New Proposed Fuel Economy Standards Cap Series of Federal Motor Vehicle Rulemakings

This summer, the Biden administration proposed several rules concerning mobile source emissions and fuel consumption. The National Highway Traffic Safety Administration (NHTSA) issued a draft rule increasing corporate average fuel economy (CAFE) requirements for most new vehicles. The Environmental Protection Agency (EPA) issued two proposals for more stringent tailpipe emission standards for new vehicles. Finally, the Department of Energy (DOE) proposed a rule that would require automakers to either sell many more electric vehicles (EVs) or substantially increase the efficiency of their gas-powered vehicles to maintain compliance with fuel economy standards. 

New Vehicle Fuel Economy Standards

NHTSA sets annual fuel economy or efficiency requirements for passenger cars, light trucks, and heavy-duty pickup trucks and vans (HDPUVs). By statute, these standards must represent “the maximum feasible average fuel economy level that [NHTSA] decides the manufacturers can achieve in that model year.” NHTSA uses data and modeling to calculate standards, which take the form of fuel economy targets expressed as functions of vehicle footprint (i.e., wheelbase times width) for passenger cars and for light trucks; for HDPUVs, the standards take the form of fuel consumption targets expressed as functions of vehicle “work factor” (i.e., hauling and towing capabilities). Each manufacturer thus has unique fleetwide standards for each vehicle category. Automakers comply with the standards by achieving the target fuel economy, paying a penalty, or using averaging, banking, and trading methods.

In August, NHTSA proposed new standards for the three classifications of vehicles discussed above. The passenger car and light truck standards will apply to model years (Mys) 2027–2032, and the HDPUV standards will cover MYs 2030–2035. The agency is proposing to increase stringency at 2 percent per year for passenger cars, 4 percent per year for light trucks, and 10 percent per year for HDPUVs.

NHTSA’s modeling considers scores of vehicle technologies as it maps out potential compliance pathways for a given scenario. However, NHTSA “may not consider the fuel economy of dedicated automobiles,” which are vehicles “that operate[] only on alternative fuel,” in prospectively setting passenger car and light truck standards. Largely for this reason, NHTSA’s standards are less stringent than EPA’s greenhouse gas (GHG) emission standards, discussed below. But because EVs already make up a substantial portion of new vehicle standards, NHTSA considered them for baseline purposes, as well as California’s zero-emission vehicle program and the Inflation Reduction Act’s (IRA) manufacturing and vehicle tax credits. Additionally, as explained in further detail below, EVs are still counted toward fleet fuel economy using a petroleum equivalency factor (PEF).

New Vehicle Tailpipe Emission Standards

The Clean Air Act requires EPA to set emissions standards for new motor vehicles and engines. Although these standards are technology-based, the statute does not prescribe a particular technology or technologies that must be used to set the standards.

In May, EPA proposed new, more stringent standards for GHG (and criteria pollutant) emissions from light- and medium-duty vehicles. The GHG standards are based on fleet average carbon dioxide (CO₂) emissions. Similar to CAFE standards, light-duty vehicle models are assigned CO₂ targets based on their footprint, while medium-duty targets are based on a work factor attribute. The fleet-average standards are the production-weighted fleet averages of the targets for all the vehicles in the manufacturer’s light- and medium-duty fleets for a given MY.

In contrast to NHTSA, EPA framed its proposal with a discussion of electrification trends, which it attributed in large part to increasing federal and state (i.e., California) GHG stringency standards and, more recently, vehicle purchase and charging incentives provided by the IRA and Bipartisan Infrastructure Law (BIL). As such, EPA said it “considers these [electrification] technologies to be an available and feasible way to greatly reduce emissions, and expects that these technologies will likely play a significant role in meeting the proposed standards for both criteria pollutants and GHGs.” As proposed, the GHG emissions standards will increase in stringency each MY, such that by 2032, EPA projects that two-thirds of new light-duty vehicles sold in the United States will be EVs.

In April, EPA proposed its Phase 3 GHG emissions standards for heavy-duty vehicles, which will cover model years 2027 through 2032. EPA assigns GHG emissions limits for heavy-duty vehicles based on several factors, including vehicle use and weight. Manufacturers generate credits based on the production volume of the vehicles in the averaging set and their respective emission levels relative to the standard. Manufacturers may use credits to offset higher emission levels from vehicles in the same averaging set such that the averaging set meets the standards on “average,” “bank” the credits for later use, or “trade” the credits to another manufacturer.

