Light-Duty Vehicle Regulations Provide New Incentives for Automaker Production of NGVs

Light-Duty Vehicle Regulations Provide New Incentives for Automaker Production of NGVs The recently-finalized light-duty vehicle regulations for MY 2017-2025 provide new incentives for automakers to produce natural gas vehicles, as well as special provisions for NGVs in dual-fuel (bi-fuel) configurations and in pickup trucks. VNG played a central role in securing these incentives and will continue working with automakers and other stakeholders to build policy momentum for NGVs. VNG offers a nationwide retail CNG fueling facility program as an owner-operator to support development of the light-duty NGV market throughout the U.S. New Benefits for NGVs in Light-Duty Vehicle Rules With current natural gas prices allowing for fuel cost savings of 40% or more compared to gasoline, the value proposition of natural gas vehicles (NGVs) for fleet operators and consumers is increasingly clear. However, VNG has long recognized that supportive government regulations are also critical to facilitating automaker production of NGVs, and worked vigorously to secure support for natural gas in new federal light-duty vehicle Corporate Average Fuel Economy (CAFE) and greenhouse gas (GHG) standards for model years 2017-2025. VNGʼs initiative included a series of meetings with key decision-makers at EPA, NHTSA, and the White House, as well as extensive written comments. These efforts by VNG and other stakeholders have achieved notable successes, yielding greater incentives for NGVs than the agencies originally proposed including significant benefits immediately in the 2012-2016 period. Under the final rules, NGVs (including dual-fuel/bi-fuel models that can run on either natural gas or gasoline) now essentially receive the same degree of compliance incentives as plug-in hybrid electric vehicles (PHEVs), including EPA multipliers, the CAFE Petroleum Equivalency Factor, and utility factors for dual-fuel vehicles (as summarized below). The rules also favor the use natural gas in pickup trucks, as well as automakers that deploy significant numbers of NGVs before 2015. New EPA Multiplier Incentives: Each NGV will be counted as more than one vehicle for greenhouse gas (GHG) compliance calculations from 2017-2021, magnifying their value for automakers. As with PHEVs, the multiplier begins at 1.6 in 2017, then declines to 1.45 in 2020 and 1.3 in 2021. EPA originally planned to only give these incentives to EVs, PHEVs, and fuel cell vehicles, but ultimately included natural gas as well due to persuasive public comments discussing the importance of NGVs as a bridge to hydrogen a core argument first advanced by VNG and subsequently by Natural Gas Vehicles for America. 1

Continued Use of Petroleum Equivalency Factor for Dedicated NGVs: The new rules continue to utilize the Petroleum Equivalency Factor (PEF) incentive for determining the CAFE value of CNG and other alternative fuels, providing enormous compliance benefits far exceeding even long term program targets. For instance, with the PEF, a 15 MPG dedicated NGV is treated as a 100 MPG gasoline vehicle twice the overall fleetwide average fuel economy of 49 MPG targeted for the rules by 2025. Unfortunately, an act of Congress will be needed to enable automakers to receive the PEF benefits for dual-fuel NGVs, due to temporary statutory restrictions on CAFE credits for these vehicles that EPA and NHTSA call absurd. VNG is developing legislation to fix this problem and will work with stakeholders and allies in Congress to pass it as soon as possible. Dual-Fuel NGV Utility Factors: New utility factor rules for both dual-fuel NGVs and PHEVs assume drivers will use alternative fuels the vast majority of the time, due to much lower costs compared to gasoline. This utility factor value depends on CNG range: for instance, a vehicle with 180 miles of CNG range would be assumed to use CNG 94.4% of the time. Dual-fuel NGVs must have a CNG range of at least twice their gasoline range to qualify for this incentive; otherwise, 50% CNG use is assumed. Advantages for Use of CNG in Pickup Trucks: The new regulations provide less stringent targets for pickup trucks in recognition of the special challenges they face in reducing emissions. Natural gas is thus a potential game-changer for this segment, allowing automakers to meet the entire 20% reduction in GHGs required by EPA between 2017 and 2025 without making sacrifices in performance. The rules also provide bonuses for manufacturers that use low-emission technologies such as natural gas in at least 10% of their pickups, further enhancing their compliance value. Special Carry-Forward Rule Encourages Early Deployment of NGVs: The GHG benefits of NGVs can be further increased by accelerating production in the early years of the program, from 2012-2015. NGVs produced through 2015 generate special GHG credits (equal to an 85% reduction in GHGs) that can be carried forward and used to meet compliance requirements in any year through MY 2021. VNG is encouraged by these positive steps by the federal government to recognize the unique role natural gas can play in meeting national energy independence and emissions goals, and looks forward to working with automakers and other stakeholders to further improve the policy environment for NGVs at both the national and state level. 2

