Electric car charger station
Articles & stories

EPA finalizes vehicle emissions standards

We have delved into the importance of regulations on accelerating electric vehicle (EV) adoption in the US. The stricter standards reinforce our view that automakers’ EV initiatives will now be required in the coming years to comply with regulations. We estimate the new rules require close to 20% EV penetration to meet EPA compliance by 2026.

Based on EPA's responses to comments, it's clear that the agency is appealing more towards climate-oriented NGOs and advocates than automakers, as the former pushed for tighter regulations. In contrast, the latter generally supported the proposed standards but not the more stringent alternatives. Effectively, EPA is setting the stage for "even greater GHG emissions reductions" in future rulemaking.

In addition to tougher targets, the EPA also limited the various credit/incentive available to help OEMs meet compliance. This shift includes more limited credit life extension than proposed, adopting only a one-year extension (beyond the current 5-year life) for credits earned in 2017-2018. The EPA reduced the incentive multiplier benefit (lower multiplier over fewer years than proposed), which allows manufacturers of electric, fuel cell, and hybrid vehicles to count these zero- or low-emission vehicles as more than one vehicle in the compliance calculation. The EPA also raised the cap for off-cycle credits, but for a more limited time frame.

To meet the revised final standards, the team’s analysis shows EV’s share of US new vehicle sales needs to reach ~18-19% by 2026 (vs. our estimated projection of ~12-14% for the proposed ruling and current penetration of ~4%). This move underscores the point that EV projections are now backed up by regulatory compliance needs, the failing of which would have implications to analyst forecasts and compliance costs.

Major automakers have drastically stepped up their EV ambitions over the last year. However, given the lag time in EV product development and supply constraints, compliance in the next couple of years may be more challenging due to the industry's underperformance relative to EPA targets since 2016 and depleting emission credit banks.

Increased credit trading is likely to fill the shortfall over the medium term. Relative to the initial proposal, the reduced compliance flexibility near-term will likely drive more reliance on credit trading, which in turn accrues value to credit generators such as the pure play EV manufacturers.

@Betty Jiang

Related content