On September 28, 2009, the Environmental Protection Agency (EPA) and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) jointly issued a proposed rule to establish light-duty vehicle greenhouse gas (GHG) standards and corporate average fuel economy (CAFE) standards. These standards, if finalized, would apply to passenger cars, light-duty trucks¹, and medium-duty passenger vehicles² for model years (MY) 2012 through 2016. Public comments are due on or before November 27, 2009.

This coordinated Federal GHG and fuel economy program has been named the National Program.³ EPA and NHTSA believe that the National Program “can achieve substantial reductions” of GHG emissions and improvements in fuel economy “based on technology that is already being commercially applied in most cases and that can be incorporated at a reasonable cost.” These technologies include engine technologies⁴, transmission technologies⁵, vehicle technologies⁶, electrification/accessory technologies⁷, and hybrid technologies.

EPA and NHTSA are proposing separate, attribute-based⁸ standards under their respective statutory authorities. EPA is proposing the following emissions standards under the Clean Air Act for 3 GHGs: (i) fleet-wide average carbon dioxide (CO₂) emission standards such that the estimated combined average emissions level would be 295 grams/mile in MY 2012⁹ and become more stringent by gradually decreasing each year to 250 grams/mile in MY 2016; (ii) a cap on nitrous oxide (N₂O) emissions at 0.010 grams/mile; and (iii) a cap on methane (CH₄) emissions at 0.030 grams/mile. NHTSA is proposing CAFE standards such that the estimated combined average fuel economy level would be 29.8 miles per gallon (mpg) in MY 2012 and become more stringent by gradually increasing each year to 34.1 mpg in MY 2016. Under the proposed standards, each manufacturer would have a GHG and CAFE target unique to its fleet, depending on the footprints of the vehicle models produced by that manufacturer. A manufacturer would have separate footprint-based standards for cars and trucks. Generally, larger vehicles would be subject to less stringent standards than smaller vehicles.

The agencies have proposed program flexibilities to assist manufacturers with achieving compliance. If the manufacturer’s fleet average CO₂/CAFE level does not meet the standard, it would generate debits. If the fleet average is better than the standard, the manufacturer would generate credits that could be carried back 3 years, carried forward 5 years. Credits could also be transferred across a manufacturer’s car-truck fleet¹⁰ and traded among manufacturers. Other program flexibilities include the following:

• Air conditioning credits for reducing related GHG emissions (for the EPA program only)
• Flex-fuel and alternative fuel vehicle credits (which are handled differently by EPA and NHTSA after MY 2015)
• Advanced technology vehicle credits (in the form of a multiplier) for electric vehicles, plug-in hybrids, and fuel cells (for the EPA program only)
• Credits for technologies that improve off-cycle emissions (for the EPA program only)
• A temporary lead-time allowance for manufacturers with MY vehicle sales less than 400,000 vehicles (for MYs 2012-2015 and for the EPA program only)
• Early generation of credits prior to the start of the National Program in MY 2012

If a manufacturer does not meet the proposed standards (after credit opportunities are exhausted), penalties could potentially attach. CAFE penalties are assessed for the entire noncomplying fleet at a rate of $5.50 times the number of vehicles in the fleet, times the number of tenths of mpg by which the fleet average falls below the standard. EPA is authorized to assess penalties of up to $37,500 per vehicle for violations of the proposed rule. EPA can consider CAFE penalties when determining appropriate remedies.

EPA and NHTSA recognize that the rulemaking may impose enormous costs — perhaps more than $60 billion during MYs 2012-2016 — on vehicle manufacturers during challenging economic times. Further, the agencies estimate that the average cost increase per vehicle for the consumer due to the proposed National Program ranges from $476 per vehicle in MY 2012 to $1,091 per vehicle in MY 2016. They believe, however, that consumers will see offsetting savings that exceed these price increases due to lower fuel costs and that sales losses will occur only if consumers fails to value fuel economy improvements at least as much as they pay in higher vehicle prices. In fact, except for MY 2012, NHTSA anticipates an increase in vehicle sales.

To decrease these burdens on small businesses, EPA is proposing to defer setting GHG emission standards for small entities meeting the Small Business Administration’s criteria of “small business” — i.e., small volume manufacturers, independent commercial importers, and alternative fuel vehicle converters. EPA would consider appropriate standards for these entities as part of a future rulemaking.

DOT AND EPA will hold three public hearings on this rulemaking on October 21, 2009 in Detroit, Michigan; October 23, 2009 in New York, New York; and October 27, 2009 in Los Angeles, California.

Please contact Steve O’Day, Phillip Hoover, or your SGR counsel if you are interested in filing public comments on the DOT/EPA proposed rule or if you have questions about how this rule might affect your company or industry.

Footnotes