Overview of the Structure of Rules for NGVs In general, the new 2017-2025 regulations are structured similarly to the MY 2012-2016 regulations; a combined Corporate Average Fuel Economy (CAFE) standard expressed in miles per gallon (MPG) administered by NHTSA and a greenhouse gas (GHG) standard expressed in grams per mile (g/mi) administered by EPA. Importantly, no single vehicle is required to meet these standards; instead, OEMs are evaluated on the production-weighted average fuel economy (FE) and GHG emissions of their entire fleet of vehicles sold in a given year, with each OEM required to meet their own individual overall target determined by the aggregated vehicle footprints of their fleet. Because the primary means to reduce GHG emissions is to improve fuel economy, these standards have been developed and promulgated jointly. However, while these standards have been coordinated to a significant degree, they are separate standards with two different sets of targets, different rules, and different types of incentives. This is particularly relevant for alternative fuels, and especially for natural gas, since this fuel yields different benefits for fuel economy (and, more specifically, petroleum reduction) and for GHG emissions: NGVs Under CAFE: Since the CAFE standard emphasizes the reduction of petroleum consumption in addition to increasing fuel economy, NGVs are treated extremely favorably due to their ability to directly replace most (in the case of dual-fuel NGVs) or all gasoline use for a given vehicle. In fact, the calculated FE of NGVs is so high under these rules over 100 MPG in most cases that todayʼs NGVs can far surpass the national required average FE for 2025 of 49.2 MPG. NGVs Under GHG Program: The GHG regulation sets targets based on vehicle tailpipe emissions, which for NGVs are typically 20-25% below an equivalent gasoline vehicle. Since the cumulative GHG improvement required for most vehicles between 2017 and 2025 is about 33%, and fullsize pickup trucks are only required to improve emissions performance by 20%, the addition of NGV capability can meet most or all (in the case of pickup trucks) of the cumulative improvements required over the duration of the rule. Moreover, as discussed below, there are additional incentives available under the GHG rule to further enhance the compliance value of NGVs. The following sections will walk through the process of determining the compliance value of NGVs under the two rules to provide a deeper understanding and comparison of the benefits provided by NGVs under the two programs. 3

