Stricter federal fuel economy and emissions rules, outlined earlier this month in concert with the EPA, and coordinated with a goal for more EVs, will require automakers to make more efficient vehicles—along with some EVs.
But that isn’t the only thing they’ll have to contend with. The penalties for failing to comply with those rules will be stricter than ever.
That’s the message behind a notice of proposed rulemaking filed on Wednesday by the National Highway Traffic Safety Administration (NHTSA), which regulates fuel economy in concert with the EPA’s greenhouse gas emissions goals. The rulemaking intends to enforce higher penalties, sooner—perhaps even retroactively—for automakers who violate U.S. corporate average fuel economy standards (CAFE).
The history behind the fine involves what appears like a whole lot of procrastination at the expense of the environment, due to various economic and political factors. Under framework adopted in 1975 but not enforced until 1997, automakers have been due to pay a fine of just $5.50 per 0.1 mpg that its fleet average fell short against CAFE standards for a given model year, times the number of vehicles in that manufacturer’s fleet sales for the year.
There have been a lot of changes along the way. A credit system was adopted in 2011, permitting trading between automakers and the ability to carry credits over for up to three model years. A 2015 act allowed for an inflationary “catch-up” adjustment of the penalties, based on the Consumer Price Index; then a 2016 rule from NHTSA pushed the base penalty rate from $5.50 to $14.
Full enforcement on hold, since 2016
In 2016, the groups now combined as the Alliance for Automotive Innovation noted that CAFE compliance costs were at least $1 billion annually for the industry, and they successfully swayed the NHTSA to dismiss raising the penalty rate. Instead the NHTSA announced that it would apply the $14 rate in 2019, but after more hearings and petitions, the NHTSA delayed the adjustment, and in the final month of the Trump administration, decided in an interim final rule not to apply the higher penalties retroactively or enforce them for model year 2021.
Fuel economy and emissions progress by manufacturer, 2013-2018 [U.S. EPA]
Now the NHTSA, under the Biden administration, is considering reverting to the previous decision, possibly applying the higher penalty retroactively to the 2019 model year, resting on the 2016 final rule—or, perhaps, to apply them starting in 2023 when tighter fuel economy targets start to apply.
After the United States Court of Appeals for the Second Circuit restored the 2016 rule raising the penalty, in late 2020, the Alliance for Automotive Innovation submitted a request that the adjustment not be applied until model year 2022.
"The Alliance argued that, as in the December 2016 rule, applying the increased penalty to any violations that are temporally impossible to avoid or cannot practically be remedied does not serve the statutory purposes of deterring prohibited conduct or incentivizing favored conduct," the NHTSA explained. "According to the Alliance, doing so would effectively be punishing violators retroactively."
That effectively remains automakers' position today, voiced by the Alliance: Don't apply it retroactively.
"Following the Second Circuit’s decision last year, our petition to the Department of Transportation sought to ensure that the near tripling of the civil penalty rate is not applied retroactively to model years already produced or designed, since doing so would produce no environmental or fuel economy benefit," stated the Alliance for Automotive Innovation Friday in a response to Green Car Reports.
The difference could potentially mean billions of dollars, combined, for automakers. Estimates from the agency anticipate that for model year 2019 alone, the shortfall due from automakers would require them to pay an additional $178.5 million in penalties at the $14 rate. What makes this a bit complicated is that the higher penalties were already passed and made part of the rulemaking, so it’s an enforcement issue.
In the notice, the NHTSA says that it’s had many comments leaning toward a decision to apply them retroactively. “The comments further argued that delaying the application of the increased rate would affect future compliance because manufacturers may be incentivized to hold credits for model years when the higher rate will apply,” it stated.
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Prior to the Trump administration’s decision, the NHTSA notes that the State of New York, the Natural Resources Defense Council, the Sierra Club, and Tesla were all raising formal concerns with the rulemaking—especially other entities’ “inability to comment on the Alliance’s petition for rulemaking in advance.”
Further, the NHTSA speculates that if the penalty rate remained $5.50 until model year 2022, a manufacturer might game the system by paying for penalties under the lower rate and carrying over credits to use for the years with the higher rate.
Changing the economics of making gas guzzlers
As many argue, it’s a fine that amounts to bad optics but little more at this point, and there’s little incentive to alter core product decisions to avoid the fine. According to the NHTSA only five automakers have paid civil penalties since the 2011 model year, and it says that only one automaker paid “heavy penalties.” That’s Fiat Chrysler (FCA), which has in recent years opted to pay the fines and keep cranking out as many gas guzzlers as it can sell, while skewing its balance away from passenger cars.
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With the stiffer fine plus stiffer standards looming around the corner, starting with the 2023 model year, the greater sting of the economics might spark more innovation.
The agency is now seeking comment on what seems to be a bewildering array of possibilities. Already, automakers who exceed the standards can carry over credits while those who don’t meet them can use them to avoid fines. NHTSA is adding to the conversation the idea that manufacturers could “carry back” credits to apply to model years before they were earned.
After posting the last rulemaking, the agency received numerous comments essentially outlining that manufacturers have been on notice of the increase for a long, long time. Should that break go on for another year or two, or should automakers be held to the numbers retroactively? Let us know in your comments below and, perhaps, submit them to the agency.