may also finalize its draft regulations governing the advanced manufacturing credits, including guidance regarding the term “produced” and applicability to constituent elements, materials, and subcomponents.[46]

For more information about regulation of mobile sources of air pollution, including EVs, please contact Jack Lyman.

[1] Hyunjoo Jin et al., Exclusive: Tesla Scraps Low-Cost Car Plans Amid Fierce Chinese EV Competition, Reuters (Apr. 5, 2024), https://www.reuters.com/business/autos-transportation/tesla-scraps-low-cost-car-plans-amid-fierce-chinese-ev-competition-2024-04-05/ (last visited Apr. 16, 2024); Lora Kolodny, Tesla Will Lay Off More Than 10% of Global Workforce: Read the Elon Musk Memo, CNBC (Apr. 15, 2024), https://www.cnbc.com/2024/04/15/tesla-shares-dip-in-premarket-trade-on-global-layoff-reports.html (last visited Apr. 16, 2024).

[2] Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles, 87 Fed. Reg. 29,184 (proposed May 5, 2023).

[3] EPA summarized key comments in the preamble to the final rule and published a detailed Response to Comments document in conjunction with the final rule. Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles: Response to Comments, EPA-420-R-24-005 (Mar. 2024), https://www.epa.gov/system/files/documents/2024-03/420r24005.pdf (last visited Apr. 16, 2024).

[4] Jack Lyman, New Fuel Economy Standards Cap Series of Federal Rules Boosting EV Production, Marten Law (Sep. 18, 2023), https://martenlaw.com/news/new_fuel_economy_standards_cap_series_of_federal_rules_boosting_ev_production.

[5] Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles 376–77 (Mar. 2024) (prepublication version) (hereinafter “Light-Duty Rule”), https://www.epa.gov/system/files/documents/2024-03/lmdv-veh-standrds-ghg-emission-frm-2024-03.pdf (last visited Apr. 16, 2024).

[6] U.S. Dep’t of Energy and Env’t Protection Agency, 2024 Toyota Prius, https://www.fueleconomy.gov/feg/Find.do?action=sbs&id=47243 (last visited Apr. 16, 2024); U.S. Dep’t of Energy and Env’t Protection Agency, 2024 Chevrolet Tahoe 2WD, https://www.fueleconomy.gov/feg/Find.do?action=sbs&id=47396 (last visited Apr. 16, 2024).

[7] Light-Duty Rule at 44–45. In its proposal, EPA had analyzed its preferred standards as well as three alternatives: a more stringent alternative (Alternative 1), a less stringent alternative (Alternative 2), and an alternative that landed at the same stringency as the proposal in MY 2032 but provided a linear ramp rate from MY 2027 to 2032 (Alternative 3). Id. EPA ultimately adopted the Alternative 3 standard for the final rule. Id.

[8] EPA also decided not to eliminate the medium-duty vehicle leakage standard, as it had proposed. Id. at 248.

[9] EPA also delayed the phase-in of its revised PHEV utility factor from MY 2027 to MY 2031. The agency uses a fleet utility factor to account for a PHEV’s operation using only its electric motor, with respect to the total mileage it travels. Recent studies had indicated that the current utility factor curves overestimate time spent driving in pure electric mode. Id. at 263–73.

[10] Id. at 45.

[11] Id. at 279–368.

[12] For example, the finalized phase-in for particulate matter (“PM”) is more gradual than proposed for both light-and medium-duty vehicles, “to address manufacturer lead time concerns about applying GPFs across ICE product lines, and the need to install PM sampling equipment into some cold test facilities.” Id. at 318.

[13] 42 U.S.C. § 7521(a).

[14] Id. at 150.

[15] Id. at 11.

[16] Id. at 724–27.

[17] Greenhouse Gas Emissions Standards for Heavy-Duty Vehicles—Phase 3, 88 Fed. Reg. 25,926 (proposed Apr. 27, 2023).

[18] Id. at 25,956.

[19] As with the light- and medium-duty rule, EPA summarized key comments on the heavy-duty proposal in the preamble to the final rule and published a detailed Response to Comments document in conjunction with the final rule.

[20] Greenhouse Gas Emissions Standards for Heavy-Duty Vehicles—Phase 3 at 36–37 (Mar. 2024) (prepublication version) (hereinafter “Heavy-Duty Rule”), https://www.epa.gov/system/files/documents/2024-03/hd-phase3-veh-standrds-ghg-emission-frm-2024-03.pdf (last visited Apr. 16, 2024). Additionally, day cab tractor standards and heavy heavy-duty vocational vehicle standards are starting later than proposed, sleeper cab standards are relatively less stringent in earlier years, and heavy heavy-duty vocational vehicle standards are less stringent over all covered model years. Id.

