The Biden administration is facing challenges in achieving its ambitious electric vehicle (EV) adoption goals, as evidenced by the recently released auto emissions standards.

Emissions Cut in Half

The Environmental Protection Agency (EPA) today finalized new emissions standards for light-duty vehicles, including cars, SUVs, and pickup trucks, for model years 2027-2032, requiring a 50% reduction in greenhouse gases and air pollutants like carbon dioxide.

According to the EPA, these standards will prevent more than 7 billion metric tons of carbon pollution by 2055, generating nearly $1 trillion in net benefits, including $130 billion from avoided health costs and preventing up to 2,500 premature deaths annually.

Specifically, the EPA set an average new vehicle emissions standard of 85 grams of carbon dioxide per mile, a nearly 50% reduction from the existing 2026 standards, with mid-size vehicles facing a 44% cut.

The agency projects that these new standards will boost EV sales to up to 56% of new passenger vehicles by 2030-2032, bringing the U.S. closer to Biden's 2021 target of widespread EV adoption. Transitioning the U.S. to clean energy and promoting EVs was a central pillar of Biden's election campaign.

In August 2021, less than six months after taking office, President Biden issued an executive order aiming to accelerate the shift to EVs through infrastructure investments and clean energy vehicle incentives. The Biden administration's plan called for at least half of new vehicle sales in 2030 to be zero-emission vehicles, including EVs, plug-in hybrids, and hydrogen fuel cell vehicles.

Notably, however, the EPA's rule does not mandate specific emission levels for individual vehicle models, but rather sets an overall reduction requirement for manufacturers. This means automakers can continue producing higher-emitting vehicles as long as they offer enough zero-emission vehicles like EVs.

Furthermore, the EPA significantly scaled back EV requirements, refraining from setting a specific mandate for EV market share (previously targeted at 60%) and avoiding a hard deadline for ending the sale of fossil-fuel vehicles, as implemented in California and the European Union. Automakers in the U.S. market will still be able to sell a range of gas-powered models under the new emissions regulations. This may disappoint some environmental advocates.

In contrast, California passed legislation in 2020 requiring 7.5 million zero-emission vehicles on its roads by 2030 and banning the sale of new gas-powered vehicles by 2035 (existing gas-powered cars can remain on the road, and used car sales are not affected).

The European Union also adopted a regulation in 2022 to effectively prohibit the sale of non-zero-emission cars by 2035. However, under pressure from Germany, the EU carved out an exception to allow the continued sale of combustion engine vehicles using carbon-neutral synthetic fuels.

Balancing Labor and Industry

The compromise embedded in these new emissions regulations reflects the competing interests at play. The rule has been under negotiation for over a year, with intense lobbying from the U.S. government, auto industry, labor unions, and environmental groups. This year is an election year in the U.S., and the Biden administration has been wary of alienating the politically powerful auto sector.

Auto manufacturing in the U.S. is concentrated in the Great Lakes region, which includes several key swing states in presidential elections. The United Auto Workers (UAW) union, with over a million members, is heavily courted by both parties.

The UAW has expressed skepticism about Biden's EV ambitions. In April of last year, the EPA proposed a higher EV sales target of 67% for 2032. However, UAW President Shawn Fain said the union would reconsider its endorsement of Biden's reelection campaign over concerns about the administration's EV transition.

Why is the UAW cool to EVs? The UAW's strength comes from its traditional auto factories in the Great Lakes region, which are concentrated in Detroit's Big Three automakers. Many EV makers, wary of the UAW, have opted to build plants in southern states with less union presence. The UAW's interests align with those of Detroit's Big Three on this issue. Additionally, the UAW has been unsuccessful in organizing Tesla workers.

For Biden, who is seeking reelection, losing the UAW's support would be a significant setback, given the union's million-plus members and the friends and family they influence. After extracting concessions from the Biden administration, the UAW

Biden's electric vehicle (EV) tax credits, reinstated after being repealed under Trump, signaled to legacy automakers a vast market opportunity. However, a more immediate catalyst for the increase in EV sales was the global spike in gas prices in 2022 due to the Russia-Ukraine conflict, effectively forcing consumers to consider EVs.

In contrast to his overtures to traditional automakers, Biden has notably snubbed Tesla and its CEO Elon Musk. Despite Tesla's dominance in EVs, it lacks the physical presence or electoral influence in the pivotal Great Lakes region, and the Biden administration has notably declined to invite Musk to White House meetings on the industry. This perceived snub, coupled with Musk's broader skepticism of government, has been a major factor in his shift toward the Republican party in recent years.

