On December 30, 2021, the U.S. Environmental Protection Agency ("EPA") published a final rule (the "Final Rule") setting revised greenhouse gas emissions standards for passenger cars and light-duty trucks with model years ("MY") 2023-2026. The final standards increase in stringency year-over-year by 10% in MY 2023, 5% in MY 2024, 6.6% in MY 2025, and by more than 10% in MY 2026. According to EPA, the 10% increase in MY 2023 is appropriate given the technological investments industry was on track to make under the previous standards. In addition, EPA determined that the sharp increase in MY 2025-2026 is justified given the lead time and in light of the accelerating transition to electrified vehicles that has already begun. The MY 2025-2026 standards represent the most stringent fuel efficiency standards finalized by EPA to date.

The Final Rule is a consequence of President Biden's Executive Order 13990, "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis," which in part directed EPA to consider suspending, revising, or rescinding the standards previously set under the Trump administration's Safer Affordable Fuel-Efficient ("SAFE") Vehicles Rule, which is discussed in our prior article. In deciding to implement more stringent standards than were set under the SAFE Vehicles Rule, EPA in the Final Rule found that it was more appropriate to place greater weight on the magnitude and benefits of reducing emissions that endanger public health and welfare, while continuing to consider compliance costs, lead time, and other relevant factors. 

EPA believes that the standards set in the Final Rule can be met with gradually increasing sales of plug-in electric vehicles in the United States, from about 7% market share in MY 2023 (including both fully electric vehicles and plug-in hybrid vehicles) up to about 17% in MY 2026. And based on compliance with the final revised standards, the industry-wide average emissions target for new light-duty vehicles is projected to be 161 grams of carbon dioxide per mile in MY 2026. It has been reported that this will translate into an industrywide average fuel economy of 40 miles per gallon at the end of 2026, as opposed to the 32 miles per gallon average that would have been required under the SAFE Vehicles Rule.

The Final Rule goes into effect on February 28, 2022. In the Final Rule, EPA announced that it is planning to initiate a rulemaking to establish multipollutant emission standards for MY 2027 and later, consistent with President Biden's Executive Order 14037, "Strengthening American Leadership to Clean Cars and Trucks." In addition to complying with the emission standards in the Final Rule, regulated entities should closely monitor this subsequent rulemaking, as its standards will extend to at least MY 2030, will apply to light-duty vehicles as well as medium-duty vehicles, and is likely to significantly build on the standards established in the Final Rule.