The Inflation Reduction Act Has Transformed Transportation Decarbonization, With Major Implications for EPA Vehicle Standards

On August 16, 2022, President Joe Biden signed the historic Inflation Reduction Act into law, enacting what may prove to be the most consequential economic and climate legislation in modern American history. The Inflation Reduction Act provides sweeping incentives for developing and producing clean energy technologies and has catalyzed a resurgence in American manufacturing capacity.¹ The combined investments of the Inflation Reduction Act and the 2021 Infrastructure Investment and Jobs Act (IIJA)² have transformed the economics of electrification, and already, billions of dollars have flowed into battery and electric vehicle (EV) manufacturing. In this new landscape of accelerating electric vehicle deployment, the U.S. Environmental Protection Agency (EPA), which the Clean Air Act mandates reduce both pollution and greenhouse gas (GHG) emissions from vehicles, can now set emissions standards stronger than what was possible even five years ago.

On April 12, 2023, the EPA announced new proposed light- and medium-duty vehicle standards, taking into account some of the Inflation Reduction Act’s investments.³ What some critics characterize as the EPA forcing EV adoption is actually the reverse: The EPA is adjusting its standard to the already changing automotive market. But there is evidence that the EPA could, and should, go further. Following recommendations from the Center for American Progress on July 5, 2023,⁴ the EPA should finalize new, stringent emissions standards that account for the changing EV landscape and go beyond its recent proposal as soon as possible and no later than spring 2024.

Since the passage of the IIJA and the Inflation Reduction Act, consumer demand for EVs has further accelerated and will hit 1 million annual sales this year.⁶ Consumer Reports finds that EV demand increased by 350 percent between 2020 and 2022, and there are now 45 interested buyers for every EV produced.⁷ In July 2023, EVs and plug-in hybrids totaled 9 percent of U.S. light-duty vehicle sales—a 53 percent increase from the previous July.⁸ Manufacturers have responded by ramping up investments in EV production. Since the passage of the Inflation Reduction Act and IIJA, announced automaker investments in EV manufacturing have jumped 406 percent,⁹ with 56 percent of the total announced investment in EVs since 2015 having been made since the passage of the Inflation Reduction Act. These trends have dramatically increased anticipated U.S. EV and battery manufacturing capability. By 2026, the United States is expected to be able to manufacture more than 4.6 million EVs¹⁰ and enough batteries to supply more than 11.8 million EVs per year.¹¹ And by 2030, Argonne National Laboratory estimates that the United States will produce enough batteries to power up to 13 million new EVs per year.¹²

The text box below breaks down the key act provisions that are driving the EV manufacturing surge.

The transportation sector is the single-largest source of greenhouse gas emissions in the United States, accounting for 28 percent of U.S. emissions in 2021.²⁹ Furthermore, unlike other sectors of the U.S. economy, emissions from transportation have increased since 1990, with transportation emissions up 19 percent in 2021 relative to that base year.³⁰ Heightened emissions have been driven primarily by increased travel demand and the resulting increased vehicle use.³¹ Fully electric vehicles emit, on average, 77.6 percent fewer GHGs annually than their internal gasoline equivalents and have no direct tailpipe emissions.³² This emissions benefit remains true even when accounting for emissions from materials procurement and manufacturing. Over its life cycle, the average EV emits 64 percent less than a comparable gasoline car.³³ Reducing emissions from transportation is critical to combating climate change, and electrifying transportation is one key method to reduce GHG emissions.

