Unpacking The Zero Emission Vehicle Mandate

BEVs available nationwide


A Quick Rundown of the ZEV Mandate and How Automakers Approach Compliance

Finding information about the California Air Resource Board (CARB) Zero Emissions Vehicle (ZEV) mandate can be difficult. The roots of the program began in the early 1990s and it has been updated regularly as technology has advanced. A mandatory percentage of Zero Emission Vehicle (ZEV) credits must be earned in states that have adopted the mandate. As of this writing, 9 states outside of California have adopted the ZEV mandate: New Jersey, New York, Connecticut, Maine, Rhode Island, Vermont, Maine, Massachusetts and Maryland.

Just looking for the current credit balances of major automakers? Jump to the chart here.

In previous years, a large portion of credits could be earned with Low Emission Vehicles such as hybrids. But moving forward, automakers will need to invest heavily in ZEV’s. Battery Electrics and Hydrogen Fuel Cell Vehicles will make up the bulk of credits earned, with a smaller portion coming from Transitional Zero Emission Vehicles (TZEV) such as Plug-In Hybrids.

The number of credits required is based on the manufacturer’s average sales numbers in the state over preceding years. When calculating the ZEV credit requirement, CARB uses the average sales for the previous 2nd, 3rd and 4th model years. So for the 2018 model year, the production volume calculation will be based on the average of the 2014-2016 model years.

Calculating the ZEV Credit Percentage

In 2018 the ZEV Credit Percentage requirement is 4.5% of all vehicles sold by a manufacturer. For Large Vehicle Manufacturers, 45% of these credits must come from vehicles that California considers Zero Emission Vehicles. This means Battery Electric (BEV) and Fuel Cell (HFCV). The remaining 55% can be earned primarily from other electrified vehicles such as Plug-In Hybrids (PHEV).

As a simple example, if an automaker sells an average of 150,000 vehicles in California between 2014 and 2016, they will need to earn a total of 6,750 credits for 2018. And at least 3,038 of those credits must be earned from the sale of a BEV or HFCV. This does not necessarily mean that an automaker needs to sell 6,750 ZEV’s and TZEV’s in order to meet this requirement. Plug-in hybrids receive between .4 and 1.3 credits per sale. Battery electrics and fuel cells receive between 1 and 4 credits.

Earning ZEV Credits

The amount of credits earned for each vehicle is directly related to range. In the case of a BEV or PHEV, this means that the larger the battery pack and the more efficient the vehicle, the higher the credits earned.

For BEV’s and HFCV’s, the Urban Dynamometer Driving Schedule (UDDS) is used for calculations. This is a testing cycle that has a lower average speed to simulate city driving. The EPA Label range is approximately 70% of the UDDS range.

Related: Musk Calls California’s ZEV Mandate Weak

So while the EPA Label for the 2016 Nissan Leaf is 107 miles of All Electric Range (AER), under the UDDS cycle it is calculated as 160 miles. So the 2016 Nissan Leaf would earn about 2.1 credits for Nissan.

Plug-In Hybrid credit calculations can be roughly estimated using the AER of the EPA Label and adding .2 credits. Since a Chevy Volt has an AER of 53 miles, we can estimate 1.03 credits are earned as for every Volt sold in a CARB state. The Toyota Prius Prime, with an EPA sticker range of 25 miles will earn Toyota about .75 credits.

Earning Extra Credit

Automakers that over comply are able to bank their ZEV credits for future use. There is a limit on how many over-compliance credits can be used per year. But automakers can also transfer credits to other states and they can sell or trade these credits with other vehicle manufacturers.

For example, Tesla does not have traditional ICE vehicles to offset, so they sell their earned credits to other automakers. Between September 1, 2016, and August 31, 2017, Tesla transferred 51,776 credits to other automakers. Toyota purchased the bulk of them at 35,200, followed by Fiat and Subaru.

During this same time period, General Motors had an excess of TZEV credits due to years of strong Volt sales. They transferred 6,000 TZEV credits to Honda, who provided GM with 2,500 BEV credits and 12,700 Partial Zero Emission Vehicle (PZEV) credits (that have been depreciated in value).

Traveling With Fuel Cells

One other important factor to consider is the Travel Provision. Previously, this allowed all-electric vehicles sold in California to net an automaker an equivalent number of credits in all other ZEV mandate states. The number of credits earned in other states was proportional to the production volume of the manufacturer in the second state. For BEVs and PHEVs the Travel Provision has ended. However, the Travel Provision is still in place for HFCVs. This is a likely reason that Honda and Toyota began to push Hydrogen Fuel Cell vehicles in California last year.