Part 1: Base FE and GHG Calculations Under Each Rule The use of CNG generates notable benefits compared to gasoline under both standards, due to the inherent qualities of this cleaner, non-petroleum fuel. However, as discussed below these benefits are temporarily limited for dual-fuel NGVs under the CAFE program, and change over time under the GHG program. Fuel Economy: For FE calculations, a gasoline gallon equivalent (GGE) of natural gas is counted as just 0.15 gallons of gasoline a calculation known as the Petroleum Equivalency Factor (PEF). Thus, a dedicated NGV with a realworld fuel economy of 15 miles per gallon is treated as a 100 MPG vehicle for CAFE compliance (15 / 0.15 = 100). This calculation allows NGVs to far exceed the fuel economy improvements required for the duration of the program, which targets an average fleetwide fuel economy between 48.7 and 49.7 MPG in 2025. This PEF calculation applies to all alternative fuels (CNG, electricity, and E85) equally. It is based on statute and applies to the current regulatory period (MY 2012-2016) as well as for the post-2025 period assuming no changes to the underlying law. However, as discussed in Part 2: CNG Fuel Use for Dual-Fuel NGVs, dual-fuel NGVs are currently prevented from taking advantage of the PEF calculation until 2020 due to outdated statutory restrictions that VNG is working to remove. Dedicated NGVs are unaffected by these restrictions and use the PEF. Greenhouse Gases: Unlike the CAFE standard, the base GHG calculation for a vehicle changes significantly between the current period and period covered by the new rulemaking. Under the previous rulemaking, it was determined that the GHG calculations for NGVs would initially be based on the PEF calculation (i.e., natural gas emissions = 0.15 the emissions of gasoline) through 2015 in order to ease the transition to the joint CAFE/GHG program. This is effectively an 85% reduction in emissions a very strong incentive. Beginning in MY 2016, NGVs will instead have their emissions calculated according to the real-world tailpipe value of the particular vehicle model. This is estimated to be a roughly 20% reduction compared to gasoline for todayʼs NGVs with engines optimized to run on gasoline, although NGVs optimized to run on natural gas have potential for up to 25% reductions in GHGs. Changing Treatment of NGV Emissions Over Time Years GHG Emissions Compared to Gasoline 2012-2015 -85% (0.15x gasoline) 2016-2025+ -20 to -25% (Actual Tailpipe) 4

While this 20-25% reduction is not as strong an incentive as the PEF calculation (an 85% reduction), it is still a significant advantage for NGVs compared to gasoline-fueled vehicles. In fact, the 20-25% reduction in GHGs that can be achieved with CNG alone can meet the large majority of the total cumulative GHG reductions required for most vehicles between 2017 and 2025 of approximately 33% and all of the 20% cumulative improvement required for the largest pickup trucks, which have significantly less stringent targets due to the need to preserve the unique functionality of these vehicles. Part 2: CNG Fuel Use for Dual-Fuel NGVs Dedicated NGVs can by definition only operate on natural gas. However, in the case of dual-fuel NGVs, regulators must first determine an assumed value for the amount of time the vehicle will operate on natural gas relative to gasoline in order to calculate appropriate FE and GHG values. One of the most notable improvements in the new rules is the new Utility Factor calculation for dual-fuel NGVs and PHEVs, which assumes that drivers will use alternative fuels the vast majority of the time due to much lower fuel costs compared to gasoline. Under previous rules, dual-fuel NGVs were assumed to operate 50% of the time on natural gas. The new utility factor (i.e. the percentage of time a vehicle operates on natural gas) is determined by the vehicle's CNGonly range and can potentially be much higher than 50%, as illustrated in the table below for selected ranges: Selected Utility Factors for Dual-Fuel NGVs CNG Range (Miles) Utility Factor (% CNG Use) 80 100 120 140 160 180 200 81.8% 86.5% 89.6% 91.7% 93.2% 94.4% 95.4% Design Requirements: Not all dual-fuel NGVs may be eligible to use this new utility factor calculation. In order to qualify for use of utility factors, a dual-fuel NGV must: 1. Have a 2:1 ratio of CNG range to gasoline range; and 2. Only operate on gasoline if the CNG tank is empty (with the exception of vehicles that start with a small amount of gasoline, then switch to CNG). Dual-fuel NGVs that do not meet these requirements simply use the calculation from the previous rules noted above, under which the vehicle is assumed to operate on natural gas for 50% of the time. 5

