Policy Options to Reduce Emissions in the Automotive Sector by Jonah Wilentz

ExecutiveSummary

Emissionsreductionsintheautomotivesectorpromisesignificantbenefits,butappropriatepolicy options remain controversial and poorly understood. Here, we evaluate alternatives to reduce cradle-to-grave emissions from U.S. passenger cars and light trucks. We define key evaluation criteria including lifecycle emissions reductions, cost-effectiveness, global competitiveness, innovation incentives, and planning certainty. We assess six policy approaches: stricter fuel economy standards, bans on internal combustion engines, battery electric vehicle mandates, hydrogenfuelcellvehiclemandates,carbontaxesonfuels,andahybrid“portfolioapproach.”

We find that all evaluated policies provide emissions benefits and all evaluated policies perform poorly on the basis of the planning certainty criterion. Policies differ significantly on the basis of cost effectiveness, global competitiveness, and incentives for innovation. When considering the full set of criteria, we conclude that a portfolio approach combining a policy instrument incentivizing reductions in emissions across the full economy with financial incentives for technology-neutralresearchanddevelopment,continuedinnovation,andelectricvehiclecharging infrastructureispreferred.End-of-lifeemissionsrepresentapromisingareaoffutureresearch.

ProblemStatement: Emissionsreductionsin theautomotivesector promisesignificantbenefits, butappropriatepolicyoptionsremaincontroversialandpoorlyunderstood.

Introduction

Emissions reductions from US cars and light trucks promise significant benefits for Americans. Reductions in localized air pollutants commonly associated with the automotive sector, like particulatematter and oxides ofnitrogen, would be expected to provide health benefits including foregone morbidity and mortality from respiratory, cardiovascular, cancer, and nervous system disease(Dockery etal.1993;Popeetal.2002;Chay& Greenstone2003,2005;Currie&Neidell 2005; Pope & Dockery 2006; Cohen et al. 2017; Choma et al. 2021). Reductions in localized air pollutionalsoincreasepropertyvalues;increaseproductivity,earnings,andeconomicopportunity; andprovideotherbenefitstoAmericans(Graff-Zivin&Neidell2012;Isenetal.2017;Colmer& Voorheis2024).

Research also suggests significant scope for socially beneficial reductions in carbon dioxide and othergreenhousegaseslikemethaneandnitrousoxidecommonlyassociatedwiththeautomotive sector(Calvinetal.2023;IPCC2023).1 Althoughtheprecisebenefitsofgreenhousegasemissions reductions for agricultural, health, energy use, property values, livelihoods, infrastructure, and other endpoints remain uncertain (National Academies 2017; Rennert et al. 2022), the scientific and social scientific consensus is that the potential benefits of incremental policy outweigh the costs of the status quo (Stern et al. 2007, Calvin et al. 2023). Policy and laws for climate change mitigationareexpandingrapidlyworldwide(IPCC2023).

AnycomprehensivestrategyformitigatinglocalandglobalairpollutantsintheUnitedStateswill haveto includeemissions from the transportation sector,and especially cars and light trucks. All elseequal,emissionsfrom“light-dutyvehicles”areexpectedtocontinuetotrendupwardthrough time. Between 1970 to 2022, the overall number of US vehicles on the road more than doubled andvehiclemilestraveledincreasednearly180percent(McKibben,2022;Zimet,2024).Between 1995and2019,annualpercapitamilesdrivenincreasedapproximately9percent(USDOE2022). Moreover, transportation ranks as the largest contributor of US greenhouse gas emissions, ahead oftheelectricity,industrial,agricultural,commercial,andresidentialsectors.AccordingtotheUS EPA,transportationaccountsforroughly28percentofallUSgreenhousegasemissions(USEPA 2015). Passenger cars and light-duty trucks contribute roughly 57 percent of all US greenhouse gas emissions from transportation and 16 percent of all US greenhousegas emissions (Centerfor SustainableSystems2024;USEPA2024).

1 Carbon dioxide represents ~98 percent of total greenhouse gas emissions from the transportation sector (USEPA 2024).Forthepurposesofthisassessment,weuserefertoemissionsofcarbon,carbondioxide,andgreenhousegases interchangeablytorepresentthemorepreciseconceptof“carbondioxideequivalent(CO2e).”

Althoughtechnicallyviableoptionsexisttoreduceemissionsfromcarsandlighttrucksinacosteffectivemanner(IPCC2023),specificpolicyoptionsremaincontroversialandpoorlyunderstood. Here,wetakeuptheissue.Theprimarytargetaudienceforthisreportispolicymakersandindustry stakeholders. The work may also be of interest to scholars, non-governmental organizations (NGOs), and other knowledgeable observers. We acknowledge uncertainty in the current US policylandscape.Nevertheless,weintendforthebroadconclusionsofthisreporttoapplytomany possibletimehorizons.

We first define policy evaluation criteria, including: (1) lifecycle emissions reductions, (2) cost effectiveness,(3)globalcompetitiveness,(4)incentivesforinnovation,and(5)planningcertainty. We then evaluate several US policy options to reduce emissions in the automotive sector, including: (1) more stringent corporate average fuel economy requirements, (2) banning internal combustionengines,(3)mandatingbatteryelectricvehicletechnologies,(4)mandatinghydrogen fuel-cellvehicletechnologies,(5)carbontaxesontransportationfuels,and(6)aportfolioapproach combiningbroadincentivesforpollutionreductionswithsubsidiesdesignedtoovercomeexisting marketfailures.

Toinformourdiscussions,wedrawinsightsfromexistingorproposedpoliciesaroundtheworld, expert opinion, the scholarly literature, and the ‘gray literature’ (i.e., reports written by expert NGO or industry stakeholders). We critically synthesize and analyze the current state of knowledge. We avoid proposing new theory or empirical analysis without the benefit of peer review or other external endorsement. On the basis of our policy evaluations, we identify broad lessons for optimal policy. We then propose specific policy recommendations. We conclude by reviewingimplicationsforexistingpoliciesandidentifyinggapsinknowledge.

Context:

Vehicles and powertrains

For the purposes of this assessment, we define vehicle types following regulatory convention in theUnitedStates.Wedefinedlight-dutyvehiclesaspassengercarsandlight-dutytrucks(USEPA 2016). We define passenger cars as motor vehicles with motive power designed for carrying 10 persons orless(49CFR §571.3).In2022,vehiclemilestraveledbyUSpassengercarsexceeded 1.2 trillion miles (USEPA 2024). We define light-duty trucks as motor vehicles with a gross vehicle rating of 8500 pounds or less used primarily for transporting light-weight cargo or equipped with special features such as four-wheel drive. This category also includes most sport utilityvehiclesandminivans.In2022,vehiclemilestraveledbyUSlight-dutytrucksexceeded1.6 trillion miles (USEPA 2024). This assessment does not consider medium- or heavy-duty trucks, buses,motorcyclesorothertransportationsourcesincludingaircraft,ships,rail,andpipelines.

Followingindustryconvention,wedistinguishseveralcommonapproachestopoweringlight-duty vehicles (i.e.powertrains). Internalcombustion engine(ICE) vehicles use fuel forpower.For the purposes of this assessment, electric vehicles (EVs) rely exclusively on an electric motor for power. Within this category, battery elective vehicles (BEVs) use electrical energy stored in batteries and hydrogenfuel-cell EVs(FCEVs)useenergy converted to electricity from hydrogen for power. We define hybrid vehicles as those that use both internal combustion and an electric propulsion system. Within this category, we distinguish between conventional hybrid electric vehicles(HEVs),plug-inhybridvehicles(PHEVs),andrange-extendedelectricvehicles(REEVs).

PHEVs are hybrid vehicles with batteries charged from external power sources rather than from vehicle operations. REEVs are electric vehicles with a supplemental power source, commonly a smallgasoline-poweredengine,thatservesasaback-uppowersourcewhenthebatteryisdrained. REEVs’supplementalpowersourcesextendthedrivingrangeofelectricvehicles.

