2017-2025 CAFE Details Emerge, Loopholes Appear Gaping

A final rule for 2017-2025 CAFE standards won’t be published until September, but a pre-publication notice by the EPA [ PDF here] reveals some of the key details we’ve been looking for. The broad strokes, which we are already well aware of are shaping up as follows:

NHTSA currently intends to propose standards that would be projected to require, on an average industry fleet wide basis, 40.9 mpg in model year 2021, and 49.6 mpg in model year 2025. For passenger cars, the annual increase in stringency between model years 2017 to 2021 is expected to average 4.1 percent, and to average 4.3 percent between model years 2017 and 2025. Like EPA, in recognition of the utility requirements of full-size pick-up trucks and the unique challenges to improving fuel economy compared to other light-duty trucks and passenger cars, NHTSA intends to propose a lower annual rate of improvement for light-duty trucks in the early years of the program. For light-duty trucks, the proposed overall annual rate of fuel economy improvement in model years 2017 through 2021 would be 2.9 percent per year. NHTSA expects to change the slopes of the fuel economy footprint curves for light-duty trucks from those in the 2012-2016 rule, which would effectively make the annual rate of improvement for smaller light-duty trucks in model years 2017 through 2021 higher than 2.9 percent, and the annual rate of improvement for larger light-duty trucks over the same time period lower than 2.9 percent. For model years 2022 through 2025, NHTSA expects to propose conditional standards with an overall annual rate of fuel economy improvement for light-duty trucks of 4.7 percent per year

We had heard that trucks would improve their efficiency at a rate of 3.5% rather than 2.9% for the 2017-2021, and a 2022-2025 growth rate of 5% rather than 4.7%. But then, cars were supposed to improve by 5% in the 2017-2025 period, so both truck and car standards seem likely to end up lower than what the president’s report seemed to promise. But that’s not the only bad news for anyone hoping for tough fuel efficiency standards (or, good news for truck-dependent automakers)… with the release of this notice, we have an initial sense of the loopholes that will be included, and they appear to be of the hefty variety.

The first of the “key program elements” is the off-cycle credit program, which aims to

promote the early market penetration of tailpipe CO2/fuel consumption reducing technologies that are not appropriately accounted for in the current test procedure

This is typically thought to include improvements in C02 output from systems whose energy consumption or C02 output is not measured on the EPA test. According to the document

EPA and NHTSA intend to develop a minimum credit value on a subset of technologies for which we have sufficient data. We expect this list to include at least six defined technologies, if not more.9 The total number of technologies will be dependent on the available data. In order to make use of the pre-defined credit list of off-cycle technologies, a manufacturer must utilize the technology on a minimum percentage of the company’s vehicles. EPA and NHTSA will continue to assess the appropriate level and will propose a level in the NPRM. The specific percentage values may vary by off-cycle technology, and will consider the applicability of the technology across vehicle type. Under the planned proposal, the total gram/mile credit from the predefined list for any given model year would not exceed a 10 gram/mile10 impact on the company’s combined fleet average. This limit would only apply to the total for technologies where the company chooses to use the agency provided credit values. Automakers can apply for additional credits beyond the minimum credit value of listed technologies if they have sufficient supporting data.

We will, of course, have to see what technologies make it onto the EPA list, and what technologies the OEMs apply for credits with, but in general this provision makes sense. Certainly when compared to the other credit programs, it seems to be the most consistent with the stated goal of reducing fleetwide emissions by all possible means.

The second “key feature” is one of the biggest, and most objectionable of the bunch: the EV/plug-in “super credit.”

To facilitate market penetration of the most advanced vehicle technologies as rapidly as possible, EPA intends to propose an incentive multiplier for all electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and fuel cell vehicles (FCVs) sold in MYs 2017 through 2021. This multiplier approach means that each EV/PHEV/FCV would count as more than one vehicle in the manufacturer’s compliance calculation. EPA intends to propose that EVs and FCVs start with a multiplier value of 2.0 in MY 2017, phasing down to a value of 1.5 in MY 2021. PHEVs would start at a multiplier value of 1.6 in MY 2017 and phase down to a value of 1.3 in MY 2021. 11 These multipliers would be proposed for incorporation in EPA’s GHG program.

As an additional incentive for EVs, PHEVs and FCVs, EPA intends to propose allowing a value of 0 g/mile for the tailpipe compliance value for EVs, PHEVs (electricity usage) and FCVs for MY 2017-2021, with no limit on the quantity of vehicles eligible for 0 g/mi tailpipe emissions accounting. For MY 2022-2025, 0 g/mi will only be allowed up to a per-company cumulative sales cap based on significant penetration of these advanced vehicles in the marketplace. EPA intends to propose an appropriate cap in the NPRM.