Dual-Fuel Weighting: After determining the applicable percentage of CNG use, dual-fuel NGVs calculate their base FE and GHG values as a weighted average of their CNG and gasoline operation. For instance, a dual-fuel NGV with a 180- mile range (and a gasoline range of <90 miles) calculates its FE and GHG on natural gas, multiplies this by the 94.4% utility factor, then calculates fuel economy and GHG on gasoline and multiplies this by the remaining 5.6% of vehicle operation. The weighted CNG and gasoline numbers are then added. Early EPA Adoption: As recommended by VNG in meetings with EPA in October 2011, these rules will go into effect immediately (in 2012) for GHG regulations, instead of waiting until 2017 (when the rest of the new rules take effect). This provides an additional incentive to pursue dual-fuel NGVs in the near term particularly since, as noted below under Part 4, excess GHG credits earned in 2012-2016 may be carried forward all the way to 2021. NHTSA Cap Until 2020: Unfortunately, statutory restrictions included in the Energy Independence and Security Act of 2007 have had the unintended effect of causing dual-fuel NGVs to be effectively treated as dedicated gasoline vehicles effectively a utility factor of 0% under the CAFE standards until 2020. This statute groups dual-fuel NGVs with ethanol flex-fuel vehicles (FFVs) and limits the combined credits these vehicles can receive through MY 2019. Since automakers are already receiving the maximum CAFE credits from existing FFV production, there are effectively no credits left for dual-fuel NGVs. In the Notice of Proposed Rulemaking (NPRM) for the current standards, EPA and NHTSA themselves referred to the treatment of dual-fuel NGVs as dedicated gasoline vehicles as an absurd result, although they do not have the authority to override the underlying statute. However, NHTSA will allow dual-fuel NGVs to receive full CAFE credit for natural gas based on the PEF, with fuel use determined by the utility factor approach, as soon as possible currently, when existing statutory restrictions expire in 2020. Legislative Fix to Allow CAFE Credits for Dual-Fuel NGVs Immediately VNG is developing legislation that would permit NHTSA to begin providing full credits for dual-fuel NGVs using utility factor calculations beginning immediately in 2012, as with the GHG regulations. This would allow automakers to receive full CAFE incentives for dual-fuel NGVs much sooner and provide a steady, consistent treatment over time for these vehicles. Draft legislation to achieve this goal has already attracted support from prominent NGV advocates in Congress, and VNG believes that the common-sense nature of this change as well as the lack of any budgetary impact will give the legislation a very strong chance to be passed in the near future, particularly if supported by automakers. 6

Part 3: New Incentives Multipliers and Pickup Truck Bonus Beyond these base calculations for FE and GHG values, NGVs may be eligible for additional incentives that further enhance their compliance value namely, multipliers under the EPA standard and performance-based pickup truck bonuses under both the EPA and NHTSA programs. Unlike the base calculations described above, these incentives are generally only available on a temporary basis to encourage early deployment of emission-reducing technologies, and are not expected to be long-term features of the program. Multipliers: Under the new rules, EVs, FCEVs, PHEVs, and NGVs are all eligible for multiplier incentives from MY 2017-2021 that count each of these vehicles more than once for compliance purposes, effectively magnifying the GHG benefits they provide. NGVs receive the same multipliers as PHEVs, regardless of whether they are dedicated or dual-fuel: EPA Multiplier Incentive for NGVs and PHEVs Year Multiplier 2017-2019 1.6 2020 1.45 2021 1.3 EPA originally planned to only give these incentives to EVs, PHEVs, and fuel cell vehicles, but ultimately included natural gas as well due to persuasive public comments discussing the importance of NGVs as a bridge to hydrogen 1 a core argument first advanced by VNG and subsequently by Natural Gas Vehicles for America. Full-Size Pickup Truck Bonus: Under the new rules, full-size pickup trucks employing new technologies that reduce emissions by at least 15%, including natural gas, are eligible for bonus incentives. As with the less stringent program targets for full-size pickups, these incentives are offered in recognition of the special challenges faced by OEMs in improving the FE and GHG performance of these vehicles without compromising their functionality, as well as the importance of this segment for maintaining consumer choice and automaker profitability. Full-size pickups receiving this incentive must meet the following criteria: 1 See 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards, p. 22. In addition to meetings with EPA and its own written comments, VNG advanced this rationale through the commissioning of a white paper by the consultancy Energy Futures titled Natural Gas Vehicles: An Essential Bridge to Hydrogen Fuel Cell Vehicles. 7