Drivetrains: Status and Trends

Internal combustion engine (ICE) vehicles represented ~96 percent of all registered light-duty vehicles in the US in 2023 and ~79 percent of all US light-duty vehicle sales by 2024q3. Within the ICE category, ~88 percent of light-duty vehicle registrations represented gasoline-powered vehicles,~7percentrepresentedflex-fuelvehicles(typicallyusingE85ethanol/gasolineblends), and ~5 percent represented vehicles using diesel or some other fuel. Electric vehicles (EVs) represented ~1.2 percent of all registeredlight-duty vehicles in the US in 2023 and ~9 percent of all US light-duty vehicle sales by 2024q3. Within the EV category, the vast majority of registrationsandsalesrepresentedBEVs.FCEVsrepresentedonly~0.005percentofallregistered light-duty vehicles in 2023 and accounted forvery small sharesofUS light-duty vehicle sales by 2024q3. Hybrid electric vehicles, not including plug-in hybrids, represented ~2.5 percent of all registered light-duty vehicles in the US in 2023 and ~10.5 percent of all US light-duty vehicle sales by 2024q3. Plug-in hybrids represented ~0.5 percent of all registered light-duty vehicles in theUSin2023and~2percentofallUSlight-dutyvehiclesalesby2024q3.2

USmarketsharesof electricandhybridvehiclesareincreasing.Between2014and2018,electric and hybrid vehicles represented around 2 to 3 percent of light-duty vehicle sales in the US. By 2024,electricandhybridvehiclesrepresentedaround21percentoflight-dutyvehiclesalesinthe US. Particularly steep upward trends since 2020 are primarily driven by BEVs and HEVs. By 2023, ~4 million BEVs and ~7 million HEVs were registered to US drivers. Most scholars and policymakers posit that upward trends in US BEVs and HEVs will continue for the foreseeable future, and at least through 2050 (EIA 2024; Edison Electric Institute 2024). Research suggests thatpolicyisakeycause ofthesetrends(Ulman2016;Senetal.2017).

2 Thedatainthisparagrapharebasedonauthorcalculations,usinginputsfromUSEIA2024andUSDOE2025.

Range and infrastructure

The average new ICE vehicle achieves a range of over 400 miles per fill-up. By contrast, the average “EPA standard” range of a new BEV is approximately 300 miles per charge. Existing electric vehicles with earlier model years achieved considerably lower ranges. For example, the averagerangefora2018model-yearBEVwaslessthan200milespercharge.

About 75 percent of current EV owners charge their vehicles at home (US EIA 2024). However, existingelectricvehiclechargingnetworksawayfromnon-single-familyresidencesarelessdense than gasoline fuel station networks. As of 2024, the US had roughly 61,000 non-single-family residenceEVcharginglocations,comparedwitharound150,000to200,000gasolinefuelstations (Bestvater & Shah 2024).3 Moreover, electric charging density varies significantly across space. While 60percent ofurbanresidentslivewithinonemile ofanEVcharging location,lessthan17 percentofruralresidentshavesimilaraccess(Bestvater&Shah2024).Chargingdensityvariesas muchas10-foldacrossUSstates.

Chargingmodesandchargingspeedsvarygreatlyacrosspubliccharginglocations.Manyexisting chargers are already out of date. Even with “Level 2” and “Fast” charging technologies, battery chargingtimes(fromemptytoafullcharge)canvaryfromaround30minutestoroughly10hours. When EV owners charge at home, such charging time variability may not significantly affect demand or usage. On the other hand, slow charging speeds away from the home can reduce EV marketsharesanduse.Marketsimulationssuggestgreateraccesstofastchargingcansignificantly increaseBEVsalesandusageofEVs(Levinson&West2018).

Surveyevidencesuggeststhat“rangeanxiety”–definedasuserfearthatelectivevehicleswillrun outofchargebeforereachingthedesireddestination–canbesignificantforconsumers.Although estimatessuggestthatonlyabout2to2.7percentofalldailytravelisforlong-distance(>50miles) purposes (U.S. Department of Energy, 2022; Wadud et al., 2024), car buyers heavily consider maximum range when buying or operating vehicles. Survey evidence suggests range anxiety can impedebothEVmarketsharesandEVusebyexistingowners(Pevecetal.2020).

To contextualize existing fueling network density and charging time issues underlying potential range anxiety concerns, it can be helpful to consider total US public filling capacity for gasoline vehiclesvs.BEVs.Here,wedefinetotalfillingcapacityastotalrangemilesachievedperhourof fueling time, by vehicle and charger type. Table1 summarizes results. After accounting for the smaller number of refilling ports, shorter ranges per refilling, and longer charging times, the US total miles gained per filling hourfor gasoline-powered vehiclesis roughly 75 times greaterthan

3 Due to safety and cost concerns, hydrogen fuel cell vehicles are not designed for refueling at owner’s homes. Although hydrogen refueling options exist at some retail gasstations in California, existing infrastructure to support light-dutyFCEVsisextremelysmall.

the US total miles gained per public filling hour for BEVs.4 Although we reiterate a significant fraction of BEV charging is done privately at home, the differences in public filling capacity remainstark.Surveyevidencesuggeststhatusers’preferreddistancebetweenchargingstationsis comparabletothecurrentdensityofgasolinefuelstations(Pevecetal.2020).

Table1.TotalcapacityofUSfillingstations:gasolinevehiclesvs.BEVs

Approximate#

Source: Author calculations. Pumps / ports, filling times, and miles per refilling are roughly approximated based on USannualaveragescirca2024.MilesperrefillingforBEVvehiclesrepresent80percentoftotalvehiclerangedueto taperingtoprotectbatterylife.

Electricvehicleswithrangeextenders(REEVs)offerthepotentialtohelpminimizerangeanxiety issues. REEVsreduce operating costs to consumers as they primarily rely on electricdrivetrains. REEVs optimize BEV efficiency over short distances and can reduce refueling times relative to fullelectricvehiclealternatives.

Nevertheless, further growth in US demand for electric vehicles will require a more robust and moreextensivenetworkofwell-connected,affordable,fast,andreliablechargingstations(Mastoi etal.2022;Spiller&Russo2025).Researchindicatesthatsuchanetworkwillrequiresignificant technological innovation and distribution point optimization relative to the status quo (Mastoi et al. 2022). Moreover, such growth will most likely necessitate public investment, as external benefitsandcostsdriveawedgebetweenprivateandsocialincentivesforcharginginfrastructure (Spiller & Russo 2025). Even in California, where 35 percent of current US EVs are registered andwhere31percentofexistingcharginginfrastructureislocated,estimatessuggest~67percent ormoreofchargingtechnologywillrequireupgradesinthecomingyears(Li&Jenn2024).

Consumercosts.Anadditionaldifferencebetweenelectric,hybrid,andinternalcombustionengine vehiclesiscosttoconsumers.Onaverage,electricvehicleshavesignificantlyhigherupfrontcosts relative to comparable ICE vehicles (Rush et al. 2022). According to automotive information

4 Here, wesum BEV capacitiesacrossLevel2, DCFast, andTesla superchargertechnologiesto obtaina totalfilling publicBEVfillingcapacityof31.6million.2400million/31.6millionisapproximately75.

companyEdmunds,theaverageManufacturer'sSuggestedRetailPrice(MSRP)forafullyelectric vehicle was approximately 40 percent higher than a comparable vehicle (O’Dell 2024). Price premiumsforelectricvehiclesalsovarybyvehiclesizeandcategory.Forexample,batteryelectric light-dutytrucksareestimatedtocost8to80percentmorethancomparableICEtrucks(Danielis etal.,2025).

ElectricvehicleresalevalueasashareofinitialpurchasepricehasalsolaggedbehindICEvehicle resalevalueasashareofinitialpurchase.Historically,BEVshaveexperiencedannualdepreciation rates as high as 13 to 19 percent (Roberson et al., 2024; Burnham et al. 2019). FCEVs have experienced annualdepreciation rates ashigh as 20 percent (Burnhamet al., 2021). Explanations forelectric vehicles’ rapid depreciation and lower resale values may include battery degradation, uncertain vehicle life expectancy, and more limited access to government-sponsored purchase incentives(Schloter2022).

The high initial costs and depreciation rates of electric vehicles affect both consumers and loan program / leasing investments. One concern is that these higher costs can incentivize potential buyers to hold on to their existing ICE vehicles longer. On average, older ICE vehicles generate considerably higher operational emissions than newer vehicles, including newer ICE vehicles. Countering these effects, consumer costs can be offset over the medium to longer run by lower operational costs relative to ICE vehicles. Electric vehicles can be cost effective to consumers if heldforatleastfivetotenyears,dependingonmileageandotherfactors.Moreover,theelectric/ ICEgapbetweennewvehiclepricesandrelativeresalevaluesappearstobeshrinkingovertime.

