Electric vehicle manufacturers are pushing back against a decision to delay penalty increases for automakers who fail to meet fuel efficiency standards.

A lobbying group representing legacy automakers — many of whom are now making substantial investments in zero-emissions vehicles — said the increase would have a significant economic impact during a time when the industry is facing mass disruption from the COVID pandemic. But new EV entrants say the penalty mechanism is a powerful performance incentive to decrease tailpipe emissions and encourage investment in lower- or zero-emissions technology.

The decision, issued in January by the National Highway Traffic Safety Administration (NHTSA), postpones imposing a penalty increase from the beginning of model year 2019 to model year 2022. Tesla is petitioning the Second Circuit U.S. Court of Appeals to review the ruling, saying that the delay “inflicts ongoing, irreparable injury” on the company and creates an “uneven playing field” by reducing the consequences of nonadherence.

The Corporate Average Fuel Economy (CAFE) penalty has been increased just once — from $5 to $5.50 for every 0.1 mile per gallon that doesn’t meet the standard — since its instatement in 1975. Congress acted to rectify the effects of inflation on the penalty by raising it to $14 in 2015, but NHTSA and the courts have ping-ponged about the increase ever since. A decision from the Second Circuit last August seemed to settle the issue in favor of instating the higher penalty starting with model year 2019, but automakers last October successfully petitioned that the increase be delayed.

The CAFE penalty can be a huge boon for zero emissions automakers, who receive credits that they can then sell to other OEMs who fail to meet the fuel efficiency target. In a recent report to regulators, Tesla said it earned $1.58 billion from selling regulatory credits to other automakers in 2020, up from $594 million in 2019. Delaying the increase harms companies that have made economic decisions on the basis of an increase to the credit, Tesla said.

EV startups Rivian and Lucid Motors told TechCrunch they also oppose any delay to increasing the CAFE penalty.

“The credit market is very beneficial for the entire EV industry, so every company that is looking to start building EVs, either as a startup or the existing manufacturers, when they build EVs it’s to their benefit to have robust credits,” Kevin Vincent, Lucid Motor’s Associate General Counsel, told TechCrunch. “A lot of existing manufacturers end up selling credits themselves, so it benefits the forward-thinking companies that are improving fuel economy.”

James Chen, Rivian’s VP of Public Policy and Chief Regulatory Counsel, said in a statement to TechCrunch that any rollback of the CAFE or other emission standard “only sets the U.S. backward in terms of emission reductions ([greenhouse gas] and criteria pollutants), increased fuel efficiency, reduction of dependence on foreign oil, technology leadership and EV proliferation.” He added that the company “strongly supports efforts to bolster EV adoption that includes more stringent emission standards and higher penalties for failure to meet those standards.”

NHTSA postponed the increase on the grounds that the penalty should not be retroactively applied to model years that had already been manufactured. As manufacturers have no way to increase the fuel economy level in these vehicles, “it would be inappropriate to apply the adjustment to model years that could have no deterrence effect and promote no additional compliance with the law,” NHTSA said.

Automakers, in a petition filed by the lobbying group Alliance for Automotive Innovation and in supplemental comments, also cited economic hardship due to the COVID-19 pandemic. Mercedes-Benz told NHTSA that the pandemic caused disruptions to its supply chain, workforce and production.

“We believe that retroactively applying an increased penalty rate in such a tenuous financial climate is unconscionable and inconsistent with this administration’s efforts to promote regulatory relief in light of the economic consequences of COVID-19,” the automaker said.

Tesla maintained in its court filing that relying on the COVID pandemic “falls flat” in the absence of specific evidence as to why it warrants the delay.

Attorney generals from 16 states, including California and New York, as well as environmental groups Sierra Club and the Natural Resources Defense Council, have also objected to the delay.

The NHTSA decision was issued in docket no. NHTSA-2021-0001. Tesla filed with the second circuit under case no. 21-593.