Introduction and summary
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.
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.
Tracking the impact of new legislation
Even before the Inflation Reduction Act and IIJA, EVs were rapidly increasing in popularity among U.S. automobile purchasers. In 2011, only 10,092 fully electric vehicles were sold in the United States. In 2021, that number had grown to 459,426—a 45-fold increase—and EVs represented 3.2 percent of all new light-duty vehicle sales in the United States.5
Since the passage of the IIJA and the inflation Reduction Act, consumer demand for EVs has further accelerated and will hit 1 million sales this year.
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.
Key Inflation Reduction Act and IIJA policies
- 30D – Credit for new clean vehicles. A credit of up to $7,500 for the purchase of a new clean vehicle. In order for a vehicle to be eligible, it must meet sourcing requirements for critical minerals and battery components.13
- 25E – Credit for previously owned clean vehicles. A credit of up to $4,000 for the purchase of a used clean vehicle.14
- 45W – Credit for commercial clean vehicles. A credit of up to $7,500 for the purchase or lease of a commercial clean vehicle less than 14,000 pounds, or up to $40,000 for the purchase of a commercial clean vehicle more than 14,000 pounds. The credit can also be monetized by certain tax-exempt entities.15
- 30C – Credit for qualified alternative-fuel vehicle refueling infrastructure. A credit of up to $1,000 for the purchase of an EV charger or other item of alternative-fuel vehicle refueling infrastructure for households, or a credit of up to $100,000 for businesses. Chargers must be located in an eligible census tract.16
- 45X – Advanced manufacturing production credit. A credit per item of clean energy technology or critical mineral produced and sold in the United States. For EVs, the 45X credit provides:
- A credit of $35 per kilowatt-hour (kWh) for battery cells.
- A credit of $10 per kWh for battery modules.
- A credit of 10 percent of the cost of production for electrode active materials, a key component of EV batteries.
- A credit of 10 percent of the cost of producing critical minerals.17
- 48C – Qualified advanced energy project credit. A credit of up to 30 percent of the investment in a project that produces clean energy technology including EVs, EV components, and EV chargers.18
- Advanced Technology Vehicles Manufacturing Loan Program. Flagship U.S. Department of Energy (DOE) automotive loan program for advanced technology vehicles. The Inflation Reduction Act removed the program’s $25 billion lending cap and allocated an additional $3 billion to the program.19
- Domestic Manufacturing Conversion Grants. $2 billion in DOE grant funding to support the domestic manufacturing of efficient hybrid, plug-in hybrid, electric, and fuel-cell vehicles. Priority is given to retooling facilities that have recently closed or will soon close.20
- National Electric Vehicle Infrastructure (NEVI) Formula Program. $5 billion in funding over five years for states to strategically deploy EV chargers to create a nationwide EV charging network.21
The above policies have transformed the economics of EVs. For manufacturers, the 45X production tax credit provides incentives across the entire battery supply chain, incentivizing the production of electrode active materials, critical minerals, battery cells, and battery modules in the United States. For consumers, the 30D, 25E, and 45W credits make EVs increasingly affordable. The International Council on Clean Transportation estimates that these combined incentives will drive EVs to purchase-price parity with light-duty combustion-engine vehicles between 2023 and 2025.22 This is a tremendous opportunity for automakers willing to move quickly and invest in EV production. While some automakers are opposing stronger standards, others have committed to meet growing demand and deliver affordability by fully leveraging the above tax credits.23 Ford expects the above policies to reduce its costs of electrification by $7 billion over the next three years, while Tesla has already saved more than $1 billion in 2023.24 These savings are already leading to more affordable vehicles: For example, Ford saw orders for its F-150 Lightning increase sixfold after a significant price cut of up to $10,000 for some versions of the vehicle.25 If automakers take full advantage of these incentives, the International Council on Clean Transportation estimates that 67 percent of all light-duty vehicle sales in the United States could be EVs by 2032.26 This move to electric transportation is not only driving a manufacturing renaissance but is also key to addressing climate change and reducing pollution.
