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US Finalizes Tough Auto Emissions Targets

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US President Joe Biden’s administration has finalized ambitious greenhouse gas emissions (GHG) standards for light-duty vehicles, posing significant risks for fuel demand in the world’s largest oil-consuming nation.

The rules, which cover model years 2022 through 2026, would result in an estimated average fuel economy of 40 miles per gallon for new vehicles in 2026, and a correlated reduction in GHGs, the US Environmental Protection Agency (EPA) said.

If achieved, that would be a significant uptick — model year 2020 vehicles averaged just 25.4 miles per gallon, the EPA estimates.

Monday's EPA announcement comes on the heels of news that Biden's sprawling "Build Back Better" legislation, aimed at building and incentivizing greater energy efficiency across wide swaths of the US economy, will likely not pass in its current form.

Reduced Fuel Demand

The finalized rules are likely to press the accelerator on electric vehicle (EV) adoption, reinforcing a global trend examined by Energy Intelligence in a set of three scenarios; in the core case, global EV uptake displaces auto fuel demand by 2.1 million barrels per day in 2030 versus business-as-usual, and 6.8 million b/d in 2040.

In all three scenarios, Energy Intelligence foresees the end of rising auto fuel demand in three key markets — the US, China and Europe — by late this decade.

Demand would peak in 2025-28 and then decline, due to both rising EV sales and improving fuel economy in internal combustion engines (ICE).

US Ambition Rising

The final EPA rules are more ambitious than a proposal rolled out in the summer that would have likely resulted in 38 miles per gallon across the US light-duty fleet in the same time frame.

The agency’s final plan is also significantly more stringent than a program in place under former President Donald Trump, which would have achieved around 32 miles per gallon by 2026. Trump had argued that tough standards would be difficult for automakers to meet and would sacrifice affordability and safety for drivers.

Biden’s EPA also acknowledged the likely increases in car costs. But the agency said fuel savings resulting from greater efficiency will exceed the initial increase in vehicle costs by more than $1,000 over the lifetime of an average vehicle.

Carrots and Sticks

How easily automakers can meet the new standards is an open question. Companies have expected the rules to be packaged with new or expanded tax credits for EVs that could help balance the added cost of compliance for both consumers and manufacturers.

EPA Administrator Michael Regan said Monday that the White House still plans to pursue congressional passage of such incentives after Sen. Joe Manchin (D-West Virginia) signaled he would not support the Build Back Better bill, effectively blocking it from passage.

Regan also said the finalized vehicle rules will be less stringent in the next few years but would strengthen in 2025 and 2026.

‘First Bite at the Apple’

Regan said EPA will now get to work on even stronger rules that would kick in from 2027. The agency also suggested it will explore steps to work toward Biden’s goal for 50% of new vehicles sold by 2030 to be all-electric or plug-in hybrids.

“This is just the first bite at the apple,” Regan said.

The transportation sector is now the biggest target when it comes to US climate policy, representing 29% of US GHGs in 2019, according to the EPA.

Long Road Ahead

Automakers continue to seek ways to make ICE vehicles more fuel efficient, whether through engine improvements, lighter weight materials or improved aerodynamics, among other methods.

Yet most experts predict that high fuel-efficiency targets, such as the 40 miles per gallon standard, will ultimately move the market squarely toward EVs.

While EV sales are indeed growing, their market share is far from Biden’s 50% target.

EVs represented around 5.6% of light-duty vehicles sales in the US in October, according to data from Argonne National Laboratory and Wards Auto. EPA estimates its new rules will result in a market share of 17% for EVs by 2026.

Other key auto markets, including China and Europe, are significantly further ahead when it comes to EV uptake (see table).

Latest Indicators: Sales and Fleet Penetration of EVs
China
NEV sales penetration
NEV sales (Jan-Oct 2021)2,542,000
Total LDV sales (Jan-Oct 2021)20,970,000
% LDV sales NEVs Jan-Oct12.1%
NEV sales (Oct'21)383,000
Total LDV sales (Oct'21)2,333,000
% LDV sales NEVs Oct'2116.40%
NEV fleet penetration
Updated through Q3 2021
NEV fleet (as of Sep 2021)6,780,000
% fleet NEVs (as of Sep 2021)2.28%
  
Europe
EV registration penetration
EV registrations Q3 '21409,882
% LDV sales NEVs18.90%
EV fleet penetration
Updated through Q4 2019
EV fleet1,417,355
% fleet NEVs0.50%
US
EV sales penetration
EV sales (Oct '21)55,007 
% LDV sales NEVs5.26%
Annual EV sales ('20)297,939
Annual % LDV sales EVs2.06%
EV fleet penetration
Updated through Jan '21
EV fleet1,769,953 
% LDV fleet NEVs0.57%

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