Working Paper

Impacts of crediting zero-emission vehicles in the upcoming federal regulation for criteria pollutants from heavy-duty engines and vehicles

Fiscal policies

In August 2021, President Biden issued an executive order instructing the Environmental Protection Agency (EPA) to update emission standards for nitrogen oxides (NOx) for heavy-duty engines and vehicles beginning in model year 2027. The administration also ordered the consideration of zero-emission vehicles (ZEVs) in these updates (Exec. Order No. 14037, 2021). Consequently, the EPA announced that new standards for criteria pollutant emissions from heavy-duty vehicles will be finalized by December 2022 and take effect in model year 2027 (EPA, 2021).

The EPA is not the first agency to consider incorporating ZEVs into NOx regulations. The California Air Resources Board (CARB) will soon finalize new criteria pollutant standards starting in model year 2024 (California Air Resources Board, 2021). Along with these new standards, CARB will update their averaging banking and trading (ABT) program to allow manufacturers to generate NOx credits from sales of ZEV power trains. This ABT program, which will terminate after model year 2026, is designed to incentivize ZEV sales beyond the state-wide requirements mandated in the Advanced Clean Trucks (ACT) regulation (California Air Resources Board, 2020).

Starting in model year 2027, the EPA could exclude ZEVs from NOx ABT, which would align with CARB’s regulatory framework, or could instead elect to credit ZEVs through several different mechanisms. Allowing manufacturers to generate NOx credits through ZEV power trains could incentivize production of ZEVs but runs the risk of disincentivizing improvements in internal combustion engines (ICEs) technology because of the ability to average out high emitting ICEs with ZEV credits. In this paper, we briefly overview the EPA’s current ABT program for criteria pollutants and how CARB will incorporate ZEVs into its ABT program for NOx.  We then assess the impact that different crediting schemes could have on the required improvements for ICE NOx emissions by considering a fictional manufacturer producing both ZEV power trains and ICE engines. Finally, we provide recommendations for the EPA to consider as it develops its rulemaking to reduce criteria pollutant emissions from heavy-duty engines and vehicles.

Incentivizing heavy-duty ZEVs is a priority for the EPA, but it is worth considering whether NOx crediting is the best avenue for doing so. Overly generous crediting schemes may act less to incentivize a transition to ZEVs and more to undermine requirements for conventional vehicles by allowing manufacturers to produce ICEs with higher NOx emissions.

A more predictable and stringent policy for ensuring a transition to ZEVs would likely be to regulate a percentage of sales of heavy-duty ZEVs, similar to what has been enacted in California through the ACT. Absent a ZEV-specific regulation, it may be more beneficial to incentivize ZEVs via the ABT program in the next phase of regulation (i.e., Phase 3) for greenhouse gases and fuel efficiency for heavy-duty vehicles.

There are also benefits to be gained from aligning with the California ABT system. Starting in 2022, manufacturers will offer CA-only products to comply with their more stringent NOx standards. If the federal government adopts the same standards and crediting system, manufacturers can return to a single set of products once again in 2027.

For these reasons, we recommend that EPA not include ZEVs in NOx crediting schemes and instead find other avenues to incentivize their production. Including ZEVs in NOx crediting may incentivize transitions to ZEVS, but will most likely increase ICE NOx emissions in the process. We recommend that the EPA find other methods to catalyze ZEV production, preferably through direct regulation or as part of the Phase 3 greenhouse gas and fuel efficiency rulemaking.