Regulators argue that the credit system is designed to incentivize “game changing” technology, its major result will likely be less admirable. As I argued in an earlier piece which anticipated the resurrection of the “super credit,” this loophole will encourage automakers to build the overly expensive, advanced technology “green cars” that they themselves argue consumers aren’t interested in buying, because the credits will allow them to build more profitable non-compliant pickups by offsetting their C02 output. The net result: more expensive passenger cars (which the OEMs can blame on the government regulation) and business-as-usual on the incredibly profitable truck side of the equation. The combination of an artificial zero-C02-per-mile emission rating for EVs (in what universe is grid power carbon-neutral?) and a “multiplier” super credit was left out of the 2012-2016 standard because

EPA has concluded that the combination of the zero grams/mile and multiplier credits would be excessive.

Why? As the National Resources Defense Council argued, the credits would

undermine the emissions benefits of the program and will have the unintended consequence of slowing the development of conventional cleaner vehicle emission reduction technologies into the fleet

And because these credits are likely to be bankable, giving automakers the ability to “carry forward” or “carry back” their benefits to future or past model-years, the wiggle room is even greater. But loophole madness is just getting started…

Next up: “Incentives for “Game Changing” Technologies Performance for Full-Size Pickup Truck including Hybridization.” As if generous over-compliance credits for cars being used to offset under-compliance for pickups weren’t enough, there’s this:

The agencies intend to solicit information on technologies that offer significant increases in fuel efficiency and reduction in greenhouse gas emissions. We intend to propose a credit for manufacturers that employ significant quantities of hybridization on full size pickup trucks, by including a per-vehicle credit available for mild and strong hybrid electric vehicles (HEVs). This provides the opportunity to begin to transform the most challenging category of vehicles in terms of the penetration of advanced technologies, allowing additional opportunities to successfully achieve the higher levels of truck stringencies in MY 2022-2025.

The agencies intend that access to this credit is conditioned on a minimum penetration of the technology in a manufacturer’s full size pickup truck fleet, with defined criteria for a full size pickup truck (e.g., minimum bed size and minimum towing capability). The agencies intend to propose that mild HEV pickup trucks are eligible for a 10 g/mi12 credit during 2017-2021 if the technology is used on a minimum percentage of a company’s full size pickups, beginning with at least 30% of a company’s full size pickup production in 2017 and ramping up to at least 80% in 2021. Strong HEV pickup trucks would be eligible for a 20g/mi credit during 2017-2025 if the technology is used on at least 10% of the company’s full size pickups.

The agencies will propose specific definitions of mild and strong HEV pickup trucks, but expect to include stop/start, regenerative braking, minimum motor power, minimum battery voltage value and minimum energy storage capacity, or similar types of objective metrics. The agencies expect that a “mild” HEV will include moderate hybridization and not just start/stop, and that a “strong” HEV will include launch assist. The agencies also intend to propose a performance based incentive credit for full size pickup trucks which achieve a significant reduction below the applicable target. This credit could also be on the order of 10-20 gm/mile vehicle. The same vehicle would not receive credit under both the HEV and the performance based approaches.

Now, even with the reduced improvement rate and “super credits,” there might have been some incentive for automakers to invest in smaller, more efficient pickups of the kind that have been woefully underinvested-in in recent decades. But with this provision, the message is clear: rather than incentivizing downsizing, or even offering this credit to all trucks and letting the chips fall where they may, the government explicitly wants to keep full-sized trucks on the forefront by encouraging their hybridization (despite likely market trends in the opposite direction). And apparently it never occurred to regulators that creating a higher truck standard might have led to the hybridization of more pickups anyway… but sometimes loopholes create the need for more loopholes.

Then we get to the treatment of CNG, PHEV and Flex-fuel vehicles.

EPA intends that CO2 credits for plug-in hybrid electric vehicles (PHEVs) and bi-fuel compressed natural gas (CNG) vehicles will be based on the recognition that, once a consumer has paid several thousand dollars to be able to use a fuel that is considerably cheaper than gasoline, it is very likely that the consumer will seek to use the cheaper fuel as much as possible. Accordingly, for CO2 emissions compliance, EPA expects to use the Society of Automotive Engineers “utility factor” methodology (based on vehicle range on the alternative fuel and typical daily travel mileage) to determine the assumed percentage of operation on alternative fuel and percentage of operation on CNG for both PHEVs and bi-fuel CNG vehicles, along with the CO2 emissions test values on the alternative fuel and gasoline. EPA does not expect to extend this method to flexible fueled vehicles (FFVs) using E-85 and gasoline, since there is not a significant cost differential between an FFV and conventional gasoline vehicle and historically consumers have only fueled these vehicles with E85 a very small percentage of the time. Therefore, treatment of E85 FFVs will continue as the MY2016 program, based on actual usage of E85 which represents a real-world reduction attributed to alternative fuels.