For 2018, Toyota will need to earn approximately 17,300 ZEV credits. About 8,000 of these will need to be from BEV’s or HFCV’s. Because of its long range, a hydrogen fuel cell vehicle like the Toyota Mirai earns 4 ZEV credits. So, for this year, Toyota will only need to sell about 2,000 Mirai’s to meet compliance in California and all other ZEV mandate states thanks to the Travel Provision.

Methods For Compliance

The CARB ZEV mandate offers many paths for automakers to take in order to comply. As we move into the next decade, the vast majority of ZEV credits must be earned from BEV’s or HFCV’s. Automakers like Nissan and General Motors have been stockpiling ZEV and TZEV credits for nearly a decade now. With 13,487 California Bolt sales in 2017, GM earned over 52,000 ZEV credits, far beyond the approximately 9,500 credits they will need for 2018. Nissan also has plenty of breathing room for upcoming years even if sales stagnate.

Toyota, Honda and Ford jumped in early on hybrids, putting them in a more difficult position. But the ability to purchase BEV credits from other automakers makes it possible for them to course correct. In 2015, Ford purchased 35,000 credits from Tesla. Toyota purchased 35,200 from Tesla in 2016. Toyota and Honda also have Fuel Cell programs that will help them shore up their numbers not only in California but in all ZEV states. Once the travel provision ends for fuel cells, it is unlikely that these programs will win out over future BEV offerings. But in the meantime, the Clarity and Mirai help them meet their yearly numbers.

Read More: Electric Car Sales Nearing 400,000 in California

Hyundai, Kia and Volkswagen have smaller credit balances, but they sell enough electrics and plug-in hybrids to maintain a buffer. Fiat CEO Sergio Marchionne has famously labeled the fun to drive Fiat 500e as a compliance car. While it does not earn as many credits as the new generation of all electrics, Fiat Chrysler has built up a huge credit balance. The Pacifica Hybrid and the ability to buy additional credits means Fiat is in no danger of running out of credits.

In other words, while the CARB ZEV mandate might seem tough at first blush, it is very flexible. As of yet, no automaker has missed compliance and no automaker is in danger of missing. The goal of the program is not to punish automakers for the sins of the past but to push forward electric vehicle adoption. California governor Jerry Brown has recently set a goal of 5 million ZEVs on the road by 2030. With the help of CARB and falling battery prices, I expect them to blow past that goal easily.

Automaker Credit Balances as of Mid-2017


CVRP Rebate Statistics

CARB ZEV Credit Statistics 

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19 Comments on "Unpacking The Zero Emission Vehicle Mandate"

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How much do these companies tend to pay per credit? How much is Tesla actually making off of this?

Some quarters they may make $50 million off of ZEV credits, other quarters they may make $140 million. Then they might make $0.

Depends on supply and demand. The more automakers make long range all electric vehicles, the less they need to buy credits. Then, when automakers build up a surplus they can sell off their credits as well. Then more ZEV credits will be available on the market, driving down the price.

But the ZEV credit requirement is getting much stricter over the next few years. So long as the price of buying a credit is lower than paying the fine, Tesla will be able to sell them. But the going rate can fluctuate wildly, and some months they do not sell any at all.

Are other companies still buying them?

I’m wondering the reason why Ford has hoarded so many credits is because they know they’re not going to generate any BEV credits past this year and aren’t going to generate any PHEV credits after 2019 until 2021

also interesting that Subaru,as an intermediate manufacturer is choosing to sell the Crosstrek PHEV vs Mazda just taking the hit and buying credits;I guess Toyota offered them a good deal to license the Prime powertrain

I think this is certainly the reason for Ford hoarding credits as well, although we know that some type of EV is coming, there is going to be a drop in sales before then.

For IVM, because many of their sales have exceeded 20,000 a year for 3 years in a row, most of the “intermediate vehicle manufacturers” will soon be considered “large vehicle manufacturers”. (At least this is my understanding.) I believe 2018 or 2019 is the year that many IVM become LVM.

Although I’m not certain about this – I will look into it further.

Maybe the Credits should add a benefit score, for the BEV / ZEV Sales / Purchase Experience?

As in, Dealers then become an Asset, or a Liability, to the OEM! Good sales experience by customers => Full Standard Credits; Bad sales experience => Credit Reductions (Penalties)!

Also, Dealers with Solar Roofs & Wind Turbines, with Battery Storage, could also be used for OEM’s to get Extra ZEV Credits!

Looking to buy an EV? Go to the Dealer with the Wind Turbine, or Solar Roof, 1st! (Theory being, they understand Using Alternate Energy, and are potentially more aware of benefits of EV’s!)

I would think that if Tesla meets their Model 3 production estimates, this will completely tank the price of credits in 2019 because they will have more to sell than all the other mfr’s combined will want to buy. Then what?

In the short term I think that will happen just the way you say.

