US to tighten mileage standards and regulate CO2 emissions from vehicles

By 2016, U.S. automakers may be required to raise the fuel efficiency of their vehicles to a fleet-wide average to 35.5 miles per gallon while lowering CO2 emissions intensity to a fleet-wide average of 250 grams per mile. Manufacturers of passenger cars, light-duty-trucks, and medium-duty passenger vehicles will have to implement technological improvements to improve efficiency by about 5% per year, beginning in 2012. If approved, this national standard would represent a significant incremental strengthening of regulations that has the potential to help address climate change, reduce dependency on foreign oil, and create jobs. Given the integration of the North American auto industry, it will also be relevant to Canadian players in the sector.

The proposal ((the details of which are available online) was jointly drafted by the U.S. Department of Transportation's National Highway Transportation Safety Authority ("NHTSA") and the Environmental Protection Agency ("EPA"). According to the joint notice released by the two agencies, the plan "is consistent with the President's announcement on May 19, 2009 of a National Fuel Efficiency Policy of establishing consistent, harmonized, and streamlined requirements that would reduce greenhouse gas emissions and improve fuel economy for all new cars and light-duty trucks sold in the United States." The proposal was developed with input from automakers, union leaders, environmentalists, and state and local leaders.

Division of regulatory responsibility

Under the program, mile-per-gallon requirements will be enacted under the NHTSA Corporate Average Fuel Economy Standards. The grams per mile requirements will be enacted under the Clean Air Act by the EPA pursuant to its authority (and obligation) to regulate greenhouse gases as recognized in 549 U.S. 497 (2007).

In Massachusetts v. EPA, the Supreme Court opined that the direct linkage between fuel efficiency and tailpipe emissions, and the DOT's recognized authority to regulate the former, "in no way licenses EPA to shirk its environmental responsibilities. EPA has been charged with protecting the public"s 'health' and 'welfare', a statutory obligation wholly independent of DOT's mandate to promote energy efficiency." The Court concluded that "[t]he two obligations may overlap, but there is no reason to think the two agencies cannot both administer their obligations and yet avoid inconsistency."

Expected benefits

The program is forecasted to deliver the following benefits:

• reduce total carbon dioxide equivalent emissions by approximately 950 million metric tons over the lifetime of the vehicles sold in model years 2012 through 2016;
• reduce GHG emissions from the U.S. light-duty fleet by approximately 21 % by 2030 over the level that would occur in the absence of the program;
• save about 1.8 billion barrels of oil savings over the lifetime of vehicles sold in model years 2012 through 2016;
• improve energy security, given that light-duty vehicles are about 95 percent dependent on oil-based fuels;
• produce a net economic benefit of about $250 billion at a 3% discount rate, or $195 billion at a 7% discount rate.

The EPA and NHTSA estimate that the average cost increase for a model year 2016 vehicle due to the program will be less than US$1,100.

The program is also expected to be the stick that complements carrots offered under financial stimulus programs directed at the auto sector. Manufacturers will have a specific technical problem to tackle with the assistance of stimulus dollars.

Flexibility or loopholes

In response to concerns expressed by the auto sector, the EPA included features in the emissions part of the program that are being described by some of offering "flexibility" and by others as constituting "loopholes". Specifically, the program includes averaging, banking, trading ("ABT") provisions.

Averaging means that manufacturers will calculate production-weighted fleet average emissions at the end of the model year and compare their fleet average with a fleet average standard to determine compliance. If a manufacturer's average is better than the average standard, credits will be created that can be used in four ways:

• remedy deficits in previous compliance years;
• bank for use in future compliance years;
• transfer to other compliance category within the manufacturer's operations; or
• trade to other manufacturers.

According to the EPA, the ABT provisions are "generally consistent with those included in the CAFE program" (although the CAFE program limits the use of credits in some circumstances) and has "been an important part of many mobile source programs under Clean Air Act Title II, both for fuels programs as well as for engine and vehicle program." The EPA notes that "ABT is an integral part of the standard setting itself, and is not just an add-on to help reduce costs. In many cases, ABT resolves issues of lead-time or technical feasibility, allowing EPA to set a standard that is either numerically more stringent or goes into effect earlier than could have been justified otherwise."

Implications for Canada

Back in March 2009, Environment Minister Jim Prentice indicated that Canada would likely follow the U.S.'s lead: "At this point in the United States, it would appear as though they are headed toward a 35 mile a gallon standard by 2020 and that would start to come into effect in the 2011 model year...We've essentially been prepared to go in that same direction...what we're striving for is a North American standard because we know there's only one North American automobile industry."

Canadian auto and parts manufacturers should therefore expect to be required to meet the same standard. Given the integration of the industry across North America, they will have to do so whether or not Canada enacts similar regulations.

Canadians players may be at somewhat of a competitive disadvantage given the scale of the stimulus money that will likely be made available to their U.S. competitors.