Under the Clean Air Act,⁴⁴ the U.S. Environmental Protection Agency is required to set emissions standards for both GHG and local pollutant emissions from vehicles, and it is now poised to do just that. In order to fulfill this obligation, the agency proposed new standards for new model year 2027–2032 light- and medium-duty vehicles in April 2023. These newly proposed standards,⁴⁵ if finalized, make much-needed progress in addressing vehicle pollution and are expected to yield significant health and climate benefits, reducing GHG emissions by 56 percent and local pollutant emissions by 60 percent relative to the existing standards.⁴⁶ These reductions are expected to net benefits of up to $1.6 trillion—including climate, health, and energy security benefits, as well as significant fuel cost savings for consumers.⁴⁷

The transformed economics of electric vehicles as a result of the Inflation Reduction Act have major implications for the EPA’s standards. Thanks to market trends and public investment, EV market share is expected to increase significantly by 2032, potentially reaching either 67 percent, according to the ICCT,⁵⁴ or 76 percent, according to the Rocky Mountain Institute.⁵⁵ Because EPA standards are based on fleet averages, this anticipated uptick in EV adoption requires the agency to tighten its emissions standards significantly to account for the new baseline and technology deployment.

Currently, the EPA’s assumptions about the growing EV market are too conservative. The rapidly accelerating EV market and urgent need to address climate change have created an opportunity—and a necessity—for the EPA to adopt even stronger standards than those it has proposed. In its proposal, the EPA included three alternative standards for consideration. In formal comments to the agency, CAP supported adoption of a standard at least as strong as “Alternative 1,” the most stringent standard the EPA proposed.⁵⁶ Alternative 1 features more robust emissions targets that are, on average, 10 g/mi lower than those of the currently proposed standard. The EPA projects Alternative 1’s more stringent emissions targets would lead to an additional $200 billion in net benefits, including $100 billion in fuel cost savings.⁵⁷

Although the initial proposal is a strong start, CAP has recommended in its public comments that the EPA make the following modifications when the agency issues its final rule, expected in early spring 2024:⁵⁸

• Increase later-year stringency. The EPA’s Alternative 1 features robust emissions reductions from 2027 through 2029, with emissions targets decreasing by at least 17 g/mi between those years.⁵⁹ However, that pace trails off between 2029 and 2032. CAP recommends that the EPA strengthen the standard’s emission targets in those years.
• Improvements for internal combustion engine vehicles. As noted previously, the EPA’s proposed standard does not require changes to any particular vehicles or vehicle types, but it does set an emissions target for each manufacturer’s entire fleet, measured as an aggregated average. With EV adoption expected to continue picking up speed, CAP recommends that the EPA include specific requirements to ensure future gasoline-powered vehicles continue to get cleaner, rather than just relying on EVs to drive down overall emissions. This is particularly critical for curbing local pollutants, as they have immediate impacts on individuals who are close to their emission sources.
• Eliminate incentives to make larger vehicles. Historically, due to the construction of the car and truck curves, the EPA’s light-duty vehicle standards have incentivized manufacturers to produce larger vehicles. The EPA’s current proposal significantly reduces this incentive; however, it also creates a new incentive to manufacture slightly larger EVs, as the larger a zero-emitting vehicle is, the more emissions credits it generates. CAP recommends that the EPA work to remove this incentive—and address lingering upsizing incentives for gasoline-powered vehicles—in its final rule. Larger vehicles are more dangerous to pedestrians⁶⁰ and other drivers,⁶¹ in addition to being less affordable.⁶²

The transition to zero-emission vehicles spurred by the Inflation Reduction Act and Infrastructure Investment and Jobs Act will bring a plethora of climate, health, and economic benefits. In addition to the reduction of GHG emissions, completing the transition to zero-emission transportation and eliminating all emissions from the power sector would yield an estimated $978 billion in public health benefits and avoid 89,300 premature deaths by 2050.⁶³ The EPA estimates that its proposed Alternative 1 standard would save consumers $990 billion in fuel costs if adopted.⁶⁴ Zero-emission transportation will impose fewer burdens on Americans and contribute to tackling the global climate crisis.

In order to build on the progress of the Inflation Reduction Act and IIJA to rapidly accelerate the decarbonization of transportation, the EPA should finalize the strongest possible standard by the end of 2023. The agency—in addition to others at the federal, state, and local levels—must ensure that changes in transportation and energy technologies deliver the greatest possible health, climate, economic, and security benefits.