On March 31, the U.S. Environmental Protection Agency and the National Highway Traffic Safety Administration finalized new standards for corporate average fuel economy, or CAFE, and carbon dioxide emissions for passenger vehicles and light duty trucks sold from model years 2021 through 2026.[1]

This is Part 2 of the Safer Affordable Fuel-Efficient Vehicles, or SAFE, Rule. The Trump administration issued Part 1 of the SAFE Rule in September 2019, which withdrew the preemption waiver the EPA previously granted California under Section 209 of the Clean Air Act.[2]

The January 2013 waiver authorized California to set more stringent tailpipe greenhouse gas standards — which other states could adopt — and to enforce its zero-emission vehicles, or ZEV, mandate. Since then, 13 "me too" states have adopted California's GHG emissions standards under Clean Air Act Section 177. Part 1 of the SAFE Rule asserted that state GHG and ZEV regulations are preempted by federal law.

The EPA and the NHTSA have declared the SAFE Rule "the largest deregulatory initiative of this administration," and stated that the new standards will reduce regulatory costs by as much as $100 billion through model year 2029.[3] But because transportation is the largest source of GHGs in the United States — with passenger cars making up the bulk of those emissions — the new standards will have a significant impact on the nation's total GHG emissions.[4]

Litigation brought by 24 states and environmental groups challenging Part 1 is ongoing.[5] States and environmental groups have already pledged to also challenge Part 2.

The Latest CAFE and GHG Standards

The CAFE and GHG emissions standards finalized in the SAFE Rule will increase in stringency by 1.5% per year over model year 2020 levels for model years 2021-2026, which is more stringent than the zero percent increase initially proffered by the EPA and the NHTSA in the proposed rule.[6]

However, the SAFE Rule's final standards remain less stringent than the 5% annual increase required by the Obama administration rule.[7] According to the EPA and the NHTSA, the new standards "fit the pattern of gradual, tough, but feasible stringency increases that take into account real world performance, shifts in fuel prices, and changes in consumer behavior toward crossovers and SUVs and away from more efficient sedans."[8]

The EPA and NHTSA project that the new standards will require automakers to achieve fleet averages of 201 grams per mile of CO2 and 40.5 miles per gallon by model year 2030.[9] The agencies note that typically (1) real-world CO2 is 25% higher, and (2) real-world fuel economy is 20% lower, due to compliance flexibilities and limitations of regulatory test procedures. Accordingly, the agencies project a real-world average of 33.2 miles per gallon, versus about 39 miles per gallon under the Obama-era rule.[10]

Changes to Compliance Flexibilities

The majority of existing compliance flexibilities — which allow automakers to achieve compliance with the CAFE and GHG emissions standards by using clean technologies, credit trading and other mechanisms – will not change.[11] Notably, the new rule:

• Continues to offer credits for reducing leakage of air conditioning GHGs;
• Extends the "0 grams/mile" assumption for electric vehicles through model year 2026, meaning the EPA will not count the upstream emissions caused by the electricity usage of such vehicles;
• Ends credits for producing full-size pickup trucks that are hybrids or otherwise outperform their GHG targets starting in model year 2022;
• Adds a 2.0 credit multiplier for natural gas vehicles through model year 2026. The 2.0 credit multiplier allows automakers to double count these vehicles for emissions compliance calculations; and
• Does not extend the credit multipliers for electric vehicles and fuel cell vehicles that are scheduled to phase out after model year 2021.[12]

Outlook

Part 2 of the SAFE Rule takes effect 60 days after publication in the Federal Register. States and environmental groups have already pledged to challenge the final rule in court.

SAFE Rule litigation will lead to ongoing regulatory uncertainty. Automakers that disregard California GHG and ZEV standards, and rely exclusively on the new federal CAFE and GHG emissions standards, do so at their own risk. If, for example, judicial challenges overturn the new federal rules, automakers may find themselves scrambling to comply with stricter standards, given the long lead times for vehicle development and production.