Lifecycle Emissions

This report aims to consider policy impacts on common air pollutants across the full emissions lifecycle.Broadly,lifecycleemissionsaccountingcoversemissionsassociatedwithrawmaterials extraction, manufacturing or processing, transportation, use, and end‐of‐life management (US EPA 2016a). In the context of cars and light trucks, life cycle or “well to wheel” accounting considers emissions from manufacturing, vehicle usage, and recycling and disposal. The manufacturingphaseincludesmineralsminingandprocessingthroughcomponentproductionand vehicle assembly (GarrettMotion,Inc.2023).For electiveandhybridvehicles,this categoryalso includes sourcing, component production, and assembly of batteries (or fuel cells). The vehicle usephaseincludesbothdirecttailpipeemissionsand/orindirectemissionsfromtheelectricitygrid used to charge batteries and vehicles (Del Pero et al. 2018). The recycling and disposal phase includesdisassemblyandscrappage(GarrettMotion,Inc.2023).

All vehicles generate emissions during the production stage. Supply chains and activities to produce vehicle structure, doors and closures, drivetrains, electrical and electronic components, interiors, and suspensions generate significant emissions. Depending on assumptions, around 40

to more than 60 percent of total lifecycle emissions from BEVs come from the production stage (DelPeroetal. 2018;Koromaet al.2022).By contrast, around 15to20percent oftotallifecycle emissionsfromICEvehiclescomefromtheproductionstage(DelPeroetal.2018).

It is widely understood that ICE vehicles generate significant emissions during the use phase. Estimates suggest that more than 80 percent of carbon emissions in gasoline-powered cars come fromtheusephase(DelPeroetal.2018).Approximately70percentoftheseemissionsaredirect exhaustgasemissionsandapproximately30percentstemfromthefuelsupplychain(DelPeroet al. 2018). Since direct tailpipe emissions represent a large majority of lifecycle emissions from ICE vehicles, emissions from these vehicles generally scale with vehicle miles traveled, speed, and driving conditions. Due to greater average fuel economy, hybrid electric vehicles (HEVs) generate lower emissions during use phase than conventional ICE vehicles. Published estimates suggest that, on average, hybrid electric vehicles emit 25-30 percent less air pollution than gasoline-poweredcarsduringtheusephase(Singh2023).

Although electric vehicles (and PHEVs, while using electric propulsion drivetrains) do not generatetailpipeemissions,5 theelectricityusedtochargevehicles’electricpropulsionsystemsis typically associated with significant carbon and localized air pollution. Using stylized data from the European Union, Del Pero et al. (2018) and Koroma et al. (2022) estimate about 40 to 60 percentofatypicalBEV’slifecyclegreenhouse gasemissionscomefromtheusephase.Koroma et al. (2022)note, however, thatthese use phase emissions sharesmightbe expectedto declineif electricitygridcarbonfootprintsdecline.

In any event, because power generation fuel mix varies substantially across location, EVs’ use phase emissions varysignificantly across location. For example, the typical EV in West Virginia is charged using electricity generated from a fuel mix involving more than 90 percent coal while the typical EV in Rhode Island or Washington state is charged using electricity generated from a fuel mix involving more than 80 percent natural gas or 60 percent hydropower, respectively.6 Figure1 summarizes carbon intensity (in pounds of carbon dioxide per megawatt hour) of electricity generation across US states. The key implication is that, since carbon intensity on the grid can vary by a factor of 10 or more across states, carbon emissions from EV use phase emissionscanalsovarybyordersofmagnitudedependingoncharginglocation.7 Farzaneh&Jung (2023) found that cleaner electricity generation could reduce total carbon emissions from US electricvehicletransitbyasmuchas40percentormore.

5 Tobeprecise,EVsgeneratenotailpipeemissionsandFCEVsgeneratetailpipeemissionscomposedsolelyofwater vapor. Since these latter emissions contain neither greenhouse gases nor localized air pollutants, for the purposes of thisassessmentwecategorizeFCEVsashavingnotailpipeemissions.

6 See,forexample,https://www.eia.gov/electricity/data/browser/

7 Aliteraturealsosuggeststhat,foranygivenlocation,gridreliabilityandemissionsprofilesdiffersignificantlyacross chargingtimeswithintheday.See,forexample,Fang,Asche,&Novan(2018)andBaileyetal.(2023).

Figure1.Carbonintensityofpowergenerationbystate.Source:USEIA(2022).

Theabovepointsnotwithstanding,existingevidencesuggeststhat–onaverage–arecentmodelyearBEV isassociatedwith roughly35percent lower totalproductionanduse phasegreenhouse gas emissions than a recent model-year gasoline-powered internal combustion vehicle (Del Pero et al. 2018; Zheng et al. 2020). See Table2 for an illustrative breakdown from Del Pero et al. (2018).Here,thetypicalBEVgeneratesapproximately60percentlowertotalemissionsfromthe use phase than the typical ICE vehicle. For a variety of reasons, however, including battery productionandgreaterstructuralanddrivetrainmass,thetypicalBEVgeneratesapproximately80 percenthigheremissionsduringtheproductionstagethanthetypicalICEvehicle(DelPero2018; MITClimate2022).

Table2.ProductionandUsePhasegreenhousegascontributions,ICEvs.BEVvehicles

Source:DelPeroetal.(2018).ReportedemissionsaremeasuredinkgofCO2e.

Emissions profiles for localized air pollutants differ considerably from corresponding emissions profilesfor greenhouse gases. Generally speaking, across the full lifecycle, historic contributions

tolocalizedairpollutionaregreaterforBEVsthanforICEvehicles.SeeTable3foranillustrative breakdown from DelPeroetal. (2018). In DelPeroetal.(2018)’s analysis,totalcontributionsto acidification (mainly from sulfur dioxide and oxides of nitrogen) are approximately 40 percent larger for BEVs relative to ICE vehicles on average. Although BEV use-phase contributions to acidification are lower than ICE vehicle contributions, BEVs production-phase contributions are morethantwotimeslarger.Totalcontributionstofineparticulatematter(PM2.5)areapproximately 2.25 timesgreater for BEVs relative to ICE vehicles on average.Although BEV and ICE vehicle use-phase contributions to fine particulate matter are relatively similar, BEV production-phase contributionsaremorethanthreetimeslarger.Totalcontributionstoozoneformation,largelyfrom emissions of oxides of nitrogen (NOx), are approximately 25 percent larger for BEVs than ICE vehicles. ICE vehicle contributions to ozone formation largely come from the use-phase, while BEV contributions to ozone formation largely come from the production-phase. For all lifecycle emissions profiles summarized in Table3, disproportionately large contributions from the production-stage of BEVs are chiefly attributable to mineral extraction and metals processing / distributionthroughoutthesupplychain(DelPeroetal.2018).

TherelianceofBEVsupplychainsonmetalsalsoimplieshigheraveragecontributionstoresource depletion across the lifecycle. The analysis in Del Pero et al. (2018) concludes that BEVs use approximately30percentmoreresourcesthancomparableinternalcombustionenginevehicleson average.Electricvehiclebatteriesandmotorsalsouseamuchlargershareofrareorcriticalmetals, including lithium, cobalt, nickel, manganese, and graphite, as well as “rare earth” metals such as neodymiumanddysprosium.Becausethesemetalsarepredominantlysourcedinselectcountries, theirutilizationenhancessupplychainvulnerabilitiesandpossiblygeopoliticalconflict.

Table3.Selectedairpollutioncontributions,ICEvs.BEVvehicles

Source:DelPeroetal.(2018).AcidificationismeasuredinmoleofH+equivalent.Fineparticulatematterismeasured inkgofparticulatesbelow2.5milligramsindiameter.Ozoneformationismeasuredinnon-methanevolatileorganic compoundequivalent.