Leveraging the Inflation Reduction Act to benefit all communities
Price cuts are not the only way to leverage the Inflation Reduction Act. State and local governments should seek to utilize the act’s 30C tax credit for EV chargers and the IIJA’s NEVI program, which is already being leveraged by several major automakers to design a joint charging network.27 Automakers should also pass along the act’s cost savings and investments in manufacturing to autoworkers who are building the EVs of today and the future. The United Auto Workers union’s recent tentative agreements with Detroit’s Big Three automakers are a significant step in this direction and should serve as the foundation for high labor standards for all EV and battery manufacturing.28 Additionally, when providing loans and grants through the Inflation Reduction Act and IIJA, the U.S. Department of Energy should support projects that adhere to strong labor standards.
Why electrifying transportation is key to reducing pollution
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.
Health impacts of vehicle emissions
Light-duty vehicles are a source of local air pollutants such as particulate matter (PM), nitrogen oxides (NOx), and volatile organic compounds (VOCs). NOx and VOCs react in the presence of sunlight to create ozone, another hazardous air pollutant. Combined, these air pollutants cause severe damage to human health and the environment. Researchers estimate that from 2008 to 2017, at least 17,000 deaths per year in the United States were attributable to emissions from transportation.34 The effects of extreme heat and air pollution are also not distributed equally. Children35 and the elderly36 are more susceptible to these pollutants and the effects of extreme heat, which is increasingly fueled by climate change37 and which exacerbates the effects of air pollution.38 The EPA finds that neighborhoods with higher populations of people of color are more likely to be intra-urban heat islands,39 and that Black and African American individuals are 40 percent more likely to live in areas expected to see the greatest increases in temperature-related mortality rates because of climate change.40 The American Lung Association finds that people of color are 3.7 times more likely to live in areas with three or more failing grades for air pollution.41 Hispanic, Black, and Asian individuals are exposed to 48, 42, and 63 percent more PM pollution, respectively, from light-duty vehicles than are white Americans.42 Because fully electric vehicles have zero tailpipe emissions, the mass adoption of EVs is seen as a significant way to boost public health.43
Why EPA emissions standards for vehicles are important
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
Health impacts of EPA emissions standards
Historically, EPA standards have had a profound impact on public health. Since 1970, vehicle emissions of local air pollutants have declined by as much as 99 percent48 due to technological improvements driven by EPA standards.49These reductions have contributed to an estimated 50 percent reduction in deaths attributable to air pollution from 2005 to 2018.50 However, in 2017, researchers calculated that the health costs of vehicle pollution still totaled $260 billion per year,51 indicating a need for further progress.
How the EPA sets GHG emission standards for vehicles
The EPA’s past and currently proposed standards are designed to drive technological progress while allowing automakers the flexibility to satisfy consumer demand with a variety of vehicle models. As a result, the EPA’s standards do not cap emissions from individual vehicles but rather require each manufacturer to meet a fleetwide emission target tailored to the size distribution of the vehicles it sells, using averaging and credits.52 To do this, the EPA first establishes emissions targets for vehicles based on their size, measured as the area between a vehicle’s wheels, which is also known as the “footprint.” Larger vehicles are assigned less stringent emissions targets, which are described as grams emitted per mile (g/mi). Figure 1 below represents the targets on a footprint curve, with emissions per mile measured on the y-axis and vehicle footprint measured on the x-axis. Cars and trucks are represented on different footprint curves to account for towing and other utility uses.
To determine the fleetwide emissions target with which manufacturers must comply, the EPA averages together the footprint targets of every vehicle a manufacturer produces in a given year. As such, the target a manufacturer must meet in a given year depends on the size and number of vehicles they produce. This gives manufacturers significant flexibility in determining how to comply with the standards and means that those who sell more large trucks have a less stringent target than those selling more small cars. The EPA’s proposal also maintains the existing averaging, banking, and trading system, which allows automakers to create and trade emissions credits in order to comply with the standards.53
The Inflation Reduction Act’s implications for the EPA’s new emission standards
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
CAP recommendations for the EPA in finalizing a strong standard
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.