Navigating EPA's New Emissions Standards and EV Tax Credit Changes for Colorado Auto Dealers

Summary: 

• New EPA emissions standards will require 67% of new light and medium-duty vehicle sales to be zero emissions by 2022, which may have significant implications for Colorado auto dealers, including potential legal challenges, federal pre-emption issues, market shifts, and inventory challenges.

• Recent changes to the EV Tax Credit eligibility based on IRS guidance have created confusion for dealers, reducing the number of qualifying EV models for the full $7,500 tax credit and altering the credit amount based on the source of the vehicle's minerals and battery materials.

• The Colorado Auto Dealers Association, National Automobile Dealers Association, and American Highway Users Association will actively participate in the rulemaking process and submit comments to the EPA, ensuring that dealers in Colorado are well-represented and informed about any significant updates affecting their business.

EPA's New Emissions Standards: Impact on Colorado Auto Dealers

In April, the Environmental Protection Agency (EPA) announced two major rules that significantly impact the adoption of Zero Emission Vehicles (ZEVs) in the United States, including in Colorado.

1. Phase III of the greenhouse gas regulation mandates strict emissions guidelines for trucks and buses in the 2027-2032 model years.
2. New emissions standards for light and medium-duty vehicles require that 67% of new sales must be zero emissions by 2022, affecting dealers across the nation, including those in the Colorado Auto Dealers Association.

Perhaps this seems like a non-story because the state of Colorado will adopt the second iteration of California’s Clear Car Rule (ZEV II) this summer, which theoretically will place us on a trajectory to hit 80% ZEV market penetration by 2032.

Challenges and Opportunities for Colorado Auto Dealers

Although Colorado plans to adopt the second iteration of California’s Clear Car Rule (ZEV II) this summer, which aims for 80% ZEV market penetration by 2032, there are still potential concerns for Colorado auto dealers:

1. Legal Challenges and Federal Pre-emption. The Colorado regulation likely faces some legitimate legal concerns and federal pre-emption challenges that could result in the state regulation being overturned in court and forcing Colorado to adopt the federal standards.
2. Federal Government vs. California. The federal government and California have battled over which one takes precedence on mobile source emissions for almost two decades. It’s revealing that when a National Highway Traffic and Safety Administration (NHSTA) bureaucrat left for the California Air Resources Board, he commented to the media that he considered the two bodies to be co-equals. The federal government wants to establish its pre-eminence by closing the gap between the two entities’ regulations.
3. Market Implications. Equally important is how much federal regulation moves the market. A handful of OEMs have had a handshake agreement with California to move to electric earlier than required. The federal rule validates that agreement and disadvantages those manufacturers who did not participate, many of whom were holding out to lead the charge on non-electric zero-emission technologies.  
4. Inventory Challenges. Finally, these requirements are on vehicles “offered for sale,” but not necessarily sold. So, if manufacturers aren’t able to produce enough ZEVs because of critical mineral shortages and supply chain issues, for example, the easiest way to meet the 67% threshold is to cut back on the overall supply of vehicles for sale. That could lead to long-term inventory challenges for both dealers and manufacturers.

Vehicle pricing would become a very unfortunate victim of these poorly considered jolts to supply and demand. As interest rates are rising and the average new car price approaches $50,000, it only exacerbates overall strain on the consumer market. The National Automobile Dealers Association (NADA) will emphasize this point when it submits comments to the EPA ahead of the rulemaking. 

CADA participates in rulemaking through its membership in the American Highway Users Association, which intends to submit comments based on feedback from its membership.  

We will keep you updated on the progress of this rule. We are well represented, which is important because the rule’s immediate impact will be felt for years to come.

EV Tax Credit Changes: What Dealers Need to Know

CADA has released dealer memos in the last several months detailing the evolution of the EV Tax Credit established in the 2022 Inflation Reduction Act (IRA). It seemed that once the ‘new credit’ began on January 1, 2023, we’d found steady footing, but new IRS guidance effective April 18, 2023, is creating chaos, instead.

The tax credit applying to the purchase of new electric vehicles – the IRA’s Section 30(D) – is the issue since leases and used credits are defined separately. As originally understood, the 30(D) credit would amount to $7,500 for every qualifying vehicle. That is no longer correct.

The new rule for qualifying for the federal tax credit is based on the battery and critical mineral requirements, which will depend on where the component minerals are sourced. These changes are based merely on the IRS’s interpretation of the IRA rather than any subsequent legislation. Nevertheless, the impact is the same.

The credit essentially has two parts: Vehicle owners will receive $3,750 if the minerals in the vehicle are sourced from approved countries, and received an additional $3,750 if the materials in the battery are as well.

The regulation cuts down qualifying EV models from 41 to 22, and only 14 remain eligible for the full $7,500 tax credit.  The remaining eight models are eligible for just half - $3,750. NADA points out that many of these newly disqualified models will still qualify for a tax credit under Section 45(w) if they are leased instead of purchased.

Below is a table displaying the vehicles qualifying for the full or partial tax credit (all are 2023 models unless noted).

NADA has compiled a list of additional resources available at their webpage, www.nada.org. 

Conclusion

As the landscape for auto dealers in Colorado evolves due to new emissions standards and changes in the EV Tax Credit, staying informed and actively participating in the rulemaking process is essential. Dealers must adapt to these changes and prepare for potential challenges and opportunities that lie ahead in the ZEV market.

Take Action: Share and Stay Informed

Help spread the word about the implications of EPA's new emissions standards and EV Tax Credit changes for Colorado auto dealers by sharing this article with others in the auto industry. To stay up-to-date on the latest news, insights, and regulatory updates, sign up for email updates from the Colorado Auto Dealers Association. Together, we can navigate the changes and ensure a thriving automotive market in Colorado.