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Federal Register / Vol. 86, No. 159 / Friday, August 20, 2021 / Proposed Rules that much of this increase would likely fall on a single automobile manufacturer and likely due to a failure to comply with the minimum domestic passenger car standard. NHTSA does not yet have enough information for Model Year 2020, which is now complete, or Model Year 2021, which is still underway, to make a similar estimate, but requests comment, data, or analysis on the potential compliance shortfalls, penalty payments, and effect on credit sales for those model years.
In addition, NHTSA believes that commenters have raised valid questions about further economic effects. These commenters have argued that, regardless of the impact of this rulemaking action on Model Year 2019 through 2021
vehicles, longer-term impacts may vary as a result of manufacturer multi-year planning, the transfer of credits across model years and between manufacturers, and the changing value of credits over time. According to these commenters, if such variation were to occur, applying the $14 penalty rate beginning in Model Year 2019 may result in manufacturers applying credit balances to Model Year 2019 through 2021 vehicles and being incentivized to make fuel economy improvements in their fleet beyond that timeframe. And for manufacturers that do not currently have credits or cannot transfer or trade for them to make up a shortfall of the minimum domestic passenger car standard, applying the inflation adjusted penalty rate beginning in Model Year 2019 places an even greater incentive on future compliance and fuel economy improvements to avoid additional higher penalties going forward.
A brief explanation of the statutory scheme that governs the use of credits is helpful in understanding how this could work. Manufacturers comply separately with the domestic passenger car, imported passenger car, and light truck standards. Thus, a manufacturer can comply or over comply with all standards, comply with some but not all standards, or fail to comply with all standards. To the extent that a manufacturer over-complies with the standard for a particular fleet, the manufacturer generates a credit for that over-compliance, which the manufacturer can hold-on to for future compliance for that standard, transfer from one fleet e.g., light trucks to its other fleet e.g., imported passenger cars, or trade those credits to another for those credits. To the extent that a manufacturer cannot meet their shortfall with these credits or, in the case of the minimum domestic passenger car standard, are prohibited from doing so by law, they would need to pay penalties.

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manufacturer. Those manufacturers can either bank those credits for their own future use or sell them to non-compliant manufacturers, who seek the credit to make up for a shortfall. These earned credits can be carried forward to apply to any of the five model years after they are earned. Manufacturers can also choose to carry back credits to apply to any of three model years before they are earned. However, there are certain limitations on the use of credits, as manufacturers may not transfer more than 2.0 miles per gallon in credits from one of their fleets to another in a single model year and neither transferred nor traded credits may be used to meet the minimum domestic passenger car standard.
Consistent with these constraints, if the rate for civil penalties instead remained at the $5.50 rate for Model Years 2019 through 2021, some manufacturers might choose to pay the lower penalty earlier and save the credits that could either carry forward or carry back for future model years when they are valued more due to the inflation adjustment. For example, a credit earned in Model Year 2017 could be used for any year up to Model Year 2022, and, thus, if the adjusted rate applied in Model Year 2019, they may use that credit at that point, while they may have saved that credit for Model Year 2022 under the delay provided in the interim final rule. Likewise, credits earned in Model Years 2019 through 2021 may be used through Model Years 2024 and 2026, respectively. Thus, if the penalty rate remained $5.50 until Model Year 2022, a manufacturer with shortfalls in one fleet in Model Years 2019 through 2021 may choose to pay penalties and hold on to any transferred or traded credits until the years in which the penalty rate has been adjusted for inflation, rather than using the credits earlier and making design changes to increase its compliance in the later model years. Likewise, a manufacturer who has a shortfall in its domestic passenger fleet might take actions to over-comply with the standard in future years when the penalty is increased to generate credits to apply to earlier years rather than paying the higher penalty.41 Finally, credits earned in Model Year 2022, which is not yet underway, could be applied back to Model Year 2019
shortfalls, which have not been assessed yet, which a manufacturer may be more 41 Although manufacturers design cycles vary, since they have been on notice since 2016 of an increase to the penalty beginning with Model Year 2019, they have had and will continue to have opportunities in the coming model years to make design choices to increase compliance.

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likely to do if the penalty rate for Model Year 2019 is the rate as adjusted for inflation. The agency has tentatively determined that these actions are possible and, thus, may mean that the argument put forward in the interim final rule that no effects beyond increased penalty payments are possible may be incorrect. NHTSA requests further comments on such potential effects, particularly as industry commenters did not provide detail as to whether and the extent to which any such potential variations are actually likely to occur.
In any event, based on further consideration of the 2015 Act and the Second Circuits decisions on this issue, NHTSA tentatively believes that that it does not have discretion over when the inflation adjustment should begin to take effect. Further, the Inflation Adjustment Act provided NHTSA no discretion over what the adjusted rate should be, as that is merely a function of the formula established by Congress and calculated by OMB, and mandated streamlined processes for making both the initial adjustment and any subsequent adjustments that do not require accompanying analyses or public comment.42
2. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act 5 U.S.C. 601 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act SBREFA of 1996, whenever an agency is required to publish a notice of proposed rulemaking or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effect of the rule on small entities i.e., small businesses, small organizations, and small governmental jurisdictions. No regulatory flexibility analysis is required, however, if the head of an agency certifies the proposal will not have a significant economic impact on a substantial number of small entities.
NHTSA has considered the impacts of this document under the Regulatory Flexibility Act and certifies that this rulemaking will not have a significant economic impact on a substantial number of small entities. The following provides the factual basis for this certification under 5 U.S.C. 605b.
42 The 2015 Act, of course, did allow NHTSA one opportunity at the time of the initial catch-up to use the notice-and-comment process to adjust the rate less than the otherwise required amount under two conditions, but the Second Circuit rejected NHTSAs belated attempt to use this provision in its decision on the July 2019 final rule. See New York, 974 F.3d at 10001.

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