Crucially, the success of the US's EV transition hinges on the outcome of this year's presidential election. A Trump presidency would not only halt progress toward Biden's EV goals but cast significant doubt on the future of the American energy transition. The nation's progress on climate would be paused or even reversed for another four years.

Trump has been a consistent climate science denier, dismissing it as a hoax that hinders the US economy. Closely aligned with the fossil fuel industry, he withdrew the US from the Paris Agreement, championed the expansion of domestic oil drilling, and overseen some of the cheapest gas prices in decades.

Trump has openly derided Biden's EV initiatives, vowed to eliminate EPA emissions regulations if reelected, and expressed personal disdain for EVs, emphasizing their range and charging limitations. His attacks have extended to UAW President Ray Curry, a supporter of Biden's reelection, whom he has labeled a "dope."

EV Sales Growth Slowing Significantly

Subsequent to the EPA's new emissions standards, the Biden administration has expressed confidence in meeting the goal of 50% EV penetration by 2030. However, current trends paint a less optimistic picture.

While 2023 saw record EV sales in the US with about 1.2 million units sold, EVs still only account for about 7.6% of new vehicle sales. Industry analysts Cox Automotive project that with more EV models becoming available, US EV sales could reach 1.6 million in 2024, potentially crossing the 10% penetration mark for the first time.

However, the Biden administration's goal of 50% EV penetration by 2031 appears increasingly out of reach, as it would require US EV sales to increase fivefold to over 8 million units annually within the next six years.

China's EV market, by comparison, dwarfs that of the US. It is now the world's largest market for new energy vehicles. According to data from the China Passenger Car Association (CPCA), in 2023, China's passenger vehicle sales grew by 5.6% to 21.7 million units, with new energy vehicle sales surging by 36.2% to 7.74 million units. The market is expected to reach a record 40% penetration rate this year.

Disappointingly for the Biden administration and legacy automakers, EV sales growth in the US is showing signs of cooling.

According to data from automotive research firm Kelley Blue Book (KBB), in the fourth quarter of last year, US EV sales rose by 40% year-over-year, marking the third consecutive quarter of decelerating growth, down from 52% and 49% in the previous two quarters. KBB's analysis suggests that while the US EV market is still expanding, its growth is becoming more moderate.

Legacy Automakers Revise EV Plans

In response to softening demand, some legacy automakers have begun to recalibrate their EV production capacity and future product plans. Ford's electric F-150 Lightning pickup truck has been a poster child for Biden's EV push, with the octogenarian president himself taking a publicized test drive at a Ford plant.

However, due to lackluster demand, Ford halved production of the electric pickup truck earlier this year, cutting output from 3,200 units per week to 1,600. In 2023, the F-150 Lightning sold a total of only about 24,000 units, compared to 750,000 units of the gasoline-powered F-150. The automaker's traditional truck buyers appear unconvinced by the electric version, and Ford expects to lose up to $4.5 billion on its EV business this year.

Beyond production cuts, some legacy automakers are hitting the pause button on EV production altogether. Late last year, GM, the top-selling automaker in the US, decided to halt production of its electric pickup truck at its Orion, Michigan plant for at least a year. The automaker is also facing production challenges at its battery plant in Ohio.

Furthermore, GM's plans to begin production of electric versions of its Chevrolet Silverado and GMC Sierra at its sprawling Detroit-Hamtramck plant this year have reportedly been delayed until at least late next year. GM says these adjustments are being made to align with changing market demand and optimize capital investments.

While EV growth has slowed, hybrid vehicle sales have accelerated in the US. In 2023, hybrid sales surpassed 1 million units for the first time, representing a 76% increase year-over-year. Notably, in the fourth quarter of last year, while pure EV sales grew by only 40%, hybrid sales jumped by 75%.

Of the top ten best-selling new energy vehicles in the US last year, only three were fully electric: the Model Y, Model 3, and Chevrolet Bolt. Hybrids accounted for the other seven spots, with Toyota claiming five of them. Cox Automotive forecasts that in 2024, hybrids will capture a 14% market share in the US, outpacing EVs' projected 10%.

Hybrids Help Toyota, Honda Profit as EV Sales Cool

The expectation for hybrid sales may have been too conservative. Last month, hybrid sales in the U.S. grew five times faster than electric vehicle (EV) sales, according to Morgan Stanley analysts. The stampede toward hybrids is coming at the expense of EV demand. With gasoline prices falling, U.S. consumers are now prioritizing the more attainable hybrid option, according to automotive research firm iSeeCars.com.