In the NHTSA program for MYs 2017-2019, NHTSA expects that the fuel economy of dual fuel vehicles will be determined in the same manner as specified in the MY 2012-2016 rule, and as defined by EISA. Beginning in MY 2020, EISA does not specify how to measure the fuel economy of dual fuel vehicles, and it is expected NHTSA will propose to use the EPA “utility factor” methodology for PHEV and CNG vehicles to determine how to proportion the fuel economy when operating on gasoline or diesel fuel and the fuel economy when operating on the alternative fuel. For FFVs, NHTSA expects to propose to use the same methodology as EPA to determine how to proportion the fuel economy, which would be based on actual usage of E85. NHTSA expects to continue to use Petroleum Equivalency Factors and the incentive multipliers that are used in the MY 2012-2016 rule, however with no cap on the amount of fuel economy increase allowed.

The first half of this sounds reasonable, but when we turn to the flex-fuel credits, my anti-ethanol anger becomes to much to contain. Because ethanol offers no real environmental benefits, has numerous social and environmental costs and sucks billions of dollars in subsidies each year, all credits for flex-fuel vehicles should be cut. But even if that’s not possible, the methodology used to estimate FFV C02 output is not great. According to 2012-2016 rules

EPA will base MY 2012–2015 credits on the assumption that the vehicles would operate 50% of the time on the alternative fuel and 50% of the time on conventional fuel, resulting in CO2 emissions that are based on an arithmetic average of alternative fuel and conventional fuel CO2 emissions… the CO2 emissions value for the vehicle is calculated to be significantly lower than it actually would be otherwise, even if the vehicle were assumed to operate on the alternative fuel at all times. This represents a ‘‘credit’’ being provided to FFVs.

EPA is requiring for MY 2016 and later that manufacturers will need to reliably estimate the extent to which the alternative fuel is actually being used by vehicles in order to count the alternative fuel use in the vehicle’s CO2 emissions level determination… the default is to assume FFVs operate on 100% gasoline, and the emissions value for the FFV vehicle will be based on the vehicle’s tested value on gasoline. However, if a manufacturer can demonstrate that a portion of its FFVs are using an alternative fuel in use, then the FFV emissions compliance value can be calculated based on the vehicle’s tested value using the alternative fuel, prorated based on the percentage of the fleet using the alternative fuel in the field.

The most complex part of this approach is to establish what data are needed for a manufacturer to accurately demonstrate use of the alternative fuel, where the manufacturer intends for its performance to be calculated based on some use of alternative fuels.

In essence, the EPA will either do its own calculations on vehicle miles traveled per year for FFVs, and calculate E85 usage per VMT based on overall E85 sales. This process would have to take place every year. Alternatively, manufacturers could present their own data from demonstration studies to make an argument about what the C02 reduction actually is. In any case, the FFV system is a serious crapshoot, and though the 2016-2025 methodology may be a bit more accurate (if far more complicated), it still amounts to a credit because it doesn’t include “upstream” GHG emissions on a lifecycle basis. If the aim of CAFE is to reduce C02 output, this qualifies as yet another counter-productive loophole.

The final loophole is the most obvious: police and emergency response vehicles are exempt from CAFE. While this is very understandable in many respects, it certainly adds to the impression that government refuses to hold itself to the same standard as it holds its citizens. No surprises there, really.

Meanwhile, the mid-term review might seem like a loophole, and it’s certainly raised fears among environmental groups, but I see it simply as a safeguard. Nobody knows what the market will be like come 2025, so a review to make sure assumptions are on track makes sense for 2017. After all,

Where EPA decides that the standards are not appropriate, EPA will initiate a rulemaking to adopt standards that are appropriate under section 202(a), which could result in standards that are either less or more stringent [emphasis added]

So, what does this all mean? Again, these details will all be hammered out before a final rule is made official in September, but it’s obvious that the 2017-2025 standard will not only be easier on trucks than cars, but it also offers huge loopholes with which automakers can offset emissions for non-compliant but high-profit trucks. Though it’s a tough standard compared to what the industry has been used to, it’s also got loopholes (like the combination of 0g/mile EV rating and “multiplier credits”) that were considered before and rejected as too lenient. The proof of the pudding though, will be in the eating. If these credits allow automakers to plan for truck sales levels that disappear under the force of rising gas prices, it could be a disaster on par with the very first round of CAFE legislation. On the other hand, if truck-heavy manufacturers continue to make huge profits due to the loopholes in this proposal, the mid-term review could be a far more feisty battle. And, if nothing else, the layers of loopholes on top of already-complex calculations prove how much more efficient it would be to simply tax gas and let the market sort the details out. Sadly though, that’s simply not an option.

Like Batman in The Dark Knight, CAFE isn’t the policy we need, but it’s the policy we deserve.