In contrast to the rapidly advancing knowledge on lifecycle emissions from production and use phases,thescientificand practicalunderstanding ofvehicle end-of-lifeemissionsprofilesremain underdeveloped. Ignoring the role of batteries, end-of-life carbon emissions contributions from dismantling,shredding,sorting,wastetreatment, andmaterialsrecyclingof bothICEandelectric vehicles are expected to be small on net. When battery considerations are included, end-of-life greenhouse gasemissionsprofilesofBEVscanrepresentnetemissionsreductionsifthebatteries arecarefullyremanufactured,repurposed,orrecycledusingstate-of-the-arttechnologies(DelPero etal.2018;Koromaetal.2022).However,neither theUSfederalgovernmentnormostUSstates requireremanufacture,repurpose,orrecyclingofEVbatteries.Ifbatteriesarenotremanufactured, repurposed, or recycled, net increases in emissions can be significant. Evidence suggests battery recycling or refurbishing at end-of-life can reduce full lifecycle greenhouse gas emissions by as much as 10 percent relative to disposal. In terms of localized air pollution, battery recycling and refurbishmentatend-of-lifecanreducefulllifecyclefineparticulatematterandtoxicpollutionby roughly15to25percentrelativetodisposal(Koromaetal.2022).

Criteria:

Having established context, we define our policy analysis criteria. For each criterion, we qualitatively consider how well a specific policy alternative performs relative to the other evaluatedpolicyalternativesand/orthestatusquo.

1. Lifecycle emissions reductions. As defined above, lifecycle emissions occur during vehicles’ production,use,andend-of-lifephases.Weconsidertheextenttowhichpolicyalternativesreduce greenhouse gas emissions throughout the full lifecycle. We consider the extent to which policy alternativesreducelocalairpollutantssuchasfineparticulatematter,ground-levelozone,nitrogen oxides(includingNO2),andsulfuroxides(includingSO2).Althoughweacknowledgethatpolicy alternatives may influence emissions and concentrations of other air, water, and waste contaminants(Karlssonetal.2020),theyareoutsidethepresentscopeunlessotherwisenoted.

2. Cost effectiveness.Weconsidercompliancecostsascostspertonofcarbon-dioxide-equivalent avoided to industry participants from meeting the obligations induced by the policy alternative. We consider the extent to which, given a fixed emissions target, policy alternatives minimize compliance costs to industry stakeholders. A key consideration is technology-neutrality, i.e. the requirement that a policy does not prescribe specific means to carbon reduction or ex-ante favor any given technology. Technology-neutral policies typically include those that price external environmental costs or subsidize generic research and development rather than technologyspecificresearchanddevelopment(Lehmann&Soderholm2018).8

8 We acknowledge that some technology-neutral policies can implicitly favor technologies that are closer to market over more “disruptive” technology alternatives (Cervantes et al. 2023). We similarly acknowledge that conditions

3. Global competitiveness. We define global competitiveness as affected stakeholders’ ability to generateshort-runandlong-runmarketsharesandprofitsthatallowthemtocontinuetoparticipate in the trade-exposed automotive industry. We consider the extent to which policy alternatives allow industry stakeholders to compete internationally. The automotive industry is changing rapidlyduetoglobalizationofsupplychains;consumerdemandforpowertrainsandothervehicle technologiesincludingdigitalexperiencesanddriverassistancesystems;theriseofChinaasboth a consumer and producer of automotive intermediate and final goods; and global trade policy (Coffin 2024; McKinsey & Company 2025). In this dynamic environment, it is necessary to understand how policies designed to reduce carbon emissions in the automotive sector affect the volumeandvalueofproductionofvehicles,drivetrains,andautopartsbymarket.

EVALUATIONCRITERIA

LifecycleGHGemissionsreductions

Costeffectiveness

GlobalCompetitiveness

InnovationIncentives

PlanningCertainty

Towhatextentdopolicyalternativesreduce emissionsthroughoutthefulllifecycle?

Givenafixedemissionstarget,towhatextentdo policyalternativesminimizecoststostakeholders?

Towhatextentdopolicyalternativesallow industrystakeholderstocompeteinternationally?

Towhatextentdopolicyalternativesincentivize newideas,products,orprocesses?

Towhatextentdopolicyalternativessupport realisticvehicledevelopmentcycles?

4. Innovation incentives. We define innovation incentives as mechanisms or factors that lead to new technologies, processes, or products that can help achieve policy goals more effectively or cost effectively (Persaud et al. 2003). We consider the extent to which policy alternatives incentivize new ideas, products, or processes. In the automotive sector, policies that directly incentivizecarbonreductionsorencourageresearchanddevelopmenthavesignificantpotentialto drive innovation in low-carbon technologies with response times typically within roughly five years(Dechezleprêtreetal.,2016).

(like pre-existing market distortions) can exist where technology-neutral policies may not be cost effective in all circumstances and all markets (Lehmann & Soderholm 2018). Nevertheless, for the purposes of this assessment we take the broad view that, on average over the short to medium run, “whenever cost minimisation is … important, technologyneutralityshouldbefavoured”(Fabra&Montero2023).

5. Planning Certainty. We define planning certainty as the clarity and durability of firms’ compliancecostsandobligationsunder anyspecific policyinstrument.We considerthe extent to which policy alternatives support realistic vehicle development cycles without rapidly changing compliance and compliance cost expectations. Abrupt or unexpected roll-backs or ramp-ups in stringency complicate firms’ production, marketing, and pricing decisions. A growing literature suggeststhatuncertaintyinpolicystringencyreducesbusiness’slonger-terminvestmentsandcan impactbothfirmsandthebroadermacroeconomy (Huang&Punzi,2024).

Planningcertaintyisunusuallysalientintheautomotiveindustry.Lagtimesbetweenideationand prototype development in the industry almost always exceed two years and typically take longer. Lagtimesbetweenprototypedevelopmentandvehicledevelopmenttypicallyexceedthreetofive years. As such, even the most ambitious investment and development cycles in the industry span five to eight years total. During a new vehicle development triggered by policy changes, stakeholders are typically rushing for scale and lack the resources and time to invest in research and development in technologies not directly targeted by the policy. As such, abrupt policy changes and/or strict implementation timeline can flatten competitive technology differentiation in the industry. As such, durable policy with realistic implementation timelines is essential to ensure global competitiveness and sustained innovation. While optimal policy surely allows at leastsomeresponsetochangingindustryandtechnologicalconditionsinthelonger-term,optimal policyintheautomotiveindustryinvolvesstrategiesthatremainrelativelystableontimehorizons ofatleast8to10years.

PolicyOptions:

On the basis of the evaluation criteria defined above, we consider the advantages and disadvantagesofsixpolicyalternatives.Here,weclarifyanddefinethosealternatives.

1. More stringent corporate average fuel economy standards. Corporate average fuel economy standards(“CAFEstandards”)areaveragefleet-widefueleconomytargetsthateachdomesticand import automaker must achieve for its US car and truck fleet in a given model year. CAFE standardswereinitiallyestablishedintheUSbytheEnergyPolicyandConservationActof1975 and remain overseen by the US National Highway Traffic Safety Association (NHTSA). To fix ideas, we considersomething akin to the June 2024 NHTSA final rule for CAFE standards.9 The rulerequiresanindustry-widefleetfueleconomyofapproximately50.4milespergallonbymodel year 2031 for light-duty vehicles. These CAFE standards increase at a rate of 2 percent per year forpassengercarsinmodelyears2027to2031andforlighttrucksinmodelyears2029to2031.

9 We acknowledge that, in January 2025, the US Secretary of Transportation declared the 2024 rule was contrary to Administration policy and initiated a new rule-making process. See below for related discussions. Nevertheless, in anyevent,conclusionsfortherelativeadvantagesanddisadvantagesofpolicyinstrumentsthatreduceemissionsfrom theautomotivesectorintheUnitedStatesremain unchanged.

2. Banning internal combustion engines. Internal Combustion Engine bans, or ICE bans, aim to approachfulleliminationofvehicletailpipeemissionsofgreenhousegasesandlocalairpollutants by a specified date. ICE bans have not been widely implemented in the United States, but the California Air Resources Board – as part of its Advanced Clean Cars IIrule – aims to require all newlight-dutypassengervehiclessoldinthestatetobe“zeroemissionsvehicles”by2035.More thanadozenotherstates,includingMassachusetts,NewJersey,NewYork,andWashington,have proposed similar measures. Under commonly proposed US state-level ICE ban policies, “zero emissions vehicles” are defined as battery electric vehicles (BEVs), fuel-cell electric vehicles (FCEVs), and plug-in hybrids (PHEVs).10 This latter group is included because their lack of tailpipe emissions while using electric propulsion drivetrains lead to lower overall use phase emissions relative to conventional gasoline-powered vehicles. The policy label notwithstanding, ICE“bans”typicallyalsoincludeintermediatetargets–beginningassoonasmodelyears2026or 2027–requiringfixedsharesofnewlight-dutyvehiclessalestorampuponthewayto100percent BEVs,FCEVs,orPHEVsbythefinalimplementationdate.

