Special Report: California ZEV Credits and the EV Market

By · October 08, 2010

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The ZEV credit mandate is one of several measures in place to help California reach its goal of having 1 million plug-ins on its roads by 2020.

The California Air Resources Board has, for the first time, released the accrued ZEV credit balances of every major carmaker selling vehicles in the state. The credits are necessary for compliance with California's Zero-Emissions Vehicle mandate, which currently requires each automaker to accumulate ZEV credits representing 11 percent of its statewide car and light-duty truck sales. All of the state's largest car sellers have so far managed to build reserves of the credits—which will allow them greater flexibility in meeting the requirement as it climbs by 45 percent between 2011 and 2018.

So what can we learn from these previously undisclosed figures? For one, that Toyota is way ahead of the game in its compliance with ZEV regulations, and shouldn't have to worry too much about its ZEV credit balance for at least a decade. The carmaker has accumulated a balance of more than 228,000 credits, thanks to years of strong hybrid sales and early, limited-market forays into alternative fuels vehicles like the original RAV4-EV.

Ford and Nissan are also in very good shape, with at least 5 years worth of ZEV credits on hand and several new electric vehicles slated for production that should help to keep the companies in the black with CARB for the foreseeable future.

Still Not Ready for Prime Time

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But other carmakers seem to be cutting it a little close heading into the most rapid increase the standards have seen in their twenty-year history. For these companies, the choice will be between finding a way to get new plug-in cars to market in California, or risk paying as much as $5,000 for each electric vehicle they fail to sell.

General Motors's 57,285 credits give it just enough for about 4 years. But with the Chevy Volt ineligible to receive full points for its plug-in hybrid system, GM appears to lack the vehicle lineup needed to meet the ZEV standard over the long run. Also somewhat behind the curve is Honda, which has barely enough ZEV credits in reserve to last the next 3 years.

As far as smaller sellers go, Volkswagen, Hyundai and Land Rover all appear to be in danger of not meeting their near-term requirements. Carmakers who sell less than 60,000 vehicles annually don't have to generate any credits from plug-in electric vehicles, but are subject to the same fines if they fail to comply with the overall standard.

For these brands, falling short (though undesirable,) may not be all that costly in terms of their global operations. For larger automakers like GM and Honda though, failure to comply would not only threaten the bottom line, it would be a black mark on the company's reputation for innovation. In order to keep that from happening, both GM and Honda could be forced to at least consider bringing fully-electric cars to California in the near future.

The Credit Crunch

Carmakers can satisfy their ZEV requirement—which is scheduled to increase to 16 percent by 2018—in a number of ways. The most direct route is through pure, battery-electric vehicles that couldn't use a drop gasoline if you wanted them to. For each 100-mile range EV an OEM sells in California, it can expect to receive 3 ZEV credits. So for example, if Nissan were to sell 3,800 LEAFs per year, the car would just about cover the company's 11,598-credit mandate completely on its own.

Partial Zero-Emissions Vehicles like the Honda Insight, Chevy Volt, or Toyota Prius Plug-in, can also qualify for varying levels of credits—as determined by their powertrain configurations, emissions levels, and several somewhat obtuse formulas based on technical specifications. For example, Advanced Technology hybrids like the 2010 Prius receive 0.6 credits each, while the Plug-in Prius will receive about 1.6 credits per vehicle when it's released for 2012.

Just a few months ago though, we learned that the Chevy Volt will in fact not qualify for the highest PZEV tier, “Enhanced Advanced Technology PZEV.” That means the Volt will only be eligible for a 0.6-credit hybrid allowance as opposed to the 1.95 credits it could have received had it designed the car with California law in mind. GM says it made a conscious decision not to initially attempt to meet Enhanced AT-PZEV specs, but that it does plan to bring the car into compliance by 2013. A failure to live up to that promise could do significant damage to GM's standing with the ZEV law.

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Smaller EV startups like CODA have been able to turn ZEV credits into an important source of revenue.

Selling Out

Another way to get credits is to buy them from other carmakers. Tesla made headlines this summer because of revelations that it has counted on the credits as a source of revenue—having sold at least $12.2 million worth to Honda last year. CODA and Aptera have also said that the sale of ZEV credits factors prominently into their business plans. Since these small, electric-only startups don't even make vehicles that aren't ZEVs, all of the credits they accumulate can be sold off to larger automakers who may be a little behind on compliance.

As long as the number of plug-ins sold in California stays close to the levels mandated by CARB, selling credits should remain a profitable enterprise for fledgling EV-makers. But some worry that the bottom could soon fall out on the ZEV credit trade, as more mass-market EVs like the LEAF hit California roads in the next few years. Right now, the auto industry will have to generate a total of roughly 106,500 overall credits to meet the 2011 standard. But only about 18,000 of those credits—representing about 6,000 electric vehicle sales—are needed to meet the ZEV-only portion of the requirement. That means that CARB's current ZEV mandate amounts to little more than 0.5 percent of total auto sales in California.

While that may sound like a lot for 2010, the industry as a whole already has enough accumulated credits to reach full compliance with the standard for the next 5 years. And with some analysts projecting the plug-in market in California to grow to at least 40,000 units annually by 2015, that could put enough plug-ins in circulation for carmakers to continue meeting the mandate even without taking significant further steps to expand their EV offerings.

Staying Ahead

Right now, the value of the credits representing one fully-electric vehicle is said to be in the neighborhood of $5,000. That's because the fine for each zero-emissions vehicle a carmaker fails to deliver or offset is $5,000. So theoretically, if Honda were to somehow fail to satisfy a single credit of its requirement next year, it could expect to face fines in the $27 million range.

But unless changes are made to the ZEV regulatory scheme, CARB risks losing its ability to influence EV adoption in California. If the value of ZEV credits drops significantly due to an “overabundance” of plug-ins, carmakers who haven't yet made strides into electrification will be free to pretty much ignore the standard in favor of second-hand allowances. Not only would that be bad news for companies like Tesla and CODA, it could put CARB out of the driver's seat on clean vehicle adoption for the first time in its history.

For their part, OEMs seem to at least be playing it safe in anticipation of possible reforms. Honda has an outstanding agreement with Tesla to purchase more ZEV credits down the road, and CODA has reached a similar deal with an undisclosed automaker. If carmakers weren't expecting changes that would significantly increase their ZEV obligations in the near future, they'd likely be content to hold out until prices on the credits drop.

Luckily, the Air Resources Board has never been one to rest on its laurels—often to the consternation of auto companies and federal regulators alike. By the end of this year, the board is expected to submit a new ZEV regulatory proposal that should significantly increase the portion of the mandate that can come only from fully-electric and plug-in hybrid vehicles. Coupled with scheduled hikes in the overall requirements and other planned phase-ins to the scheme, the changes will hopefully be enough to protect the system's influence on vehicle lineups in the country's largest car market.

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Because of the complicated system that California has for calculating ZEV credits, the figures in this table are measured in emissions rather than credits themselves. To figure out how many credits an automaker actually has, divide their NMOG number by 0.035.

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