Automakers could face a significant challenge if only SAFE Rule Part 2 is upheld, but not Part 1. In that scenario, the California waiver presumably would be left intact, allowing California — and the 13 states that have adopted California standards — to impose stricter GHG emissions standards than apply to the rest of the country.[13] This could be a challenging outcome for automakers who have striven for years to ensure that California's standards are harmonized with the federal standard, to maintain one national standard.

In the meantime, four major automakers — Volkswagen Group of America Inc., America Honda Motor Co. Inc., Ford Motor Co. and BMW of North America LLC — entered into a light-duty greenhouse gas emissions standards voluntary agreement with California.[14] These automakers committed to reducing their vehicles' average GHG emissions at an annual rate of 3.7% (year-over-year) beginning in model year 2022 through model year 2026.

The agreement's credit multipliers also differ from those in the SAFE Rule: the agreement allows double credit for battery and fuel cell electric vehicles and a 1.6 credit multiplier for plug-in hybrid electric vehicles through model year 2024. Participating automakers would be excused from accounting for upstream emissions in their compliance calculations, and would be eligible for up to an additional 5 g/mi of credits for off-cycle emission reduction measures.

Volvo recently announced that it is in talks with California to enter a similar voluntary agreement.[15] It remains to be seen whether states that have adopted California standards will pursue similar agreements with automakers, and whether additional automakers will seek to join those agreements.

Canada has also pledged to align mileage requirements with California.[16] At any rate, automakers must now evaluate numerous litigation and rulemaking scenarios in determining their fuel economy and GHG compliance strategies.

©2020. Published in Law360, Online, May 6, 2020, by LexisNexis Group. Reproduced with permission. All rights reserved.

[1] Prepublication final rule available at https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/final_safe_preamble_web_version_200330.pdf.

[2] The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule Part One: One National Program, 84 Fed. Reg. 51,310 (Sept. 27, 2019).

[3] EPA, U.S. DOT and EPA Put Safety and American Families First with Final Rule on Fuel Economy Standards (Mar. 31, 2020), https://www.epa.gov/newsreleases/us-dot-and-epa-put-safety-and-american-families-first-final-rule-fuel-economy-standards.

[4] EPA, Fast Facts: U.S. Transportation Greenhouse Gas Emissions 1990-2017 at 2 (June 2019), https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100WUHR.pdf.

[5] Union of Concerned Scientists v. NHTSA, No. 19-1230 (D.C. Cir.); California v. Chao, Case No. 1:19-cv-02826-KBJ (D.D.C. Sept. 20, 2019) (stayed pending resolution of related litigation before the D.C. Circuit).

[6] SAFE Rule Part II at 18.

[7] Id.

[8] Id. at 7.

[9] Id.

[10] Id. at 7, 23.

[11] Id. at 11-12.

[12] Id. at 51-55.

[13] Those 13 states are Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington. California Air Resources Board, States that have Adopted California's Vehicle Standards under Section 177 of the Federal Clean Air Act (Aug. 19, 2019), https://ww2.arb.ca.gov/sites/default/files/2019-03/177-states.pdf.

[14] Agreement available at https://ww2.arb.ca.gov/sites/default/files/2019-07/Auto%20Terms%20Signed.pdf.

[15] Reuters, Volvo Cars in talks to reach emissions deal with California (Mar. 21, 2020), https://www.reuters.com/article/us-autos-emissions-volvo/volvo-cars-in-talks-to-reach-emissions-deal-with-california-idUSKBN21I34L.

[16] Juliet Eilperin and Brady Dennis, Major automakers strike climate deal with California, rebuffing Trump on proposed mileage freeze, Wash. Post, July 25, 2019, https://www.washingtonpost.com/climate-environment/2019/07/25/major-automakers-strike-climate-deal-with-california-rebuffing-trump-proposed-mileage-freeze/.