Toyota and Honda have been among the skeptics toward the EV revolution, with Toyota executives repeatedly predicting the demise of EVs, but they have been raking in profits from their hybrid models. Toyota sold 2.25 million vehicles in North America last year, up 6.6% year over year, second only to General Motors. Hybrids accounted for three in 10 Toyotas sold or 657,000 vehicles. Honda sold 1.3 million vehicles in North America, up 33% year over year, but it doesn't sell a single fully electric vehicle.

The rising demand for hybrids in North America and Europe while EV sales cool has been a boon for Toyota, according to Christopher Richter, an analyst with automotive research firm CLSA. "The combination of high EV prices and a lack of charging infrastructure has really impacted consumer enthusiasm for EVs, which has played directly into the hands of Toyota, the leader in hybrid technology."

Faced with big losses on their own EV operations and watching the Japanese automakers rake in profits from hybrids, traditional American automakers like Ford Motor and GM have been pivoting toward hybrids since late last year, unable to ignore sales and profits.

Ford plans to triple its hybrid offerings over the next few years. Even GM, which has declared it is "all in" on EVs, now plans to roll out more hybrids to meet market demand. GM CEO Mary Barra said the automaker will use its existing hybrid technology to launch new models "because that's what the market needs."

The modest shift has paid off almost immediately. Ford's hybrid sales rose 37% in the first two months of this year, largely thanks to the hot-selling Maverick hybrid, which starts at $25,000 and now accounts for half of the model's sales.

Ford decided to boost production of the Maverick hybrid as its electric F-150 Lightning pickup faced production cuts. Ford announced this week that it is adding a third shift to run its Maverick hybrid plant around the clock to meet demand.

Start-Ups Face Challenges

While traditional automakers pile into hybrids, the start-up EV makers are facing a new round of challenges. The EV sector is undergoing a shakeout, with the cost of survival increasing, and smaller companies may not make it without finding partners, according to a Morgan Stanley research note.

EV start-ups including Rivian, Lucid, Fisker, and Canoo are all suffering from big losses, and some are facing a brutal market reality after investing heavily to build factories to make EVs and batteries.

"The EV adoption curve is flattening, and this is happening just as automakers are ramping up battery plants, creating a tense dynamic in the U.S. auto industry," the Morgan Stanley analysts wrote. "If this dynamic does not change, we could see billions of dollars' worth of underutilized battery plants."

Even Tesla, the industry leader, is facing a sharp slowdown in growth. After reporting its earnings last month, Tesla warned that its sales volume growth this year will fall below the level achieved last year. And the constant price cuts Tesla used last year to boost sales ate into its profits. Tesla, once the world's most profitable automaker by gross margin, has now been surpassed by Chinese automakers BYD and Li Auto.

According to current Wall Street analyst estimates, Tesla will deliver 2.2 million vehicles this year, up 20% from last year but a slowdown from the 35% growth it posted last year and far short of the 50% annual growth rate that CEO Elon Musk has targeted. Of course, Tesla no longer talks about that unachievable growth target.

Tesla has also repeatedly delayed construction of its new Gigafactory in Nuevo León, Mexico, as it grapples with rising interest rates and slowing demand. Tesla announced the factory at its investor day early last year, but it has yet to break ground on the construction. The governor of Nuevo León recently publicly called on Tesla to begin construction next month, and the state has promised to provide Tesla with $153 million in incentives.

Rivian also recently put its $5 billion Atlanta factory project on indefinite hold. Rivian didn't say it was scrapping the plant but has given no timeline for when it might start construction. Suspending the plant will save Rivian a significant $2.25 billion in capital expenditures.

Scrapping the plant may be a necessary step for Rivian to survive as the start-up faces a cash crunch. Rivian produced 17,500 vehicles in the fourth quarter of last year, a 7.5% increase year over year, but delivered only 14,000 vehicles, falling short of Wall Street estimates by 10%.

Musk said publicly last month that while Rivian has "great products," the hardest part of carmaking is building them at scale and achieving positive cash flow. Musk suggested that if Rivian doesn't make significant adjustments to improve its cash flow, it could run out of money in about 18 months. Rivian peaked at a market cap of $153 billion in early 2021, surpassing even GM and Ford. But like other US EV upstarts such as Lucid, it has since shed more than 90% of its value, now worth just $11 billion.

Another EV startup, Fisker, is reportedly in talks with bankruptcy advisors. Fisker produced 10,000 EVs last year but only sold 5,000, leaving it with a backlog of over 5,000 units. Amid severe cash constraints, Fisker has announced layoffs of 15% and this month halted production.

Fisker has just $120 million in cash on hand, of which less than $90 million is available, yet has $182 million in outstanding payables and missed an $8.4 million interest payment this week. The EV maker may file for bankruptcy for the second time unless it can raise $150 million in emergency financing.