But the increase in the ZEV percentage and the ending of the travel provision means that the amount of credits needed is going to skyrocket over the next few years. Before, lagging automakers could release their cars only in California and all other states could be more or less covered.

Now they will need to actually obtain credits for all ZEV mandate states. Credits will burn more quickly and they will need to spread out their sales across the country. Some automakers are prepared with large credit banks and multiple plug in or fuel cell models. (GM, Toyota, Nissan etc)

But other automakers will continue to at least partially rely on purchasing as the requirement moves towards 22%.

OR, they just need to start shipping their ZEV offerings to more than just California. As it is, BMW already started putting cash on the hood of the i3 in some markets in the Northeast which is almost certainly to help them meet the needed sales in those states.

Wait… I thought ZEV Credits expired after two years, if not turned in for use to bring down a CAFE rating, or traded to another manufacturer. Does CARB allow traditional automobile manufacturers to ‘bank’ ZEV Credits for use in California only, indefinitely? That seems… strange.

How likely is it the CARB ZEV states stay firm, with 2018, 2019, etc., plans? Is the White House threat apt to slow them down at any juncture, or will 2% of sales = ZEV be the most likely outcome?

They’re already suing the EPA for the rollback of standards, but it is unclear what that would do to the overall ZEV program since it’s not necessarily the same.

Thanks, and thank you, Wade. This is what I’m trying to follow. There’s growing dichotomy in state policy, and survival of ZEV, in tandem with lawsuits exercising state sovereignty (for the ~dozen state CARB waver). I sort of see the dozen moving inexorably forward with electrification/infrastructure/etc., but a lot hinges on what, specifically, the federal government can sue to stop. IOW, can the “% of sales” aspect survive a court ruling that achieves legal cover underneath the “patchwork of regs” thesis?

I know many see CA prevailing, and I agree, but am not sure if my (logical?) conclusion, that 30-40% of the new vehicle market following a second standard constitutes a “patchwork”. Patchwork isn’t a legal term, but derives from impacts to commerce, under multiple (in this case, two) regulatory regimes.

You bet! My understanding having looked into it previously is that the ZEV mandate and the ability of California to be granted waivers is more or less safe. It has decades of prior support from both parties and is an important part of the Clean Air Act. I don’t see congress coming together to amend that, and automakers are not pushing for it at all. The EPA and administration could not do it on it’s own. Even the Bush administration granted waivers for ZEV regulations. In 2006, as CARB moved to make changes to their ZEV rules, the EPA stated: ” By this decision, issued under section 209(b) of the Clean Air Act, as amended, (hereafter ‘‘Act’’), 42 U.S.C. 7543(b), the Environmental Protection Agency (EPA) today has determined that provisions of the California Air Resources Board‘s (CARB’s) 1999–2003 amendments to the California Zero Emission Vehicle (ZEV) regulations as they affect 2006 and prior model years (MYs) are within-the-scope of previous waivers of federal preemption granted to California for its ZEV regulations. In the alternative, EPA is also granting a waiver of federal preemption for these MYs. EPA is also granting Californias request for a waiver of federal preemption to enforce… Read more »

Great article! Three feedback items.

1. You should add some information, maybe even in its own subheading, about how the credits for fuel cell vehicles have changed. Previously, FCVs were getting some obscene number like 7 or 9 credits per car (I forget the number), way more than a long range EV like a Tesla. Now they are treated the same as BEVs.

2. Another good guide is here: https://www.ucsusa.org/clean-vehicles/california-and-western-states/what-is-zev . I think they state better the impact of the travel provision changes: “The provision has also created an incentive to concentrate sales of battery electric and fuel cell vehicles in California. However, in 2018 the travel provision will be removed, except for fuel cell vehicles. This should increase model availability and sales numbers outside California.” That last sentence is huge, for those of us outside California!

3. Typo: “will help them sure up”; you mean “shore up”.

Fixed typo. Thank you.

1) An article with the changes over time might be interesting actually. I’ll keep it in mind for the future.

2) True, it will have a benefit for states outside of California. I mentioned this in the comments but not the article. I might add a line or two to the article as well.

3) I ‘shore’ did, thank you! 🙂

Wait… I don’t understand. I thought that ZEV Credits had to be turned in to reduce CAFE ratings with the NHTSA at the Federal level. This article talks about ‘stockpiling’ as if they are eternal, used at the State level for compliance only. ZEV Credits are supposed to expire after two years, and the ones earned in one year by a traditional automobile manufacturer may be used again the following year. That’s why certain cars, like the Honda Accord Plug-in Hybrid and Honda FIT EV were only offered in low volumes for a year or two before being discontinued. I was under the impression that ZEV Credits were going away for good in 2019 — this article seems to indicate that was only for hybrids. Is that true?

This article refers only to the California (CARB) ZEV mandate. This is unrelated to CAFE credits that are a completely separate system.