[21] Id. at 37.

[22] Id. at 501.

[23] Id. at 451.

[24] Petroleum Equivalence Factor, Notification of Petition for Rulemaking, 86 Fed. Reg. 73,992 (Dec. 29, 2021).

[25] Petroleum-Equivalent Ful Economy Calculation, 88 Fed. Reg. 21,525 (proposed Apr. 11, 2023).

[26] Petroleum-Equivalent Fuel Economy Calculation, 89 Fed. Reg. 22,041, 22,042-43 (Mar. 29, 2024) (to be codified at 10 C.F.R. part 474).

[27] Id. at 22,042.

[28] Id. at 22,041.

[29] Id. at 22,046.

[30] Id. at 22,048. These schedules account for different annual driving patterns and scrappage rates as vehicles age. Id.

[31] Id. at 22,047.

[32] Id. at 22,053, 22,056.

[33] Id. at 22,049–52.

[34] Id. at 22,053, tbl.7.

[35] See, e.g., Letter from Cheryl Stark, Stellantis, to Michael Berube, DOE, re: Voluntary Clarification Opportunity on Petroleum Equivalency Factor at 6–7 (Sep. 29, 2023), Dkt. No. EERE-2021-VT-0033-0053.

[36] See, e.g., Petroleum Equivalence Factor, Notification of Petition for Rulemaking, 86 Fed. Reg. 73,992 (Dec. 29, 2021).

[37] 42 U.S.C. § 7607(b); 49 U.S.C. § 32909.

[38] State of Iowa et al. v. Jennifer Granholm et al., No. 24-1721 (8th Cir. filed Apr. 5, 2024), available here (last visited Apr. 16, 2024).

[39] Id.

[40] See Sabin Center for Climate Change Law, Texas v. EPA (displaying documents filed in this litigation), https://climatecasechart.com/case/texas-v-epa-2/ (last visited Apr. 16, 2024).

[41] The private petitioners also argued the rule is arbitrary and capricious because “it treats [EVs] as though they contribute zero emissions in some contexts, while acknowledging their upstream emissions in other contexts.” Texas v. EPA, Private Pets. Br. at 62, Case No. 22-1031, Dkt. 1972107 at 86 (D.C. Cir. filed Nov. 3, 2022).

[42] Pete Ricketts, Press Release: Ricketts, Sullivan Comment on EPA Finalizing Emission Rule for Biden’s EV Mandate (Mar. 20, 2024), https://www.ricketts.senate.gov/news/press-releases/ricketts-sullivan-comment-on-epa-finalizing-emission-rule-for-bidens-ev-mandate/ (last visited Apr. 15, 2024); John James, Press Release: Rep. James Issues Statement Following Biden Administration Regulations on Tailpipe Emissions (Mar. 20, 2024), https://james.house.gov/news/documentsingle.aspx?DocumentID=150 (last visited Apr. 15, 2024).

[43] See, e.g., S. 4072, 118^th Cong. (introduced Mar. 23, 2024) (would prohibit EPA from “finalizing, implementing, or enforcing” the light-duty tailpipe rule); H.R. 2779, 118^th Cong. (introduced Apr. 20, 2023) (would repeal 49 U.S.C. ch. 329, concerning automobile fuel economy, in its entirety).

[44] NHTSA arguably has a clearer statutory mandate that affords additional agency discretion. See, e.g., Ctr. for Biological Diversity v. NHTSA, 538 F.3d. 1172, 1195–97 (9th Cir. 2008) (holding that the Energy Policy and Conservation Act permits, but does not require, the use of a marginal cost-benefit analysis and that NHTSA has discretion to decide how to balance the statutory factors as long as that balancing does not undermine the fundamental statutory purpose of energy conservation).

[45] See Section 30D New Clean Vehicle Credit, 88 Fed. Reg. 23,370 (proposed Apr. 17, 2023); Office of Information and Regulatory Affairs, View Rule: RIN 1545-BQ52, Section 30D Clean Vehicle Credit Regulations (Fall 2023) (indicating status of proposed rule), https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202310&RIN=1545-BQ52 (last visited Apr. 16, 2024).

[46] Section 45X Advanced Manufacturing Production Credit, 88 Fed. Reg. 86,844 (proposed Dec. 15, 2023) (to be codified at 26 C.F.R. Part 1); see also Office of Information and Regulatory Affairs, View Rule: RIN 1545-BQ85, Advanced Manufacturing Production Credit (Fall 2023) (indicating status of proposed rule), https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202310&RIN=1545-BQ85 (last visited Apr. 16, 2024).