Again, EPA recognized that since its last rulemaking, “[s]everal significant developments have occurred . . . that point to [ZEV] technologies becoming more readily available much sooner than we had previously projected for the [heavy-duty] sector.” To that end, the agency proposed more stringent CO₂ standards for some MY 2027 vehicles and new, increasingly stringent CO₂ standards for MY 2028–2032. As with previous rules and its CAA mandate, the proposed standards do not mandate the use of a specific technology; rather, “EPA anticipates that a compliant fleet under the proposed standards would include a diverse range of technologies (e.g., transmission technologies, aerodynamic improvements, engine technologies, battery electric powertrains).”

Updated EV Petroleum Equivalency Factor

In April, DOE proposed a new PEF that NHTSA will apply to EVs for CAFE compliance purposes, starting in MY 2027. The proposal followed a 2021 petition from environmental groups requesting DOE revisit the value. The groups argued that the value’s basis in “outdated data and circumstances” rendered it too high, since an artificially high value means that an automaker gets too much “bang for its buck” and can use a smaller fleet of EVs to offset a larger fleet of gas-powered vehicles, other things being equal.

DOE agreed it was time for an update and identified the gasoline-equivalent energy content of electricity on a full lifecycle basis as the dispositive factor for its updated PEF value. DOE used a 2029 projected mix of electricity sources and the production and generation efficiencies of those fuels to calculate a proposed PEF of 23,153 Wh/gal, a steep decrease from the current value. The proposed factor means automakers will have to sell over three times as many EVs as they currently sell to receive the same reduction in their fleetwide average for purposes of CAFE compliance.

What’s Next?

Hundreds of comment letters have been received across the three rulemakings, including from vehicle and fueling trade groups, public interest organizations, automakers, think tanks, and states and cities. NHTSA must finalize its CAFE standards by March 31, 2025, and DOE is expected to finalize its PEF rule in early 2024. EPA’s final heavy-duty emissions rule is expected by the end of 2023, with the light-duty rule finalization to follow in early 2024.

Once finalized, EPA’s and NHTSA’s emissions and fuel economy rules will almost certainly face legal challenges. DOE’s rule could prove less contentious but may still face lawsuits.

Challenges to the emissions rules may follow a path similar to the light-duty petitions currently playing out in the D.C. Circuit. Following EPA’s promulgation of the most recent light-duty emissions rule, Texas and 14 other states petitioned for review of the rule, as did a number of pro-liquid transportation fuel trade associations and other private parties. The private petitioners explicitly attacked the rule as EPA (and NHTSA) “on a mission to phase out the internal-combustion engine and electrify the Nation’s vehicle fleet.” And both the state and private petitioners extensively cited the Supreme Court’s 2022 decision in West Virginia v. EPA for the proposition that electrifying the nation’s light-duty fleet is a “major question” that only Congress may address.

Similarly, challenges to NHTSA’s rule could echo current litigation around previous standards, where opponents have argued that the agency “may not set fuel-economy standards that are feasible only if automakers produce [EVs],” while the agency has argued that its standards “represent the maximum level that . . . manufacturers can feasibly achieve without producing new alternative fuel vehicle models.”

Anticipating legal challenges, EPA framed its rules as part of a larger, congressionally sanctioned push for electrification. The agency pointed to studies showing rapid electrification due in large part to the IRA and BIL even absent more stringent GHG emissions standards. Additionally, the IRA’s new definition of “greenhouse gas” as “the air pollutants carbon dioxide, hydrofluorocarbons, methane, nitrous oxide, perfluorocarbons, and sulfur hexafluoride” may also help shield the emissions rules from “major questions” challenges.

Congress also may elect to invoke the Congressional Review Act (CRA) to nullify the rules; subject to certain timing constraints, if the House and Senate each pass a resolution of disapproval and the president signs it (or Congress overrides a presidential veto), a rule becomes void. In May 2023, Congress used the CRA to void EPA’s January 2023 heavy-duty vehicle final rule, though President Biden vetoed the measure. Congress could also pass legislation mandating more specific guardrails for the proposals or simply prohibiting their enactment. Additionally, as we have recently seen, a new presidential administration could rewrite any of the regulations, subject, of course, to judicial constraints.