POLICYALTERNATIVES

 Morestringentcorporate averagefueleconomystandards.

 Banninginternalcombustionengines.

 Mandatingbatteryelectricvehicletechnologies.

 Mandatinghydrogenfuelcellvehicletechnologies.

 Carbontaxesontransportationfuels.

 Portfolioapproach.

3. Mandating batteryelectric vehicle technologies.ThispolicysharesessentialfeaturesofanICE ban, as described above, but targets must be met specifically with BEVs instead of other “zero emissionsvehicles.”

10 Weacknowledgethat,atthetimeofthiswriting,federalwaiversallowingCalifornia’sAdvancedCleanCarsIIrule andotherstate-levelICEbansareunderthreat.Nevertheless,inanyevent,conclusionsfortherelativeadvantagesand disadvantages of policy instruments that reduce emissions from the automotive sector in the United States remain unchanged. EURegulation2023/851requiresallnewpassengerlight-dutyvehiclestobezeroemissionsby2035.To theauthors’ knowledge, theregulation doesnot explicitly mention PHEVs, butthese arepresumably notincluded as theycangenerategreenhouseorlocalairquality pollutants.

4. Mandating hydrogen fuel cell vehicle technologies. This policy shares essential features of an ICE ban, as described above, but targets must be met specifically with FCEVs instead of other “zeroemissionsvehicles.”

5. Carbon taxes on transportation fuels. Carbon taxes set a “price” on greenhouse gas emissions or a “price” per unit of fuel on the basis of that fuel’s carbon content. This latter case recognizes thatgreenhousegasemissionsareproportionaltothecarboncontentofanygivenfuel,sotaxrates canbebasedonobservedfueluseratherthanon hardertoobserveemissions (WorldBank,n.d.).

Carbonpricesaimtointernalizethesocialcostsofcarbonandincorporateexternaldamagesfrom greenhouse gases into producer and consumer decision-making (Fischer & Newell 2008). In principleatleast,carbontaxesproportionaltothecarbon-dioxide-equivalentemissionsincentivize cleaner fuels and investments in emissions reductions from ICE vehicles, HEVs, and PHEVs. CarbonpricingincentivesconsumerconservationwhileoperatingICEvehiclesandHEVs,aswell asincreasingconsumerdemandforBEVs,HCEVs,orPHEVs.

If the distributional consequences of higher expected consumer prices and lower producer surpluses may be significant, tax revenues can be allocated to promote distributional neutrality. One possibility is to return a share of tax revenues to residents via adjustments to personal and corporate taxes or through redistribution by lump sum transfer (Rivers & Schaufele 2015). Such anapproachreducesburdensonconsumersandmayavoiddisadvantagingcertaingroupslikelowincome households. Another (not mutually exclusive) possibility is to return a share of tax revenues to stakeholders to support their continuing global competitiveness. Revenue-neutral carbontaxeshavebeen foundtoincreasepublicsupport,decreasetaxburdensonconsumers,and evenincreaseeconomicactivity(Goulder,1995;Rivers&Schaufele,2015).

For the present purposes, we consider a somewhat narrowly defined tax on gasoline, diesel, and biofuels on the basis of their carbon content. These carbon prices could begin at relatively low rates(e.g.,lessthanUS$50pertonCO₂equivalent)andratchetupthroughtime.

6. Portfolio approach: Fischer & Newell (2008) show that theoretically optimal emissions reductionpolicieslikelycontainacombinationofelements,soweconsider ablendedpolicy.

First,theportfoliopolicyincludesbroadprovisionsthatsimultaneouslyincentivizecleanerfuels; reductions in use phase emissions for all vehicle types; consumer demand for BEVs, HCEVs, or PHEVs;andconsumerconservation.Onenaturalalternativeisaneconomy-widecarbontax,rather thancarbonpricingappliedsolelytotransportationfuelsasdescribedabove.11 Here,carbontaxes

11 Another alternative is Clean Electricity Standards (CES), which require a specific percentage of power generation to come from low- or zero-carbon sources (wind, solar, hydropower, nuclear, etc.) by a target date. These standards aim to eventually promote decarbonization of the grid, enabling EVs to produce fewer lifecycle emissions when

are applied to energy sources (on the basis of their carbon content) across all economic sectors includingpowergenerationandtransportation.Asanexample,Swedenhashadaneconomy-wide carbontaxinplacesince1991.Thepolicymakesallfossil-fuelsourcesrelativelymoreexpensive, thusincentivizingreductionsinemissionsacrossthefulleconomy(Fischer&Newell2008).

Second,thepolicyacknowledgesandaddresseskeymarketfailuresinfluencingthepresentscope and scale of emissions reductions in the automotive sector. Research and development, technological innovation, and infrastructure (including EV charging or refueling networks) all have public goods components, implying that they generate benefits and spillovers to parties not involved in their direct provision (Samuelson 1954). As such, private markets will underprovide these goods and services relative to a social optimum. Our portfolio policy alternative therefore complementsthecarbontaxwith:(a)subsidies(ortaxincentives)fortechnology-neutralresearch and development investment in clean vehicle technologies (Fischer & Newell 2008) and (b) subsidiesforchargingnetworkinfrastructureexpansionandupdates.

Evaluation:

Here we qualitatively rate the above policy alternatives on the basis of each evaluation criterion, using the coarse scale of “good” (+), “neutral” (0), or “poor” (-). In principle, we could assign weights to evaluation criteria and rank alternatives. Instead, we illustrate generalizable strengths and weaknesses of policy instruments and thus build a framework for stakeholders to form their ownconclusionsonthisbasisoftheirownpriorities.

Figure2 summarizes evaluation results. For each policy / criteria combination, we strive to conciselyarticulatereasoning.Beforedoingso,wenotethatpolicy-inducedchangesingreenhouse gases co-move with policy-induced changes in local criteria air pollutants for all interventions considered. Although we acknowledge that lifecycle greenhouse gas reductions will not necessarily scale linearly with air pollution co-benefits, the relative strengths and weaknesses of various policy instruments are roughly consistent on the two dimensions. We therefore focus, without loss of generality, on discussions for reductions in greenhouse gas emissions and or for generic reductionsinairpollutionemissions.

More stringent corporate average fuel economy standards

Emissions(0).EstimatessuggestsCAFEstandardshavesavedover1.5trilliongallonsofgasoline andavoidedover14billiontonsofGHGemissionsin theUnitedStatessince1975forlight-duty vehicles(Greeneetal.,2020).Lookingforward,overthenextfiveyears,incrementallyincreasing stringencyofCAFEstandardsisestimatedtoresultina50percentreductioninaverageemissions

charged on a cleaner grid. However, as this policy alternative does not necessarily disincentive emissions from ICE vehicles,wedonotconsideritfurthergivenmoreholisticoptions.

per mile for cars and light trucks – or about 8 percent of US emissions (Uddin, 2024). However, sinceCAFEstandardsprimarilytargettailpipeemissions,theyhavelimitedimpactsonusephase emissions for EVs and limited impacts on production and end-of-life emissions for any vehicle type. Moreover, by lowering the cost of driving, CAFE standards are associated with a “rebound effect.”Here,driversrespondtoloweroperationalcostsbydrivingmore.Estimatessuggestaone percent increase in fuel economy is associated with 0.1 to 0.4 percent increase in vehicles miles traveled. Asa consequence, emissionssavingsfrom CAFEstandards are projectedtobe10to 40 percentlowerthanwouldbeexpectedintheabsenceofreboundeffects(Herring2013;Linn2013; Gillingham2020).

ALTERNATIVES

Figure2.OutcomesMatrix. The figure summarizes qualitative evaluations of the policy alternatives listed in the top row on the basis of the criteria listed in the left column. For each evaluationcriterion,eachpolicyisratedas“good”(+),“neutral”(0),or“poor”(-).