Bed Size: Full-size pickups must have an open cargo bed with a minimum length of 60 inches and a minimum width of 48 inches. Vehicles with detachable covers are considered open. Hauling Capacity: Minimum hauling capacity can be measured in either of two ways: a gross combined weight rating (GCWR) minus gross vehicle weight rating (GVWR) of at least 5,000 lbs, or a GVWR minus curb weight of at least 1,700 lbs. There are two distinct levels of this incentive based on the level of GHG reductions achieved by a given technology one incentive for vehicles achieving at least a 15% reduction in emissions, and one for vehicles achieving at least a 20% reduction. In addition to meeting these minimum emission reduction requirements, automakers must incorporate a given technology into a minimum proportion of their full-size pickups in order to qualify for this incentive. The incentive available for a 20% GHG reduction, which is clearly achievable with natural gas, is much more favorable than the incentive for a 15% reduction, with double the bonus, a lower minimum penetration rate, and a longer duration. Pickup Truck Incentive Summary Minimum GHG Reduction Bonus Minimum Penetration 15% 10 g/mi CO2 15% of full-size pickups in 2017, increasing steadily to 40% in 2021 20% 20 g/mi CO2 10% of full-size pickups (constant) Duration 2017-2021 2017-2025 The 20 g/mi bonus achieved by vehicles reducing GHG emissions by at least 20% a threshold that should be achievable for most NGVs is a significant incentive. For comparison, the largest light trucks (including pickups) must achieve total GHG reductions of 70 g/mi between 2017 and 2025 (from 347 g/mi to 277 g/mi). While this incentive is expressed in terms of GHG reductions on a per vehicle basis, EPA will also convert the aggregate GHG bonuses achieved for all pickups into an equivalent improvement to be applied to an automakerʼs CAFE score. Expressed in gallons per mile (since the GHG incentive is a g/mi incentive), each 10 g/mi bonus is roughly equivalent to a 0.0011 gallons/mile improvement, and each 20 g/mi bonus is equivalent to a 0.0023 improvement. For purposes of comparison, a 15 mpg full-size pickup consumes 0.0667 gallon/mile, which is improved by approximately 3.5% with the 0.0023 gallon/mile bonus more than the incremental 2.5% annual improvement in FE required for these vehicles between 2017-2021. 8

Part 4: Allocating Credits Over Time Carry-Forward and Back As provided for in the original CAFE legislation, automakers that exceed their overall FE target for a given year may bank these excess credits for use in future years or in past years during which the automaker was below their target. This statutory flexibility includes a carry-back period of credits up to 3 years in the past and a carry-forward period of up to 5 years into the future. EPA has adopted the same provisions for the GHG program, with the addition of a special, one-time extended carry-forward for this rulemaking that allows excess credits accrued any time between 2012 and 2016 to be banked until 2021. This extended carry-forward period is designed to provide additional flexibility for automakers in the ongoing transition to the joint CAFE/GHG program. These provisions are particularly useful for NGVs, since the treatment of these vehicles over time changes under each program whether due to the limitations of dual-fuel NGV credits under CAFE through 2020, or due to the move from the 0.15 divisor to actual tailpipe GHG values under the EPA program in 2016. The examples below illustrate how carry-forward and carry-back rules can be used to maximize the value of NGVs for automakersʼ overall compliance strategies: CAFE Carry-Back Example: For the CAFE rules, the carry-back rule may be particularly valuable if the NHTSA cap is not removed, since it can be used to effectively benefit from the substantial dual-fuel NGV fuel economy credits that begin in 2020 for compliance as early as 2017. For example, an automaker planning to produce substantial numbers of dualfuel NGVs in 2020 and beyond can run a CAFE deficit beginning in 2017, with the understanding that it will be able to carry-back the robust incentives given to these NGVs starting in 2020 to meet this shortfall. EPA Carry-Forward Example: By contrast, under the EPA rules, the onetime extended carry-forward rule can be used to take advantage of the very large GHG credits generated by NGVs (including dual-fuel NGVs) from 2012-2015 due to the use of the 0.15 divisor (i.e. an 85% reduction in GHG emissions compared to gasoline). For example, an automaker that deploys significant numbers of NGVs before 2016 can generate a large stockpile of excess credits that can be used in 2017-2021, when GHG targets begin to ramp up and NGV credits are based on the actual tailpipe level of 20% to 25% below gasoline. Thus, automakers that already have established compliance plans for 2012-2016 still have an incentive to move to increased production of NGVs in this period, since the excess credits can be used far into the future. 9

