Earlier this week, the Environmental Protection Agency (EPA) released its final determination in its mid-term review of greenhouse gas emissions (GHG) standards that will govern all new passenger vehicles sold in the United States from 2022 through 2025. As expected, the agency decided that the standards are too stringent, and it now plans to ease them.

A lot has been written about EPA’s move. But in reading through the determination, something new caught my eye that I suspect many people glossed over. As mundane as it may seem, the section explains a lot about why auto companies wanted to revisit the standards, what is really at stake, and why we may be about to miss out on improving one of the most innovative aspects of the current policy: the credit market.

Here is the relevant text, which comes in a section about electric vehicle sales and is intended to explain one of the major differences between the original determination completed by the Obama Administration and the one completed by the Trump Administration:

“The agency’s January 2017 Determination was completed at a time when the trends and data…showed that the majority of the major car-manufacturing companies were “over-complying” with their relative GHG compliance requirements and building up credits. EPA’s latest data show that starting in MY 2016, many companies, for the first time, had to rely on credits in order to comply with the program. While these companies did remain in compliance, they are relying on banked credits which suggests that it may be increasingly difficult for them to comply going forward as they use up their supply of credits. Additionally, the stringency curve dramatically increases at around the same time these credits could run out, further complicating the feasibility of compliance for MY 2022 – 2025.”

This is true. At the time the previous determination was made, the available data suggested that the industry as a whole was producing vehicles whose performance exceeded the standards. As a result, companies were generating “credits,” denominated in tonnes of greenhouse gas emissions, which they could bank to cover future shortfalls. Moreover, if a company was not so worried about future shortfalls, they could sell their excess credits to other companies that needed them.

Continue reading at Forbes…

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