The Biden administration has been using the carrot-and-stick approach to get the U.S. auto industry to make more zero-emission vehicles. Tax credits for the purchase of electric vehicles are the carrot. Now comes the stick.
On Wednesday morning, Environmental Protection Agency Administrator Michael Regan will outline stricter tailpipe emission standards at an event in Washington. It is not known exactly what will be proposed. What the standards will do is. In the future, they will make it harder and more expensive to sell cars that burn gas and emit carbon dioxide.
Carbon dioxide is the main greenhouse gas responsible for global climate change.
Wednesday’s rules will be the latest step President Biden has taken to reduce the amount of greenhouse gases emitted by American cars. In August 2021, Biden hosted an event at the White House where members of several auto companies pledged to electrify 50% of all new car sales in the US by 2030.
(EV leader Tesla (TSLA) was not invited to this event.)
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Biden’s target includes battery electric vehicles, or BEVs, plug-in hybrid vehicles, or PHEVs, as well as fuel cell vehicles. Only a handful of fuel cell vehicles are sold each year in the U.S. PHEV sales are significant, but only accounted for about 20% of all plug-in sales in the U.S. in 2022. BEVs accounted for about 80 %.
PHEVs accounted for nearly 50% of US plug-in vehicle sales in 2017. Cheaper and more efficient batteries mean that putting a gas and electric powertrain in a car these days adds too much cost without much benefit.
After the 2021 event, automakers such as Ford Motor ( F ) and General Motors ( GM ) pledged to spend hundreds of billions of dollars over the next few years developing EV models, as well as in the construction of the assembly and the capacity of the battery necessary to produce them.
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To help automakers meet their commitments, the Biden administration passed the 2022 Inflation Reduction Act, which included tax credits for the purchase of electric vehicles. The credit, of up to $7,500 per qualifying electric vehicle, helps keep electric vehicles attractive and affordable to U.S. car buyers.
Biden has also contributed billions to improve charging infrastructure in the U.S. Having a place to plug in also makes electric vehicles more attractive.
Automakers are benefiting from both the growing charging network and vehicle credits, though the credits haven’t been as big a boon as some had hoped. The IRS will release a new credit guide on April 17. Some electric vehicles will lose half or all of the credit because of where the batteries and battery materials come from.
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The industry, however, will feel some pain from tightening emissions restrictions. EPA Administrator Regan could equate the new standards to a new penetration rate for zero-emission car sales. Instead of 50% in 2030, it could push them to 60% in 2032.
Practically speaking, penetration rates are not that important. What the new regulations boil down to is this: it will be more expensive for automakers to ignore emissions standards.
Automakers are already required to meet average fuel economy standards. Failure to do so results in fines. Fiat Chrysler
,
now part of Stellantis ( STLA ), paid a $79 million fine for failing to meet its fuel economy goals for the 2017 model year. That’s the latest available government data.
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The new rules will mean that fines will increase, increasing the cost of making traditional vehicles, while credits and technological improvements reduce the cost of making electric vehicles.
That’s how it’s supposed to work anyway.
After the announcement, investors will hear countless analysts and auto industry experts debate whether or not the targets are realistic. What is harder to calculate is what investors will do with car stocks.
The auto stock that can be moved are all the usual suspects. There are shares of pure-play EV makers, including Tesla
,
Rivian Automotive (RIVN), Polestar Automotive (PSNY) and Lucid (LCID).
Shares of Ford, GM and Stellantis can also move. All three plan to sell millions of electric vehicles a year in North America by the end of the decade.
The impact of the new EPA rules will last for decades. At the moment, investors are not focused on 2030. There is too much wrong with 2023.
Rising interest rates and declining vehicle affordability have investors worried about demand for new cars and automaker profits. The average stock in the Russell 3000 auto and auto parts index is down about 40% over the past 12 months, while the
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S&P 500
i
Dow Jones Industrial Average
they have dropped by 9% and 3%, respectively, in the same period.
Write to Al Root at allen.root@dowjones.com