Cost effectiveness (0).HistoricCAFEstandardshaveincreasedproductioncosts,raising average consumerpricesandreducingaverageproducersurplus(USCongressionalBudgetOffice,2003). Withthatsaid,lossesinconsumerandproducersurplusarelesssignificantthanmightbeimagined because vehicle lightening induced by the policy has reduced production costs. Similarly, lower fuel costs offset increased costs to consumers over the medium and longer-term (Greene et al., 2020).Relativetoalternatives,CAFEstandardsaretechnology-neutralbydesign.Theysettargets for fuel economy and allow automakers to meet them through any mix of technologies – engine

improvements, transmissions, hybridization, lightweighting, aerodynamic design, alternative fuels,orsellingmoreEVs.Thereisnospecifictechnologydictated.Thisgivesmarketsflexibility topursuethemostcost-effectivemethodstomeetcompliancerequirements.

Global Competitiveness (0). Fuel economy standards are expected to have mixed effects on the globalcompetitivenessofproducersandsupplychainsservingtheUSautoindustry.Comparedto China’sCorporateAverageFuelConsumption(CAFC)standardsofaround58.8milespergallon and the European Union’s “Euro” standards of around 56 miles per gallon, the United States has more relaxed standards (Oxford Institute of Energy Studies, 2025; European Parliament, 2023). IncreasingthestringencyofUSCAFEstandardsmayleveltheplayingfieldwithotherlargeglobal markets and provide incentives for final vehicles appropriate for both domestic and international markets.

Innovation incentives (+). Incremental increases in CAFE standards over time have spurred technological advances including different vehicle body materials and densities, vehicle-to-grid technologies, autonomous driving technologies, and electric battery improvements (Wang et al., 2024). Although CAFE standards encourage innovation, evidence suggests the nature of CAFE standardshasledtoincrementalimprovementsratherthanmoredisruptiveinnovations.

PlanningCertainty(-).Theincrementalnatureof light-dutyvehicleCAFE standardsmakesthem susceptible to abrupt or unexpected roll-backs or ramp-ups in response to changing political administrations (Epp 2025). CAFE standards also allow credit banking, trading, and various exemptions,whichlowerexpectedcompliancecostsbutadduncertaintyforplanning.

Banning internal combustion engines.

Emissions(+).Bansoninternalcombustionengineshavelimitedimpactsonusephaseemissions for EVs. Moreover, all else equal, bans on internal combustion engines increase net production phase emissions since EV production generates significantly greater emissions that ICE vehicle production.Nevertheless,thebans’eventualnear-totaleliminationoftailpipeemissionswouldbe expected to generate large net reductions in greenhouse gases from light-duty vehicles (Morfeldt etal.2021;Heldetal.,2021).Itbearsnoting,however,thatthosenetemissionsreductionswould be achieved with lags relativeto policy target dates. US vehiclelifespans currently average10 to 15 years and average vehicle lifespans abroad are often greater. More expensive vehicles incentivizeconsumersto holdontoexistingvehicleslonger.So,forexample,acompleteinternal combustionenginebanfornewvehiclesby2035mightbeexpectedtospurlargelyzero-emissions roadtravelafter2050.

Cost effectiveness (-). Given significant departures from current market conditions, compliance costsandreductionsinproducersurplusareexpectedtobehighunderbansoninternalcombustion engines.Consumersurpluslossesarealsoexpectedtobehighinitially,althoughtheybepartially

offset by expected fuel savings in the longer-run. Consumer surplus losses will be magnified if charging infrastructure is not expanded and upgraded. Relative to fully flexible policies, internal combustion engine bans are rigid and not technologically neutral, as they do not allow market participants to pursue the full range of cost-effective approaches to emission reductions. On the other hand, relative to technology-specific mandates, ICE bans incentivize technological advancement across more types of vehicles including the full range of EVs, HCEVs, HEVs, and (dependingonprogrammaticdetails)PHEVs.

Global competitiveness (-). The effects of ICE bans on global competitiveness are negative. Although the EU and several countries (including Israel, Singapore, and Norway) have implementedorproposedbansoninternalcombustionengines,Chinaandseveralotherlargelightduty vehicle markets have not done so. Think tanks and industry stakeholders note that the EU’s phased-in ICE bans are already substantially shifting competitive advantage in the automotive industryawayfromtheregion.TheinteractionofEUpolicywiththeregion’shighlaborcostand highenergycosts,especiallywhencombinedwithbatterysupplychainsdominatedbyChinaand aggressiveChineseindustrysupport,aremakingitincreasinglychallengingforEuropeanindustry participantstocompeteinternationally(doPradoetal.2025).

Innovationincentives(0).Asdiscussedabove,ICE bansincentivizeresearchanddevelopmentin technologies supporting more efficient and cost-effective EV, HCEV, HEV, and (depending on programmaticdetails)PHEVdesignandoperation.

Planning Certainty (-). A well-designed ICE ban set years in advance with realistic milestones provides clarity about future regulation and supports reasonable vehicle development cycles. On the other hand, actual implementation of the policy remains unclear. Current state-specific ICE ban policies and proposals are granted only by US EPA waiver of its own regulations under the Clean Air Act and are under threat. As such, US bans on internal combustion engines are potentiallysubjecttochangingfederalpolitics.

Mandating battery electric vehicle technologies.

Emissions (+). BEV mandates have limited impacts on use phase emissions for EVs. Moreover, BEVmandatesareexpectedtoincreasenetproductionphaseemissionsasbuildinganewelectric vehicle can produce about 80 percent more carbon dioxide emissions than building a similar car with an internalcombustion engine (Del Pero etal. 2018; MIT Climate, 2022).Nevertheless, the BEVmandate’seventualnear-totaleliminationoftailpipeemissionswouldbeexpectedtoreduce total carbon emissions by 35 to 50 percent by mid-century, depending on the fuel mix of the electricitygridusedforBEVcharginginfutureyears.End-of-lifeemissionsfromthemanagement of lithium batteries can be significant absent refurbishment, reuse, or recycling. Reuse and recyclingarecommonbutnotcurrentlymandated.

Cost-effectiveness (-). Given significant departures from existing market conditions, compliance costsandreductionsinproducersurplusareexpectedtobehighunderbansoninternalcombustion engines. Consumer surplus losses are also expected to be high initially, although they may be partially offset by fuel savings in the longer-run. Consumer surplus losses will be magnified if charging infrastructure is not expanded and upgraded. Moreover, BEV mandates prescribe the specific means by which reductions must be met, violating basic cost effectiveness principles associatedwithtechnologyneutrality.

BEVs also generate unusually large production-phase emissions. It can take as many as 15 years of operation for electric vehicle emissions to become net negative relative to gasoline-powered ICE vehicles (Elgowainy et al. 2016). Moreover, even over a 15-year operations cycle, costs per ton of carbon dioxide avoided can be 2 to 5 times higher than alternatives like clean diesel and HEV vehicles (Elgowainy et al. 2016), depending on technology and driving conditions. For typicalvehicle lifespans, mediumto lowmileage drivingismorefavorable to hybridswhile high mileagedrivingconditionsaremorefavorabletoBEVs(GarrettMotion,Inc.2023).

Globalcompetitiveness(-).Generallyspeaking,thecompetitivenessconcernsdiscussedabovefor ICE bans apply for the similar but even narrower BEV mandate. A related concern is that BEV mandates “pick winners” ex-ante, thus “leveling down the playing field” and reducing competitiveness of innovators pursuing other technological solutions. One possible offsetting benefit is that a BEV mandate might strengthen domestic producers’ positions in the broader EV market, particularly as major global markets strive for greater electrification. Leaders in BEV productionandadoptionmightsecuresupplychainadvantages,includingprominenceinrareearth minerals, battery, and EV component processing and production value chains. Nevertheless, the policy’s focus on a single drivetrain and other inflexible features suggests strongly negative implicationsforglobalcompetitiveness.

Innovation Incentives (0). BEV mandates incentivize research and development in technologies supportingmoreefficientandcost-effectiveBEVs.Suchtechnologiesmaysupportgreaterbattery efficiency,batterystoragecapacity,andoverallvehicleperformance.However,BEVmandatesdo not incentivize research and development into other technologies, including other zero emission vehicletechnologies.

Planning Certainty (-). A well-designed BEV mandate set years in advance with realistic milestones provides clarity about future regulation and supports reasonable vehicle development cycles. On the other hand, actual implementation of the policy remains unclear. Complementary infrastructure development is necessary, and public resources for this purpose have been controversial (St. John & Daly 2025). Moreover, the existing US federal policy venue for BEV

targetshasbeenpresidentialexecutiveorders,whichareunusuallysensitivetochangesinfederal politics.

