New targets related to fuel economy in the US should herald significant changes in the EV market.

On Friday, April 1, the National Highway, Transportation and Safety Administration (NHTSA) released the final national fuel economy standards for 2024-2026 model year light vehicles. The new targets replace the 1.5%/year fuel economy improvements contained in the Safer Affordable Fuel-Efficient (SAFE) regulations passed in 2020.

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By the 2026 model year, the new fuel economy targets closely align with the EPA’s CO2 targets released in December 2021. The result is a projected 49 mpg national light vehicle fleet average for the 2026 model year. Our vehicle and powertrain forecasts already account for the changes finalised in the new fuel economy law due to its eventual parity with the pre-existing EPA standards.

In drafting the new fuel economy targets, the committee took into account California and the Section 177 states which have adopted or will adopt, Zero Emission Vehicle (ZEV) regulatory targets. It also considered the fact that despite the weaker SAFE regulations, some OEMs chose to continue pursuing more ambitious CO2 goals, signing a separate pact with California. Also, sales of Battery Electric Vehicle (BEV) models have increased dramatically in the US over the last couple of years, from a 1.8% market share in 2020, through 2.7% in 2021, to 4.3.% in the first two months of sales in 2022.

While BEV sales are not mandated, they will play a strong role for many OEMs in meeting the standards. Tesla still commands the US BEV market for the moment (making up 66% of sales in 2021) but other brands are rolling out appealing, affordable, high-volume models with starting prices of around US$40,000 including the Volkswagen ID.4 and Ford Mustang Mach-E, which are helping spur sales. Building on this momentum, the Chevrolet Equinox EV will launch in 2023 with a starting price of around US$30,000. There will also be several full-size electric pickups available, starting with the recently launched Hummer EV and Ford F-150 Lightning, making BEV market growth all but certain. The speedy rise of the average vehicle transaction price to over US$44,000 this year, according to JD Power’s Power Information Network, assists in removing sticker shock in buying a BEV. This is especially true as many BEVs still qualify for the US$7,500 national plug-in electric vehicle credit, with several states offering additional incentives.

When announcing the new rules, Transportation Secretary Pete Buttigieg said the updated standards will help insulate US consumers from future gasoline price shocks of the type that are now being experienced. With these changes now finalised through 2026, the EPA and NHTSA will begin working to form regulatory targets for the 2027 model year and beyond. We expect the annual improvements in fuel economy and CO2 reduction to be set at between five and ten per cent, with no specific prerequisite for ZEV sales share or absolute volumes.

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These regulatory actions are all part of President Biden’s bigger picture, which aims to reduce the climate impact of the US transportation sector. These policies will work hand in hand with the Infrastructure Investment and Jobs Act (the Bipartisan Infrastructure Law) passed last November, which entails spending US$7.5 billion to expand the US electric vehicle charging infrastructure. Furthermore, it invests over US$65 billion into updating the nation’s electrical grid, expanding the use of renewable energy, and lowering its costs. These investments work in consort with other investments and regulations to reduce US greenhouse gas emissions by 50%+ in 2030 from 2005 levels.

Kevin Riddell, Senior Manager, Powertrain Forecasting, LMC Automotive