ZEV Mandate Series Part 2: CO2 Performance Standards
This piece is the second in a six-part series New AutoMotive is releasing during the ongoing consultation period for the UK’s Zero Emissions (ZEV) Mandate, over April-May. This series will examine the current government proposals around the Mandate in detail, as well as putting the policy framework into its broader context. In addition to publishing this blog series and submitting a formal consultation response, New AutoMotive will be hosting a webinar event around the ZEV Mandate and the current consultation in the coming weeks. If you are interested in attending this webinar event, you can register your details at the bottom of this page.
The release of the final Zero Emissions Vehicle (ZEV) Mandate consultation stole most of the headlines following the UK government’s ‘Green Day’ announcement late last month. An equally critical part of the government’s package has gone largely under the radar; the new proposals around CO2 regulations. These are important as, once they are implemented, they will work in tandem with the ZEV Mandate to ensure adequate regulations for the polluting portions of the new car and van market in the UK.
The Current State of Play: Existing Regulatory Frameworks
Upon officially leaving the European Union (EU) in 2021, the British government simply copied and pasted the existing EU laws that had governed the emissions of the UK’s new passenger cars and vans directly into British law. These EU-derived CO2 regulations set average emissions performance targets, measured in grams of CO2 per kilometre, for manufacturers that sell cars and vans in the UK. Targets set under this framework would shift annually, to ensure newly registered vehicles emitted less carbon. Under this system, increased sales of battery electric vehicles (BEVs), which have a 0 gCO2/km rating, could be used to decrease the fleet’s annual emissions and meet the legally binding targets
New AutoMotive analysis has shown that there was no actual evidence of a correlation between manufacturers performing well within the EU-derived scheme’s framework and producing more BEVs. However, this analysis did determine a correlation between positive performance within the scheme and the production of hybrid vehicles. This means that it was likely that these regulations were encouraging hybrid production, but not providing any solid regulatory push towards BEVs - meaning the scheme was flawed. Additionally, CO2 emissions from vans actually rose in the second quarter of 2021, leading to calls for the government to reform the way vehicle emissions are regulated, as to ensure that manufacturers are pushed towards higher BEV production and lower ICE and hybrid production.
The Proposed New Framework
The new CO2 regulation will only apply to those vehicles with a tailpipe emission of more than zero. Two separate schemes will be in operation; one for cars and one for vans - with no interaction between the two schemes allowed. Petrol and diesel vehicles will be regulated through this scheme up until 2030, and hybrids will be regulated until 2035, corresponding with their phase-out dates under the ZEV Mandate.
Manufacturers will be given an allowance they can spend within the scheme - 1 allowance will be equal to 1gCO2/km. If they go over this allowance they will need to use the scheme's flexibilities to comply, or pay a buy-out price. Each manufacturer will be given an average CO2/km WLTP rating they must meet. This will be based on their average (mean) CO2/km for their fleet in 2021. This average will be multiplied by the number of vehicles sold annually, to calculate the CO2 allowance a manufacturer will receive.
To illustrate how this works, let us consider the example of Jaguar Land Rover (JLR). In 2021, the average CO2 intensity of newly registered cars bearing the Jaguar or Land Rover marques was 176.88 gCO2/km. If JLR register 41,532 non-zero-emission cars in 2024 (as they did in the 12 months to March 2023), then we calculate the number of CO2 performance allowances that JLR will be given as target x total sales, or 7,346,180.16.
The number of allowances that they must surrender would be the sum of the CO2 ratings of each vehicle they sell. We do not know how much more fuel efficient JLR’s new cars will be by 2024, so for the sake of illustrating how the scheme works let’s suppose that there is no change compared to the last 12 months. In that case we estimate that JLR would have to surrender 7,032,832 allowances, giving JLR a surplus of around 300,000 surplus allowances. This reflects improvements in the average fuel efficiency (and carbon intensity) of JLR’s new cars and means that they would comfortably meet their CO2 performance targets if they did not improve the CO2 performance of their new cars between now and 2024.
Manufacturers will have a number of ways they can comply, including ensuring their average emission output is below their target, trading with over compliant manufacturers, utilising a flexibility, or trading ZEV Mandate compliance for CO2 compliance. Because the government wants to encourage the development of the ZEV portion of the fleet, the rate of conversion will be heavily weighted so that it is easier to transfer excess ZEV credits into CO2 allowances than it will be to transfer CO2 allowances into ZEV credits. This function will be examined in more detail in part 4 of this blog series, which will assess the flexibilities in the scheme.
This CO2 allowance must not be exceeded by the manufacturer, and if a manufacturer goes over their allowance even after trading and allowance swapping, they must pay a non-compliance charge. For every gram of CO2 exceeded, manufacturers will be fined £86 multiplied by the number of non-ZEV vehicles sold in the corresponding year.
The Schemes Trajectory
The fundamental differences between this new scheme and the previous EU legacy scheme are:
(1) That it only applies to non-ZEV vehicles, and takes no account of the weight of the manufacturer's fleet.
(2) The government is proposing no to few decreases in annual targets.
(3) The government has proposed that the average CO2/km will be calculated from the manufacturers fleet averages in 2021 as this was the last year where a significant reduction in CO2 targets were issued.
(4) The government proposes that this target remains flat up until 2030 with no tightening of regulations. This sends a clear message to manufacturers to prioritise developing their ZEV fleet, rather than focusing on piecemeal changes in fuel efficiency.
However the government has proposed two other scenarios for the trajectory: ‘tightening’ and ‘lightweighting’. The ‘tightening’ scenario sees the targets reduced by 2% annually from the start of the scheme in 2024, through to 2030. The ‘lightweighting’ scenario also asks the manufacturers to reduce their averages by 2% - but adds that they increase their share of non-ZEV lightweight vehicles steadily, meaning the net improvement per year equals a 2.4% reduction in the averages.
Going Forward
The current consultation is the last chance for external stakeholders to contribute to the design of the ZEV Mandate prior to its finalisation later this year. Given this, this consultation phase will be crucial to deciding the final design of the Mandate. Shaping the final version of the Mandate so that it drives the UK’s transition forward will be crucial to ensuring a timely and equitable transition.
New AutoMotive is currently analysing the details of the government’s proposals, and preparing its formal response to the ZEV Mandate consultation. Submissions to this consultation can be made here. In addition to this blog series and a formal consultation response, New AutoMotive will be hosting a webinar event around the ZEV Mandate and the current consultation in the coming weeks. If you are interested in attending this webinar event, you can register your details below, and we will reach out to you with more details as they develop.