Mandating hydrogen fuel cell vehicle technologies.

Emissions (+). FCEV mandates are expected to increase net production phase emissions as building a new FCEV generates more carbon dioxide emissions than building a similar car with aninternalcombustionengine.Nevertheless,FCEVscandecreasetotalgreenhousegasemissions by roughly 50 percent compared to gasoline-powered vehicles when using renewable hydrogen (Miotti et al. 2015; Elgowainy et al. 2016). If using green hydrogen, total carbon emissions reductionscould–inprinciple–beconsiderablygreaterthan50percentrelativetogasolinecars.12

Cost effectiveness (-). Given significant departures from existing market conditions, compliance costsandreductionsinproducersurplusareexpectedtobehighunderbansoninternalcombustion engines. Consumer surplus losses are also expected to be high initially, although they may be partially offset by fuel savings in the longer-run and consumer preferences for the longer ranges and faster charging available afforded HCEVs (relative to BEVs). FCEVs are currently more costly to produce than comparable BEV or ICE vehicles due to their hydrogen fuel cells (Usai et al., 2021). Although the fuel-cell technology frontier is advancing rapidly, the literature suggests FCEVs are also somewhat less energy-efficient (in converting energy to motion) than BEVs due to energy leakage while generating, compressing, and storing hydrogen (Togun et al. 2025). A critical issue impacting adoption and cost effectiveness is infrastructure. Current hydrogen refueling infrastructure for light-duty vehicles is extremely limited in the US (and absent outside ofCalifornia).Finally,HCEVmandatesprescribethespecificmeansbywhichreductionsmustbe met,violatingbasiccosteffectivenessprinciplesassociatedwithtechnologyneutrality.

Moreover, since HCEVs generate significant production-phase emissions, even over 15-year operations cycles FCEV’s cost perton of carbon dioxide avoidedcan be2 to 5 times higherthan alternativeslikecleandieselandHEVvehicles(Elgowainyetal.2016),dependingontechnology and driving conditions. For 3-year operations cycles, FCEV’s cost per ton of carbon dioxide avoided can be as much as 10 higher than alternatives like clean diesel and HEV vehicles (Elgowainyetal.2016).

Global competitiveness (0). Hydrogen fueldevelopment may afford producers and supply chains a greater level of energy security and independence (Hassan et al. 2023). Moreover, as HCEV

12 Greenhydrogen, createdbyelectrolysisusing renewable energy,hasnear-zeroemissions.Grayhydrogenrefersto hydrogenproducedbyfossilfuelsthroughsteammethanereforming.Bluehydrogenisproducedfromfossilfuelsbut involvesa carboncaptureandstorageelement whichreducesthe carbonfootprint whencompared to grayhydrogen. SeeHassanetal.(2023)formorediscussionanddetail.Usingcommoncurrenttechnologies,anoffsetting(co-benefit) concern associated with hydrogen FCEVs is the large quantity of water consumed. For every kilogram of hydrogen produced, 9 kg of water must be consumed (Beswick et al., 2021). Scaling up hydrogen production for widespread useintransportationusingcommoncurrenttechnologiescouldputpressureonwater-scarceregions.

markets are still nascent, opportunities for comparative advantage from early adoption are significant. On the other hand, global markets for new light-duty vehicle are rapidly pivoting towardsBEVs.AnoveremphasisonHCEVscouldplaceproducers andsupplychainsatrisk.

Innovation incentives(0). FCEVmandates incentivize researchand development in technologies supporting more efficient and cost-effective FCEVs. Such technologies may support advancementsinelectrolysis,hydrogenstorageefficiency,andfuelcelllongevity.Greenhydrogen technologies offer unusual opportunities for disruptive technical change (Hassan et al. 2023). However, FCEV mandates do not incentivize research and development into other technologies, includingotherzeroemissionvehicletechnologies.

Planning Certainty (-). A well-designed FCEV mandate set years in advance with realistic milestones provides clarity about future regulation and supports reasonable vehicle development cycles. On the otherhand, the lack of refueling infrastructure for FCEVs raises serious questions aboutthesustainabilityofthepolicyabsentco-investmentininfrastructure(Hassanetal.,2023).13

Carbon taxes on transportation fuels

Emissions (+). A carbon price on transportation fuels such as gasoline, diesel, and biofuels has limited consequences for use phase emissions for EVs. Carbon pricing solely targeting transportation fuels also has limited consequences for production phase emissions for all vehicle types. Nevertheless, carbon pricing encourages uptake of EVs and HEVs (by making gasoline costly),reducesICEandHEVvehiclemilestraveled,andpromptsefficiencyimprovementsacross the entire automotive sector. Taxes generate greater demand responses than other commensurate changes in fuel prices, highlighting the efficacy and salience of tax-based policy instruments (Rivers & Schaufele, 2015). Estimates suggest emission reductions can be rapid and large, both absolutelyandrelativetootherpolicyalternatives.

Cost-effectiveness (+). Carbon pricing flexibly encourages emissions reductions, allowing both consumers and producers to seek the most cost-effective ways to reduce tax payments and thus emissions.Carbonpricingsatisfiesthe“principleoftargeting,”focusingthepolicyinstrumenton themarginofmostdirectinterest(emissions)ratherthanamarginseveralstepsremoved.Carbon taxesmaintainfulltechnologyneutralitywhilereducingemissions.Thereisnobiasfororagainst anyspecificvehicletechnologyorfuelbeyondcarboncontent.

Global competitiveness (0). Carbon pricing is generally considered neutral with respect to competitiveness,provideditareharmonizedtoprevent“leakage”fromajurisdictionwithataxto ajurisdictionwithoutatax(Parry2021;Muresianu&Bray2022).Withrespecttoacarbontaxon

13 Togunetal.(2025)suggestsFCEVsmaybemoresuitedtolong-distance,heavytransport.

transportationfuels,thepolicyis unlikelytosignificantlydisadvantagecompetitivenessprovided itisuniformlyappliedacrosstheUS.

Innovation incentives (+). By allowing considerable flexibility in methods to achieve carbon reductions, carbon taxes on transportation fuels promote widespreadinnovation. Acarbon tax on fuels improvesthebusiness case foradvanced biofuels, EV and HEVadoption, EVcharging and refuelingtechnology,betterbatteries,lightweightmaterials,etc.-becauseinnovationsalongallof thesedimensionshelpavoidthetaxedfuel.Moreover,unlikeonetimeallornothingpolicies,taxes giveongoingincentives.

Planning Certainty (0). In principle, carbon taxes on transportation fuels provide certainty about current and future emissions prices, which support business decision-making and mobilization of investment (Parry, 2021). As price signals are fixed by policy, price signals to businesses are predictable. Taxes on transportation fuels are also administratively and politically familiar, as gasolinetaxeshavebeenimplementedsincearound1920.Thesestrongpositivesnotwithstanding, “taxes”arepoliticallysalientandgenerallyunpopular(Povitkinaetal.2021).

Portfolio Approach

Emissions (+). An economy-wide carbon tax incentivizes cleaner fuels; reductions in use phase emissions for all vehicle types; consumer demand for BEVs, HCEVs, or PHEVs; and consumer conservation. A broad price on carbon also reduces emissions across the full lifecycle including production phases and end-of-life phases for all vehicle types. Carbon taxes are associated with significant reductions in carbon emissions (Fischer & Newell 2008; Aldy 2013; Anderson et al. 2016; Macaluso et al. 2018). Even at low tax rates, Sweden’s carbon tax reduced transportation emissionsbymorethan6percent peryearbetween1990and 2005(Andersson2017).Moreover, a share of tax revenues could be used to directly subsidize EV refueling and charging infrastructure,reducingbarrierstodrivetrainswitching(USDOT2025).

Cost-effectiveness (+). Because carbon pricing does not pick winners ex-ante and broadly incentivizes emissions reductions across all vehicle drivetrains and lifecycle stages, emissions pricingiscosteffectivebydesign.Evidencefromeconomicsimulationssuggestscarbontaxescan achieveemissionsreductionsinthedomesticautomotivesectoratapproximatelyone-thirdofthe cost of commonly used alternative policy instruments (Anderson et al. 2016). Additional technology-neutralresearchanddevelopmentsubsidies(ortaxincentives)promotecost-effective innovation. EV infrastructure subsidies overcome possible free-rider issues associated with the publicgoodsnatureofrefuelingandrechargingnetworks.