Conclusion Maximizing NGV Benefits for Automakers By using low-emission, domestically-produced natural gas instead of gasoline, NGVs offer consumer fuel cost savings of 40% or more and enjoy significant compliance advantages for automakers under both the CAFE and GHG programs. Indeed, the compliance benefits provided by NGVs far exceed the fuel economy improvements required for light-duty vehicles over the entire 2017-2025 period, while also meeting all or most of the total GHG improvements required over this eight-year period (depending on achieved tailpipe GHG reductions and the GHG target set for a given vehicle footprint). NGVs also provide important advantages for automaker compliance strategies compared to other alternatives like electrification. Unlike EVs, NGVs leverage existing ICE platforms instead of using complex and expensive new drivetrain technologies. Thus, NGVs can benefit from all of the ICE fuel economy improvements being developed for gasoline vehicles while also providing a durable, incremental GHG reduction of 20-25% inherent to the use of a cleaner fuel. NGV capability can also be incorporated into a full range of vehicle models and is particularly well-suited to light trucks and pickups, which are impractical candidates for electrification due to battery weight issues for larger vehicles. Importantly, as discussed in detail in the recent Future Transportation Fuels report written by the National Petroleum Council (NPC) of the Department of Energy, the incremental costs of NGVs can also be expected to decline rapidly with a move to high-volume OEM production. 2 For instance, the incremental costs of NGV pickup trucks using Type I tanks are projected by the NPC report to fall from $11,668 today to $3,462 in 2020, with additional cost improvements over time with increasing economies of scale. Incremental costs for EVs are expected to remain much higher, with a significant degree of uncertainty over the achievable cost reductions for battery packs in particular. Beyond these core advantages of NGVs, automakers wishing to pursue an aggressive natural gas strategy can maximize these benefits by taking full advantage of the opportunities presented by the new regulations: Focus on Dedicated and Dual-Fuel NGV Pickup Trucks: Natural gas is a potential game-changer for full-size pickups, allowing automakers to meet the entire GHG reductions required by EPA between 2017 and 2025 without downsizing engines or making other sacrifices in performance that may be required for gasoline-fueled vehicles. And, if automakers utilize NGV technology in at least 10% of their pickups, they can generate additional CAFE and GHG credits. 2 NPC Future Transportation Fuels Study. http://npc.org/ftf-80112.html 10

Early GHG Benefits Can Be Carried Forward: The GHG benefits of NGVs can be further increased by accelerating production in the early years of the program, from 2012-2015. In addition to providing a head start on market development for NGVs, vehicles produced through MY 2015 generate very pronounced GHG benefits (equal to an 85% reduction in GHGs) that can be banked and carried forward through MY 2021. Dual-Fuel Strategy Maximized With Policy Initiative: Due to statutory limitations, benefits from dual-fuel vehicles are only immediately available under EPAʼs GHG emissions program. To receive full credits under the CAFE program, Congressional action will be required to fix the outdated limitations imposed by statute. VNG is developing model legislation to address this issue and has begun reaching out to NGV supporters in Congress, and robust support from automakers will undoubtedly increase the likelihood of prompt action on this initiative. These new light-duty vehicle rules provide a stronger rationale for OEM inclusion of NGVs in their long-term regulatory compliance strategies, as well as a foundation for deepening collaboration between VNG and automakers. Working together on both commercialization and policy issues at the state and national level will ensure that the unsurpassed potential of NGVs to provide a compelling value proposition for fleets and consumers while also contributing to energy independence and greenhouse gas emission goals becomes a reality. FOR MORE INFORMATION, please contact Paul Kouroupas, Vice President, Regulatory & Government Affairs, at 973-886-7675 or pkouroupas@vng.co 11