Global competitiveness (0). Carbon taxes are not inherently harmful or helpful to global competitiveness, but implementation details matter (Muresianu & Bray, 2022). Incentives to

decreaserelianceonfossilfuelscanstrengthenUSenergysecurityandincreaseresiliencetoprice shocks (US Dept ofTreasury 2025). On the other hand, policy “leakage” – where carbon pricing simply shifts emissions-producing activitiesto areas not covered by the policy – may represent a potential competitiveness concern (Muresianu & Bray, 2022). The issue here is that global competitors not subject to additional taxation may achieve lower costs and greater profitability whilestillretainingaccesstoUSmarkets.

Innovation incentives (+). By allowing maximum flexibility in methods to achieve carbon reductions, carbon taxes with coupled technology-neutral research and development subsidies promote widespread innovation. The carbon tax emissions policy base promotes low-carbon activity,spurringinnovationanddiffusionofenergyefficienttechnologies andrenewable energy sources (Anderson et al., 2016). Evidence suggests research and development is fundamental driveringreenhousegasemissionreductioninnovation(Sarpongetal.,2023).

Planning Certainty (0).In principle, acarbon tax with a clearstarting rate and plan for structured rate increases will provide stakeholders with certainty about current and future emissions prices they will face, allowing time for appropriate adjustment to mobilize towards cleaner energy sources and technology optimization (Parry, 2021). A potential countervailing downside is that economy-wide taxes are unfamiliar and may be politically salient or unpopular (Povitkina et al. 2021). While most Americans claim theywould support a carbon taxin principle, few recent US surveyrespondentsclaimawillingnesstopayfor reductionsingreenhousegasesthatapproaches an optimal carbon tax (Tyson & Kennedy, 2020; University of Chicago, 2024). Moreover, while pricecertaintyishighwiththeportfolioapproach,benefitcertaintyislessclear.Thatis,emissions reductions given a tax rate can be difficult to predict ex-ante, which makes them potentially unpopularwithlawmakersandmanyNGOobservers(Noll&Hart2019).

Discussion:

Broad lessons and recommendations.

On the basis of our evaluations, we note some broad lessons for effective and cost-effective policiestoreduceemissionsfromtheUSlight-dutyvehiclesector:

 Allpolicyalternativesgeneratebenefitsviasignificantreductionsinuse-phaseemissions.

 Maximallyeffectivepolicycoverstailpipeandupstream/downstreamemissions.

o Full lifecycle emissions reductions require incentives to reduce emissions from productionandend-of-lifestages.

o Full lifecycle emission reductions for all vehicle types require incentives for emissionsreductionsfromtheelectricitygrid.

 Allpolicyalternativesgeneratecostsrelativetothestatusquo.Nevertheless,wenote:

o Costeffectivepolicyistechnologyneutral.

o Costeffectivepolicytargetsemissions,themarginofdirectpolicyinterest.

o Costeffectivepolicycomplementsemissionspolicywithsupportforinfrastructure expansionandreliability.

 ICEbansandBEVmandatesperformpoorlyonthebasisofglobalcompetitiveness.

 Allpolicyalternativesincentivizesomedegreeofinnovation.

o Maximizing innovation incentives requires complementing emissions policy with subsidiesfortechnology-neutralresearchanddevelopment.

 Aportfolioapproachisambitiousbutpreferredon thebasisofthefullcriteriaset.

o Theportfolioapproachcombinesabroademissionspolicywithbothinfrastructure andresearchanddevelopmentincentives.

o Economy-wide carbon taxes may be an effective and cost-effective emissions policyoptionforthebroadbaseofaportfolioapproach.

o In a politically constrained second-best world where carbon taxes cannot be implemented,cleanenergystandardscouldserveasanalternativeemissionspolicy basefortheportfolio.

 Nopolicyalternativeperformsfavorablyontheplanningcertaintycriterion.

o Optimalpolicyisdurable.

o Optimal policy supports realistic development cycles of at least eight years and involvesrealisticcompliancetimelines.

o Optimalpolicyallowsforupdatinginresponsetochangingindustryconditions.

Implications for current policy in the US, the EU, and China.

Although the above conclusions are intended to be general and forward-looking, they also highlight illustrative lessons for current emissions policies in the automotive sector. Current US policy emphasizes Corporate Average Fuel Economy standards and modest financial incentives. Current EU policy centers an ICE vehicle ban by 2035 and aggressive intermediate emissions reductions mandates by 2030. Current Chinese policy stresses a blended approach, combining a new energy vehicle (NEV) mandate and tradable credit system with aggressive subsidies and incentivesforinnovation,researchanddevelopment,andinfrastructuredevelopment.

US approaches have advantages and disadvantages. Fuel economy standards are technologyneutral by design, promoting cost effectiveness relative to alternatives like bans and mandates. Fuel economy standards also encourage innovation on the margin. On the other hand, US fuel economy standards have limitedimpacts on production and end-of-lifeemissions forany vehicle type. US approaches dominated by fuel economy standards have limited impacts on use-phase emissions for electric vehicles (i.e., they provide no incentives for reduced emissions from the grid). US approaches provide limited direct support for both infrastructure and research and development. Modest EV purchase and infrastructure incentives through recent policies like the Inflation Reduction Act (IRA) somewhatoffset theseconcerns, but totalsupportis small relative to historical policy incentives in other countries like China. The US approach lacks long-term planning certainty and is susceptible to reversals given political uncertainty and change. Global competitiveness may be favorable relative to more burdensome regulatory approaches in Europe butarelikelydisadvantageousrelativetoportfolioapproachesinChina.

The EU’s phased-in ban on internal combustion engine vehicles and stringent interim emissions mandates offer the potential for significant reductions in greenhouse gases and localized air pollution. In principle, if practically achievable, clear and enforceable long-term targets promote planning and investment certainty for industry participants. On the other hand, the policy has limited impacts on use-phase emissions for EVs (i.e. from the grid). The policy will increase net production-phase emissions due to the substantial metals extraction, processing, and distribution alongelectricvehicles’ supplychains.EUbansandmandatesaretechnology-specificandarenot expected to be cost effective relative to alternatives. Most significantly, EUpolicies are expected to significantly increase production costs, consumer costs, and reduce domestic global competitiveness.Thinktanksand industrygroupsincreasingly assertthat EUpoliciesarealready substantiallyshiftingcompetitiveadvantageintheautomotiveindustryawayfromtheregion.The interactionofEUpolicywiththeregion’shighlaborandenergycosts,especiallywhencombined with battery supply chains dominatedby China and aggressive Chinese industrial policy support, are making it increasingly challenging for European industry participants to compete internationally(doPradoetal.2025).ChineseEVmanufacturersofferingmoreaffordablevehicles areaparticularlysalientconcernatpresent.

Relative to US and EU policies, China’s hybrid policy most resembles optimal policy as defined above.OnecenterpieceofChinesepolicycombinesacorporateaveragefuelconsumptionstandard (similar to US CAFE standards) with a flexible New Energy Vehicle (NEV) mandate. Under the NEV policy, automakers earn credits for producing or importing electric or hybrid vehicles. Automakers failing to meet their credit targets may buy credits from other companies to meet compliance objectives. Another centerpiece of Chinese policy is subsidies and other support for batterysupplychaindevelopment,industryresearchanddevelopment,charginginfrastructure,and (historically) EV consumer adoption. Under this blended policy arrangement, China has become the global leader in electric and hybrid vehicle production, battery production, and electric and hybridvehiclesales.Overall,Chinesepolicieshavehelpedpromotesignificantemissionsbenefits, eventhoughthepolicieshavelimitedimpactsonuse-phaseemissionsforEVs(i.e.fromthegrid) and increase net production-phase emissions. As noted above, the hybrid approach has enhanced cost effectiveness. As one example, mandate implementation with tradable credits significantly reduces overall compliance costs. Supply-side subsidies and other investments have also helped spur development of new electric vehicle technologies. Overall, the hybrid policy approach in Chinahassignificantlyimprovedglobalcompetitivenessofindustryparticipants.

Knowledge gaps

Thelargestgapinrelevantcurrentknowledgeisend-of-lifephaseemissions.End-of-lifeemissions representanimportantareaoffutureresearch.

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Policy Options to Reduce Emissions in the Automotive Sector